Keynes on the Entrepreneur

22 May 2007 at 10:01 pm 3 comments

| Peter Klein |

Robert Solow, in his review of Thomas McCraw’s Shumpeter biography, emphasizes the contrast between Schumpeter and Keynes. Schumpter’s Business Cycles (1939) was long, detailed, convoluted, and mostly ignored. Keynes’s General Theory (1936) was — at least as interpreted by Meade, Hicks, Hansen, etc. — short, straightforward, operational, and hugely popular. (The book itself is a tough read.) Not surprisingly, Solow’s sympathies lie with Keynes. Schumpeter, he writes,

seemed not to understand what Keyensian economics was about, or why it won over the younger [i.e., Solow's] generation. For example, he described Keynes as the apostle of consumer spending (in contrast to his own emphasis on innovational investment). But in fact consumer spending is passive in Keynes’s General Theory. The driving force of the aggregate economy is actually investment spending; and Keynes put great causal weight on “animal spirits” and “the state of long-run expectations,” both of which are much more akin to entrepreneurial drive.

It’s been a while since I’ve read Keynes carefully (and hopefully will be a while before I do so again), but this can’t be right. To be sure, “entrepreneurial behavior,” meaning aggregate investment, is critially important in the Keyensian system. However, it is precisely because entrepreneurs are guided not by reasonable conjectures, but by animal spirits — i.e., because investment is so unstable — that all the action lies with consumption. Central planners have no choice but to manipulate aggregate demand; there is little they can do about (highly volatile) aggregate investment.

More generally, Keyes’s investment theory has little to do with any systematic account of the entrepreneur and his function. Am I wrong?

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3 Comments Add your own

  • 1. Nicolai Foss  |  23 May 2007 at 2:13 pm

    Peter, I agree that Keynes’ investment theory has little to do with a systematic account of the entrepreneur. However, I am not sure I get your point that in Keynes (1936), “all the action lies with consumption.” On the contrary, I think Solow is right. In Keynes, investment dominates, and saving responds through the consumption function (and the income multiplier). Saving is really a residual in Keynes. Consumption seems to me for this reason to be something passive, basically only serving as a mechanism in Keynes’ overall argument that it is possible to have I=S in a situation with unemployed resources.
    I am not sure you are right either that Keynes believed that “central planners” cannot manipulate aggregate investments. In his 1937 paper, he is explicit that the “money rate of interest” “rules the roost” and that the MEI would follow. This seems to give a lot of room for monetary policy in influencing investments in Keynes’ thinking (as Friedman and Allan Meltzer later recognized). And, of course, Keynes talked about the possible need for a “socialization of investment” to stabilize aggregate investment. Mine 2 ører.

  • 2. spostrel  |  23 May 2007 at 5:17 pm

    The statement “Central planners have no choice but to manipulate aggregate demand; there is little they can do about (highly volatile) aggregate investment” isn’t quite right because investment is part of aggregate demand.

    The strange thing to me is that I think Keynes was interested in equilbirum stagnation, but his work was used (or adapted) to analyze business cycles. Hence the importance in 1970s macro textbooks of unintended inventory accumulation as a component of investment.

  • 3. Peter Klein  |  23 May 2007 at 9:19 pm

    OK, what I was trying to express — albeit clumsily — was that it’s hard to make a theory in which economic performance iis driven primarily by fluctuations in aggregate demand into an “entrepreneurial” theory of economic growth, which is what Solow seems to be implying. If AD = C + I + G and C is passive and I is inexplicably irrational, then public policy is all about G, manipulating it to keep AD from being too high or too low. (I should have written “all the action lies with fiscal policy,” not “all the action lies with consumption.”) And obviously there’s no room for technological or organizational innovation in the Keynesian system.

    My broader point was to challenge Solow’s claim that Keynes, not Schumpeter, offers an explanation for business cycles that makes room for the entrepreneur. Indeed, Keynes’s opinion that stock markets are little more than casinos, and that (as Nicolai points out) eliminating private capital markets altogether might not be such a bad idea (note the infamous preface to the German edition of the General Theory), makes it hard to take Solow’s general point seriously here.

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