Happy Reading to the London Reading Group on Keynes's General Theory! I bought my first copy of this great book (trading off 21 meals) in 1972 in Dhaka. Bangladesh had just emerged from a genocidal liberation war and we were in a hero-worship mood, and Keynes seemed to us like the great warrior who battled the genocide-like problem of mass unemployment. But we soon found what Samuelson described: this book was hard to read. We learned what Keynes said from Alvin Hansen and Kenneth Kurihara and others. As I lost my books when I moved from Dhaka to New York to Boston to Washington to Atlanta to Toronto, I kept buying copies of the book, and with the same frustration: how do you read what Keynes wrote? I Bbught the same book five times over, but could never finish reading it. Can the London group finish reading it? I guess somebody should prepare a readable version of the book. Here are some suggestions for the reading group. 1. What is GT about? Suppose that it is about market-clearing, namely, how can the economy reach a state of full employment such as when the supply of labor is matched by demand? To find what may determine full employment, we may also discover what may deter full employment: what could prevent the market from clearing? 2. Unsaying Says Law? The new generation of readers may approach the issue of market clearing with a two dimensional concept of market equilibrium. The first dimension is the quantitative matching: the quantity supplied must match the quantity demanded. Classical theory had two ingredients to deal with this, but the two were not modeled compactly, leaving much looseness that ultimately assailed it. The quantitative matching relies on the price flexibility mechanism, and also involves an equality of value of equivalence to achieve balance of payment or balance of incomes. The price flexibility mechanism says that if the demand is not equal to supply, the price must change such that demands and supplies will change until they become equal. The other part is Says Law that ought to have said that the value of what one sells must be equal to the value of what one gets in exchange. But Says Law was unclear and that doomed the theory of market clearing through price and output adjustments. The assault on Says Law was bound to invite a backlash. But why was Keynes talking about money then? Was he groping to find an articulation for the second dimension of market clearing? The second dimension is that in equilibrium, the kinds of goods must match too. After being sabotaged by Jevons, the idea of double coincidence as an equilibrium condition lost its legitimate place and gave rise to groping. One could not see why money was in the picture without grasping the second dimension (matching of kinds). Had this been clear, Keynes would be understood most easily. Here is how I would reread Keynes. First, let us bust Says Law by showing that even when demand is equal to supply for every good at the equilibrium price (so that income is equal to expenditure for every agent), the market may still not clear. Suppose that John has 1 dollar of x to sell and wants to buy 1 dollar of y from Paul. However, Paul does not want to buy 1 dollar of x, from John but wants to buy 1 dollar of z from Tim. And Tim wants to buy 1 dollar of x against the sale of 1 dollar of z. Now, there is a set of prices at which the values of x, y and z reach equilibrium; and the income for each agent is exactly equal to the expenditure. Yet there is no trade, because barter is not possible. John cannot sell x and buy y directly, because Paul refuses to buy x against y. Paul cannot sell y to buy z, because Tim refuses to buy y against z. And Tim cannot buy x for z, because John does not want to buy z. The solution is the use of external money as a device to transfer claims. An outside senior must issue money such that John will deliver x to Tim and get money instead of z. He will then buy y with money instead of with x. Paul will get money for y, and then get z for money but not for y. The real goods are of the wrong kind to serve as means of payment, so that everybody here must pay with money instead of with the real good, even though money is just a device to allow the owner to claim the right kind of good. The second dimension is the matching of kinds. This is achieved by creating double coincidence between money and the real good, and this double coincidence is artificial. Thus John really does not demand money, but demands y, and yet he pretends to demand money when he sells x to Tim for money. The double coincidence between x and money is a necessary condition for the sale of x. There is no market clearing except with money here. Even though z really pays for x, z cannot pay for x directly: it must be converted into y to properly compensate the seller of x. This conversion is done by the use of money as a device to transfer value, and not a device to store value. If one sees this example, one can relate it to Keyness idea of multiplier. If one dollar changes hands 3 times over, then the failure to issue 1 dollar will disable trade worth 3 dollars. 3. Price theory of monetary theory? The monetarist counter-revolution and the rise of real business cycle there would not occur had Keynes steered clear of price theory (first dimension) and instead embarked on monetary theory to uncover the second dimension of market equilibrium. I have decided to forgive myself for feeling utterly confused: what is Keynes doing? Is he studying price theory or is he doing monetary theory? What have the wage rate or the interest rate to do with market clearing other than the way classical theory described price-quantity adjustments? In short, why bring money in the discussion? Wage rigidity, money illusion, and liquidity trap are all matters of price theory, oops, are they matters of monetary theory? The key is to distinguish between ability to buy as given by equivalence (Says Law) from ability to pay as given by money. The term effective demand seems to be groping for this distinction. For example, John has 1 dollar of x and wants to buy 1 dollar of y, he has the ability to buy y, that is, he has adequate real income to buy y. Classical theorists could not understand how there could be lack of demand for y. Well, there is no lack of demand. But there is lack of means of payment. John cannot pay for y with x, he must pay for y with z, but he does not have z. So he must get money and with it, empower Paul to get z with money. That is, paying with money is a ploy to pay with goods belonging to other people. It has nothing to do with price. So when Keynes says effective demand, he seems to refer to demand coupled with ability to pay in addition to ability to buy. In the example, John must convert x into money before he can purchase y. Thus owning x is not effective as demand, but it is demand in the classical sense. 3. Animal spirits of outside animals? The savings-investment equilibrium of course must be present to clear the market in the first dimension, but it has no relevance in the second dimension. The new reader may notice the existence of banks as issuers of (fiat) external money, without being either the producer or the consumer of real goods. The big bad animal with a wayward spit lives in Lombard Street of good old London. May be the readers group should visit the financial city to see how the bankers are able to increase or decrease the supply of money without any consideration of the volume of actual output or productivity or real profitability prospects. If the bankers are lending money to stock market speculators, they may be pumping in too much money compared to the stock of real goods. But with a few spectacular failures of borrowers, they bankers may also cut down the supply of money even if no decline has occurred in real output or productivity or profitability. This animal spirit is wholly different from the spirit of the investors in real output and the savers who save out of real output. The marginal propensity to consume and the marginal propensity to save should give fair warning that the real people are not as wily the animals as business cycle would require them to be. Are business cycles adequately explained by wild fluctuations in marginal propensity to consume or to save? The wily ones are in the City. And they are increasing or decreasing the supply of fiat money according to their wily animal spirits. In short, the failure of the market to clear in the second dimension lies outside the real sector: it is not in the factory floors or in the farm lands; it is in the banks. This money does not grow out like crops of savings (or savings of real crops?), and surely does not fall from Friedmans endogenous helicopter (or like weeds growing spontaneously or as spontaneous classical veils like on the faces of Afghan women under the Taliban?). This money is created out of thin air and it vanishes into thin air. Yes, there is that animal, not unlike the Alice in Wonderland capacity of the Cheshire Cat: he may vanish, but his smile or grin may not. He is not real, and yet he has effect, like the ghost. May be it is a spirit behaving like an animal: the spirit of Wall Street? May you read Keynes ever so happily. Mohammad Gani