Keynes' Theory

Keynes' General Theory (1936) offered an entirely new kit of tools and broke away from the traditions of the Marginalist analysis by employing such categories as aggregate demand, aggregate supply, savings, investment and volume of employment and national income. He discarded the assumption of perfect knowledge and certainty by pointing to the ignorance that pervaded decision making and emphasized the veritable nature of the expectations on which investment was based. He denied the causal nexus between interest and savings, and emphasized the rigidity of wage rates. He regarded money to be much more than a mere numeraire by making liquidity preference a crucial factor in his analysis. He did not have much use for the classical fascination with equilibrium either. Thus the whole apparatus of neoclassical analysis was, if not declared useless, relegated to the position of being specific to certain uses and supplemented, if not entirely replaced, by a whole set of new ones. More important than these formal changes was, however, the reference to social reality which provided the justification for doing so and served as a grim reminder to the fact that, after all, economics had a purpose.

Whereas the classicists were convinced they understood human nature, Keynes hardly pretended he did. Whereas they confidently proceeded to deduce everything else from what they thought they knew, Keynes' analysis rested on facts as he observed them. And as all that needs be known cannot be, his conclusions are often in terms of "mays" rather than the "musts" his predecessor's methodology yielded. Unlike the Cartesian roots of the classical methodology, Keynes' method had affinity with Existentialism. As a matter of fact it is hard to ascribe a definite methodology to Keynes. He was pragmatic, making use of deduction sometimes but mostly being guided by empirical truths and a sense of what was desirable. He looked forward to proper management of man's economic affairs, the efforts to understand and analyze were a means to this end. Many macroeconomic categories and some macroeconomic analysis can be traced back to the classical economists, but there was no macroeconomic policy. Once economic policy came to the fore, the social institution primarily responsible for implementing any policy, i.e., the State, became one of the chief actors on the economic scene. Indeed one of the greatest contributions of Keynes was bringing home the realization that the Market could not always be relied upon and recourse to State action was a constant feature of economic life even in a free enterprise system.

Source: Dr. Muhammad Nejatullah Siddiqi, Economics An Islamic Approach. Republished with permission.