For Keynes the context of finding a scientific explanation for the same great depression of the 1930s that Narayan explained in Marxist terms, was that of an economics profession that had long ago left Marx far behind, or at least thought it had. For Keynes, the lack of sufficient purchasing power to buy the products of industry, and the consequent idling of industry and laying off of workers even while needs were not being met, was not a problem defined in terms of what Marx would call relations of production. The problem was defined in terms of what Marx would call the level of circulation. According to the labor theory of value, as Marx applied it, the secret of profit-making (and also, according to Narayan, the secret of simultaneous overproduction and underconsumpton) could only be discovered by going deeper than the level of circulation to analyze the exploitation of labor at the level of the relations of production. But for orthodox economists the law of supply and demand was science while the labor theory of value was not science. The latter was metaphysical nonsense.

 

The problem, for Keynes, was to explain why the law of supply and demand did not bring about a satisfactory equilibrium. The depression was an equilibrium of a sort. Prices were fixed at the levels people were willing and able to pay. The amount currently produced (disregarding unsold amounts left over from prior overproduction) was the amount the market effectively demanded. If more were produced it would not be sold; if prices went down it would not be worthwhile to produce as much and supply would decline; if prices went up people could not or would not pay the higher prices. In these respects the law of supply and demand was working just as it was supposed to work. But, as Narayan said, “factories are lying idle; credit is frozen; warehouses are glutted. At the same time we find people who are in dire need of all the things that are locked up in warehouses or wantonly destroyed by the State and the capitalists. On the one hand, there is said to be overproduction; on the other, an appalling underconsumption.” According to Say’s Law, supply produced its own demand. Therefore, if there was a supply of workers willing and able to work, then there must be a demand for them. Demand for investment capital was supposed to be a function of the price of money, that is to say of the interest rate. But in the depression interest rates went down to one percent, and sometimes neared zero percent, and still nobody wanted to take the risk of borrowing funds to put them to work to earn profits. The valiant efforts of classical economists to massage the data and tweak the theory to make them fit each other were in vain.

 

Keynes took large notice of the fact that in any given society for any given period, total purchases must equal total sales. This is an accounting identity. (I mention that it is an accounting identity partly in order to point out that economics is not always social physics; it does not always take concepts from mechanics like elasticity, equilibrium, and so on and postulate equivalents to them in the social world that can be treated with the same mathematical tools.) The accounting identity must be true because each exchange transaction is a purchase from one party’s point of view and a sale from the other party’s point of view. All the money spent is the same as all the money taken in as receipts. (I think this general point holds up well enough when it is complicated by considering three party transactions, delivery of goods to be paid for at a later date, and so on ….)