The Years of High Theory

[Front Matter and Table of Contents]: Title page, publication details, dedication, acknowledgements, and table of contents for G.L.S. Shackle's 'The Years of High Theory'. The contents outline the book's focus on the evolution of economic theory between 1926 and 1939, covering value theory, liquidity preference, the multiplier, and growth models. [Chapter 1: The Origin of Theories: A Case-Study Procedure]: Shackle introduces theory-making as a uniquely human activity, distinguishing it from technology by its imaginative and speculative nature. He proposes an empirical study of how economic theories originate, identifying three major episodes of rapid advancement: the mid-eighteenth century (Smith/Physiocrats), the late nineteenth century (General Equilibrium/Marginalism), and the 1920s-30s. The chapter sets the stage for analyzing the 'High Theory' period as a case study in intellectual evolution. [Chapter 2: Economic Hard Times and the Riches of Ideas]: This chapter surveys the collapse of the 'Great Theory' of stationary, perfectly competitive equilibrium in the face of the economic crises of the 1920s and 30s. Shackle highlights six major innovations: the introduction of uncertainty and expectations (Myrdal, Keynes), the theory of liquidity (Robertson, Keynes), growth theory (Harrod), input-output analysis (Leontief), the indifference-map (Hicks, Allen), and the move toward imperfect competition (Sraffa, Robinson, Chamberlin). He questions why these tools often took decades to be recognized despite their components being available much earlier. [Chapter 3: Sraffa and the State of Value Theory, 1926]: Shackle analyzes Piero Sraffa's 1926 critique of Marshallian value theory. He explores 'Sraffa's dilemma': the logical incompatibility of internal economies of scale (increasing returns) with perfect competition. The chapter traces the mathematical roots of marginal revenue back to Cournot and Marshall, noting how they failed to fully integrate these insights into a unified theory of imperfect competition. Sraffa's work is presented as the catalyst that forced economists to abandon the assumption of perfect competition in favor of a model where firms face downward-sloping demand curves. [Chapter 4: Marginal Revenue]: Shackle traces the intellectual history of the concept of marginal revenue, noting its early algebraic appearance in Cournot and Marshall before it was formally named and utilized as a distinct tool. He highlights the independent and simultaneous discovery of the concept in the late 1920s and early 1930s by Yntema, Harrod, and others. The chapter emphasizes how the shift from perfect competition to monopolistic assumptions necessitated marginal revenue to explain firm equilibrium, particularly when facing falling demand curves. Shackle argues that the intervention of demand elasticity in the price-output relationship effectively destroyed the traditional concept of the industry supply curve, a realization that threatened the existing fabric of value theory. [Chapter 5: The New Establishment in Value Theory: (I) Mrs Joan Robinson]: This chapter examines the 'revolution' in value theory led by Joan Robinson, contrasting her rigorous, model-based approach with the more 'evolutionary' and 'nostalgic' Marshallian tradition. Shackle discusses the struggle of economists like Robertson and Shove to reconcile increasing returns with perfect competition through the 'Representative Firm' construct, which Robinson eventually replaced with a static model of imperfect competition. Key analytical developments include the 'tangency proposition' (where average revenue is tangent to average cost), the dissolution of the industry supply curve, and the redefinition of the 'industry' under conditions of product differentiation. The section concludes by noting that Robinson's work unified monopoly and monopsony under the general principle of equating marginal gains with marginal costs. [The Ascendancy of Perfect Competition]: A brief concluding observation on why the assumption of perfect competition remained dominant for so long, suggesting that the usability of a coherent theory of value and the perfectly competitive assumption were seen as nearly inseparable conditions. [The New Establishment in Value Theory: Edward Chamberlin]: Shackle examines the simultaneous and independent development of monopolistic and imperfect competition theories by Edward Chamberlin and Joan Robinson in 1933. He compares their analytical tools, noting Chamberlin's initial resistance to the marginal revenue curve and his inclusion of selling costs and product differentiation. The segment highlights how both theories eventually converged on the 'tangency condition' where average revenue and average cost curves meet, effectively merging monopoly and competitive analysis into a unified theory of the firm. [The Dissolution of the Industry and the Rise of General Competitiveness]: This section discusses the logical consequences of monopolistic competition theory, specifically the breakdown of the traditional concepts of 'industry' and 'commodity'. Shackle references Robert Triffin's critique, which argues that once products are recognized as heterogeneous, the boundary of the industry dissolves into a broader web of general competitiveness. The focus of economic theory shifts from the physical commodity to the firm as a profit-maximizing policy maker, leading to what Hicks described as the 'wreckage' of traditional value theory. [The Indifference-Curve: Edgeworth and Pareto]: Shackle traces the origins of the indifference-curve, starting with Edgeworth's 1881 definition in the context of bilateral exchange and the 'contract curve'. He then details Vilfredo Pareto's crucial refinement: using indifference curves to dispense with cardinal utility (ophelimity) in favor of an ordinal preference-ranking. The segment explains how Pareto viewed these curves as 'photographs of tastes' and established the rule of convexity to the origin as a replacement for diminishing marginal utility. [The Operationalization of Demand Theory: Barone, Slutsky, and Hicks]: This section explores how Pareto's indifference-map was combined with the budget-line to create a modern theory of consumer demand. Shackle credits Enrico Barone with the first classic diagram comparing direct and indirect taxes, and Eugen Slutsky with the algebraic foundation. He highlights the work of Hicks and Allen in the 1930s as the 'technological' breakthrough that popularized these tools in the English-speaking world, allowing for the separation of income and substitution effects without assuming the constant marginal utility of money. [Monetary Equilibrium: Wicksell, Myrdal, and the Role of Money]: Shackle introduces the concept of monetary equilibrium, tracing its development from Wicksell to the Swedish School (Lindahl and Myrdal). He argues that money and ignorance (uncertainty) are what break the necessary equality of total demand and supply found in barter-based general equilibrium models. Myrdal's distinction between 'ex ante' (planned) and 'ex post' (realized) viewpoints is identified as the vital spark that allowed for the analysis of non-fulfilment of equilibrium conditions, effectively destroying Say's Law in a monetary economy. [Myrdal's Analysis: The Ex Ante and Ex Post Distinction]: Shackle examines Gunnar Myrdal's 1933 contribution to economic dynamics, specifically the introduction of the ex ante and ex post distinction. This framework resolves the apparent contradiction between the necessary identity of recorded (ex post) saving and investment and the frequent disparity of intended (ex ante) saving and investment. Myrdal's analysis recognizes the fundamental difference between the past and the future, grounding economic theory in the imaginative constructions and expectations of individuals facing an unknown future. [The Conditions of Monetary Equilibrium]: This segment details the formal identities and conditional equalities that define Myrdal's monetary equilibrium. Shackle explains how Myrdal refined Wicksell's 'natural rate of interest' by moving from a physical productivity concept to an exchange value productivity concept. The discussion highlights the role of money in allowing a divorce between production and demand intentions and introduces the Austrian theory of capital (Böhm-Bawerk and Wicksell) as the foundation for these ideas, while noting Myrdal's eventual rejection of purely technical interpretations of interest. [The Yield of Planned Investment and Liquidity]: Shackle explores Myrdal's transition toward a value-based, expectational definition of the natural rate of interest. He argues that Myrdal was 'groping' toward the concept of liquidity preference by recognizing money's role in deferring decisions in an uncertain world. The segment analyzes Myrdal's formula for the 'net return of real capital' and identifies a logical error where Myrdal initially compared capital value to itself rather than to construction cost—a mistake Myrdal eventually corrected by defining yield as the ratio of net return to production cost. [Myrdal and Keynes: Convergence on Investment Equilibrium]: Shackle demonstrates the striking convergence between Myrdal's final version of monetary equilibrium and Keynes's 'marginal efficiency of capital.' Both theorists arrived at the conclusion that investment equilibrium occurs when the discounted value of expected profits (demand price) equals the cost of construction (supply price). Shackle notes that while Myrdal was more explicit about the role of uncertainty in investment calculations, Keynes's 'General Theory' eventually used these same concepts to explain the fragility of the inducement to invest and the possibility of under-employment equilibrium. [The Economics of Disorder: Uncertainty and the Multiplier]: The final part of the chapter compares the Wicksell-Myrdal focus on price levels (assuming full employment) with the Keynesian focus on output levels (allowing for under-employment). Shackle credits Myrdal with anticipating the 'consumption function' by identifying income as a subjective, expectational variable. He concludes by discussing the simultaneous discovery of these 'high theories' by Myrdal, Keynes, and Kalecki as a response to the intellectual shock of the Great Depression, which necessitated a shift from the 'Economics of Order' to an 'Economics of Disorder' based on radical uncertainty. [Chapter 11: Keynes's Ultimate Meaning]: Shackle argues that the true 'thermal source of power' in Keynes's theory is not the formal arithmetic of the marginal efficiency of capital, but the recognition of the fundamental uncalculability of the future. Drawing heavily from Keynes's 1937 QJE article, Shackle explains how society uses 'conventional judgement' and the assumption of the present as a guide to the future to mask the underlying 'vague panic fears' and 'unreasoned hopes.' This segment contrasts the 'Economics of Order' (general equilibrium) with Keynes's 'Economics of Disorder,' where unemployment is the result of the collapse of these fragile, non-rational conventions. [Chapter 12: The Anatomy of the 'General Theory' - The Core Defect of Classical Economics]: Shackle begins an anatomical dissection of Keynes's 'General Theory', highlighting that the fundamental shift was not in mechanical details but in recognizing the existence of an uncertain, unknown future. He contrasts the 'hedgehog' approach of Keynes's later work—focusing on the single big idea of ignorance—with the 'fox' approach of his earlier chapters. The core defect of classical theory is identified as the false assumption that men possess adequate knowledge and act within a system analogous to celestial mechanics. [The Role of Money and Say's Law]: This segment explores whether involuntary unemployment arises from the nature of money or the nature of human ignorance. Shackle argues that money acts as a catalyst that multiplies the effects of ignorance by allowing individuals to accumulate wealth without deciding on its real physical form, thus breaking the link between supply and demand that holds in a barter system (Say's Law). [The Classical Postulates and Keynes's Critique]: Shackle examines the two central postulates of classical employment theory: that wages equal the marginal product of labor and that the utility of the wage equals the marginal disutility of employment. He details Keynes's logical objection: that because workers are paid in money rather than goods, they cannot effectively bargain for a specific real wage, as price levels are outside their control. [The Missing Link: Saving, Investment, and Intentions]: Shackle identifies a gap in Keynes's Chapter 2 regarding the interlocking of the wage argument and the independence of saving and investment. He proposes a link based on the 'conditional intentions' of income-earners and business men. Involuntary unemployment is redefined as a conflict between the desired saving-spending composition of aggregate reward at full employment and the actual investment intentions of entrepreneurs. [Methodological Innovations: Equilibrium vs. Process]: Shackle critiques Keynes's reliance on equilibrium comparison over Myrdal's step-by-step process analysis. He argues that Keynes's failure to use ex ante/ex post terminology led to confusion between the definitional equality of realized saving/investment and the contingent equality of intended saving/investment. Despite this, he praises Keynes's use of Marshall's short-period principle to simplify economic units to money-value and employment. [Macro-economics and the Theory of Stocks]: Shackle discusses Keynes's role as an innovator in macroeconomics and the shift from 'flow' analysis to 'stock' analysis. He credits Keynes with establishing a purely 'stocks' analysis of interest rates via liquidity preference, forcing economists to recognize that asset valuations can change without market transactions. He notes precedents in Wicksell, Quesnay, and Robertson but emphasizes Keynes's unique impact. [The Inducement to Invest and the Marginal Efficiency of Capital]: Focusing on Books III and IV of the General Theory, Shackle explains how Keynes linked the present to the future through durable equipment. The 'marginal efficiency of capital' is described as a schedule highly sensitive to expectations and 'kaleidic shifts'. Shackle argues that Keynes's gift was treating aggregate income as a variable dependent on investment and the propensity to consume, thereby integrating uncertainty into value theory. [The Keynesian Theory of Interest and Uncertainty]: Shackle details the revolutionary nature of Keynes's interest rate theory, which rests on uncertainty regarding future bond prices rather than the equalization of saving and investment. He explains the 'two camps' (Bulls and Bears) necessary for market stability and critiques the 'bootstraps' argument. He also clarifies the various motives for holding money, specifically distinguishing the speculative from the precautionary motive. [Independent Variables and the Philosophy of History]: In the final section of the chunk, Shackle analyzes Keynes's choice of independent variables (propensity to consume, marginal efficiency of capital, interest rate). He contrasts Keynes's 'open' system—where variables are influenced by the 'jetsam of the tides of history' like politics and fashion—with the 'closed' dynamic models of Frisch and Harrod. Shackle suggests Keynes views the ultimate drivers of the economy as spontaneous or originative forces outside technical economic determination. [Chapter 13: Spending, Saving and Demand - Comparing the Treatise and the General Theory]: Shackle reflects on the evolution of Keynes's thought between 'A Treatise on Money' and 'The General Theory'. He argues that while the General Theory is more powerful, it represents a shift from the dynamic analysis of disequilibrium found in the Treatise toward comparative statics. Shackle critiques certain 'fallacious short-cuts' in the General Theory, such as the necessary equality of saving and investment, while praising the Treatise for its 'brilliant novelty' and its focus on how profit-disequilibrium drives changes in output. [The First Fundamental Equation and the Mechanism of Price Change]: An in-depth analysis of Keynes's first Fundamental Equation from the Treatise, which explains changes in the price level of consumption goods. Shackle introduces the concept of the 'proper-named interval' to explain Keynes's ex post view of historical time-segments. He details how the equation compares expected and realized outcomes, highlighting the roles of production costs (efficiency-earnings) and the disparity between investment and saving as drivers of price fluctuations. [Entrepreneurs' Remuneration and the Definition of Income]: Shackle examines Keynes's definition of 'normal' remuneration for entrepreneurs and its implications for the theory of income. He argues that the Treatise implicitly treats income as an expected value, whereas profits are essentially unexpected 'windfalls'. By applying a period-analysis interpretation, Shackle clarifies that these unexpected profits cannot be part of the decision-making process at the start of an interval, but rather influence future decisions. [The Inducement to Invest and Liquidity Preference]: This section traces the development of the 'inducement to invest' through the Treatise, comparing it to the later 'marginal efficiency of capital' in the General Theory. Shackle notes that the Treatise initially places the burden of investment changes on the interest rate and liquidity preference, largely neglecting the 'precarious human hopes and fears' that characterize the General Theory. He highlights how the Treatise views the banking system's role in managing security prices and liquidity. [The Second Fundamental Equation and the Transition to General Theory]: Shackle analyzes the second Fundamental Equation, which deals with the price level of output as a whole. He discusses the Wicksellian roots of the Treatise, where the gap between investment and saving drives price changes. The segment concludes by contrasting the Treatise's 'formal and explicit study of disequilibrium' with the General Theory's 'comparative statics', arguing that the latter's focus on the 'psychics of investment' and radical uncertainty represents Keynes's most significant discovery. [The Multiplier: Kahn's Theory and Its Precursors]: Shackle examines the Kahn Multiplier, defining it as an equilibrating mechanism where extra non-consumable output generates a stream of income that elicits further consumption output until savings equal investment. He distinguishes the Multiplier from the Accelerator (induced investment), the Leontief mechanism (inter-industry supply chains), and Pigou's 'double Say's Law effect.' Shackle also critiques the attempt to link the Multiplier to the income velocity of circulation, arguing that the Multiplier is a matter of production decisions and propensities rather than the mechanical transit of cash packets. [Finance, Saving, and the Meade Equation]: This section clarifies the distinction between the Multiplier mechanism and the finance required for investment. It discusses the Meade equation as an ex post identity where realized saving equals realized investment. Shackle emphasizes that the Multiplier is an equilibrating process that moves the economy toward a level where desired saving matches desired investment, noting Kahn's argument that in conditions of unemployment, such expansion need not be inflationary. [Historical Anticipators: Bagehot, Wulff, and Johannsen]: Shackle reviews historical precursors to Kahn's theory found in Hegeland's research. He analyzes Bagehot's description of industrial interdependence, Julius Wulff's 1896 formula using import leakages, and N.A.L.J. Johannsen's 'multiplying principle' based on 'impair saving.' While these writers captured elements of the convergent series, Shackle notes they often focused on downward spirals in trade cycles rather than the upward employment theory established by Kahn and Keynes. [Danish Contributions and the Essence of Leverage]: The text explores Danish contributions to multiplier theory, specifically Jens Warming's 1931 insights into how savings weaken the total increase in production. Shackle reflects on the essence of the Multiplier as a form of 'leverage' where an initiator finances only a portion of the total economic effect, relying on the self-interested responses of other sectors to provide the remaining motive power and resources. [Keynes's Evolution and the Final Verdict on Originality]: Shackle traces Keynes's struggle to formalize the Multiplier, from the 1929 pamphlet with Henderson to the 'Treatise on Money,' where the concept of working capital and consumption redistribution was present but unfocused. He concludes by evaluating L.F. Giblin's 1930 Australian multiplier and Llewellyn Wright's scholarly assessment, ultimately affirming Kahn's 1931 article as the pioneering work that demonstrated how consumption and investment expand together in a 'fixprice' environment. [Chapter 15: Liquidity Preference - The Nature of Interest and Uncertainty]: Shackle explores the foundational logic of Keynesian liquidity preference, defining interest as a reward for parting with liquidity in the face of inescapable uncertainty regarding future bond prices. He distinguishes between different assets like shares, land, and money, explaining that the market prices bonds to compensate for the risk of capital loss. The section introduces Keynes's three motives for holding money—transactions, precautionary, and speculative—while Shackle argues that the precautionary motive is essentially a subset of the speculative motive driven by doubt over future price behavior. [The Enigma of Interest-Rate Theory: Stocks vs. Flows]: This segment addresses the theoretical tension between 'flow' theories of interest (matching new lending and borrowing) and 'stock' theories (matching the existing supply of bonds and money). Shackle explains Keynes's resolution: the massive stock of existing assets dominates the market, allowing interest rates to remain 'too high' for full employment regardless of new saving flows. This shift from the Treatise on Money to the General Theory represents a move toward a more formal, though perhaps less 'lively', analysis of how liquidity preference decouples interest from its classical role of equalizing full-employment saving and investment. [Monetary Circulation and the Classification of Deposits]: Shackle examines Keynes's detailed classification of money in the Treatise on Money, including the distinction between industrial circulation (income and business deposits used for production/consumption) and financial circulation (savings deposits and speculative business deposits). A significant point is raised regarding unused bank overdrafts as a form of money. The section contrasts the Treatise's view of a more passive banking system responding to public demand for deposits with the General Theory's view of a centrally controlled money supply where the public's propensity to hoard determines the interest rate rather than the quantity of money. [The Speculative Motive and the Role of Convention]: This section analyzes the speculative motive for holding money, emphasizing the 'bull' and 'bear' psychology described in the Treatise and the functional liquidity preference of the General Theory. Shackle highlights Keynes's argument that interest rates are anchored by a 'conventional' sense of normality; when rates diverge significantly from what the market considers 'safe' or 'normal', the risk of capital loss (illiquidity) drives the demand for cash. The discussion notes that this conventional stability is not linked to full employment, allowing for persistent economic sub-optimality. [Hicks's Marginalization of Money and the 'Finance' Motive]: Shackle critiques Sir John Hicks's 'Suggestion for Simplifying the Theory of Money', which attempts to apply marginal utility theory to money holdings. While Hicks successfully structures the transactions motive by considering the costs of investment, Shackle argues he downplays the 'bull/bear' volatility central to Keynes. The segment also introduces Keynes's 'finance motive'—the need for liquid funds to bridge the gap between an investment decision and its execution—and discusses how unused overdraft facilities in the UK banking system mitigate the pressure this motive places on interest rates. [The Great Debate: Keynes vs. the Stockholm School]: This section details the 1937 debate in the Economic Journal between Keynes and Bertil Ohlin regarding the determination of interest rates. Ohlin presents the Stockholm School's 'ex-ante' and 'ex-post' framework, derived from Wicksell and Myrdal, which distinguishes between planned and realized saving/investment. Shackle critiques both sides: he finds Keynes's reliance on the ex-post identity fallacious for equilibrium analysis, while noting that Ohlin fails to grasp how the stock of existing bonds (rather than credit flows) dominates the interest rate. The segment emphasizes that income, not interest, is the primary variable that reconciles ex-ante disparities in saving and investment. [Hugh Townshend and the Nihilism of Expectation]: Shackle concludes the chapter by highlighting the work of Hugh Townshend, whom he considers Keynes's most radical interpreter. Townshend argues that if prices are governed by expectations of future values, then the economic system is fundamentally indeterminate and lacks a stable equilibrium. This 'nihilistic' view suggests that asset values can be created or destroyed 'out of nothing' based on shifts in imaginative thought, violating Walras's Law. Ultimately, economic stability is seen as a fragile convention—a tacit agreement to believe in stability—which, once doubted, leads to cascading disorder. [Chapter 16: Formal Dynamics: Cycles and Growth]: Shackle explores the transition from static general equilibrium to formal dynamics, focusing on Roy Harrod's 'An Essay in Dynamic Theory'. He details Harrod's fundamental equation (Gw = s/C) and the interaction between the Multiplier and the Accelerator. The chapter examines the inherent instability of growth models, where departures from the 'warranted' growth rate lead to cumulative upward or downward movements. Shackle also critiques the reluctance of Harrod and Keynes to fully embrace Myrdalian ex ante analysis, attributing it to a desire to maintain economic theory as a study of rational order rather than essential disorder. The section concludes with an overview of how Samuelson and others refined these insights into rigorous mathematical models of the business cycle. [The Evolution of Business Cycle Theory and Harrod's 'The Trade Cycle']: This segment analyzes Harrod's 1936 work 'The Trade Cycle' as a bridge between Keynesian macroeconomics and dynamic cycle theory. Shackle highlights Harrod's use of the 'Relation' (the Accelerator) and the Multiplier to explain the self-regulating yet unstable nature of the economy. He notes the irony that while the General Theory focused on static states, it inspired a generation of dynamic models. The section also includes Paul Samuelson's mathematical systematization of these interactions using difference equations to categorize economic behavior into asymptotic, oscillating, or explosive patterns. [Chapter 17: Leontief's 'Tableau Économique']: Shackle provides a detailed technical and historical overview of Wassily Leontief's input-output analysis. He explains the mathematical foundations of the system, including the use of matrix algebra to solve for total production requirements based on a 'bill of goods' for final use. The chapter traces the intellectual lineage of this method back to François Quesnay's 18th-century 'Tableau Économique', framing Leontief's work as the empirical realization of Walrasian general equilibrium. Shackle distinguishes between 'closed' systems that describe total interdependence and 'open' systems used by policy-makers to calculate the implications of specific economic goals. [Chapter 18: The Landslide of Invention]: This concluding chapter reflects on the nature of economic invention and the epistemological shift that occurred between 1926 and 1939. Shackle argues that the 'Great Theory' of general equilibrium, predicated on perfect competition and perfect knowledge, collapsed when faced with the 'Age of Turmoil' and the reality of unemployment. He contrasts the mathematical approach, which treats economics as a mechanism, with the conceptualist approach that relies on named images and linguistic structures. The chapter synthesizes the book's themes, highlighting how the recognition of uncertainty and the role of money as a means to defer decision-making destroyed the unified pattern of neo-classical order, replacing it with a 'mosaic' of fragmented but suggestive theories. It also notes the generational shift as the Victorian cohort of economists passed away, allowing a new 'High Theory' to emerge from the ruins of the old equilibrium. [Index: A to G]: Alphabetical index covering terms and authors from 'Accelerator' through 'General Theory of Employment, Interest and Money'. Includes detailed sub-entries for major figures like Sir Roy Harrod and John Maynard Keynes. [Index: G to Z and Library Metadata]: Final portion of the index from 'General Theory' through 'Yntema', followed by library acquisition stamps and cataloging information.