Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

Keynes on business cycles as "waves of irrational psychology"

Winslow Ted, York University

Keynes conceives “the soul of man” as composed of a rational universal element in conflict with an irrational instinctive element (e.g., II 189). In the second of his posthumously published Two Memoirs, “My Early Beliefs,” he identifies full development of the former element with “reliable, rational, decent people, influenced by truth and objective standards, who can be safely released from the outward restraints of convention and traditional standards and inflexible rules of conduct, and left, from now onwards, to their own sensible devices, pure motives and reliable intuitions of the good.” (X 447) He also claims, however, that most people are to some more or less significant degree influenced by “insane and irrational springs of wickedness.” (X 447) Consequently, “civilisation” is “a thin and precarious crust erected by the personality and the will of a very few, and only maintained by rules and conventions skillfully put cross and guilefully preserved.” (X 447) He then goes on to claim that taking account of the irrational instinctive element is essential to realistic “discussion of practical affairs.” (X 449) The first memoir, “Dr Melchior: A Defeated Enemy,” elaborates this point by means of a discussion of the role of irrationality in the negotiations ending in the Treaty of Versailles. The paper aims to show that Keynes also gives an essential role to this element in his "general theory" of "capitalism" treated as an historically and culturally limited form of economy having as its "essential characteristic" irrational "money-motives" (IX 293), namely, "an intense appeal to the money-making and money-loving instincts as the main motive force of the economic machine." (IX 293) In particular, he treats "trade cycles" (VII chap. 22) as "waves of irrational psychology" (VII 162) characteristic of this form of irrationality elaborated as his general theory's "three fundamental psychological factors." (VII 214) As an essential part of this argument, the paper will examine the implications for realistic representation of trade cycles understood in this way of Keynes's general argument that the nature of economic phenomena significantly limits their realistic representation by axiomatic deductive, particularly mathematical, forms of reasoning, an application to economics of his general claim about formal logic in his 1930 essay on Frank Ramsey (X 338).

Area: Eshet Conference

Keywords: Keynes Irrationality business cycles

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