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… is from pages 1174-1175 of Joseph Schumpeter [2]‘s monumental 1954 History of Economic Analysis [3]; Schumpeter is here speaking of J.M. Keynes [4] and Keynes’s General Theory (original emphasis):
The analytic apparatus of the General Theory is, first, essentially static…. [O]f all the aspects of the investment process, it is only the expenditure effect of new investment which enters the model (not the book): as Keynes himself rightly emphasized, physical capital (equipment) is assumed to remain constant throughout, both in kind and quantity. This limits the theory to an analysis of the factors that determine the higher or lower degree of utilization of an existing industrial apparatus. Those who look for the essence of capitalism in the phenomena that attend the incessant recreation of this apparatus and the incessant revolution that goes on within it must therefore be excused if they hold that Keynes’s theory abstracts from the very essence of the capitalist process.
Schumpeter’s use of the word “rightly” in the above passage rightly points to the fact that, because in reality all that Keynes set out to do was to supply an alternative theory for why aggregate demand might fall to levels too low to sustain a given pattern of specialization and trade [5] – a pattern that by assumption is the ‘appropriate’ or ‘best’ pattern for the economy in question – then by assumption all questions of real resource allocation and relative pricing become irrelevant. All that remains to theorize about is why aggregate demand might be too low, as well as about what are the exact consequences of inadequate aggregate demand, and about how best to raise aggregate demand and to maintain it at an adequate level. (Of course, similar theorizing can be done about why aggregate demand might be too high.)
Such theorizing is worthwhile. (Here’s my earlier take on it [6].) But such theorizing (as Schumpeter and many others [7] have recognized) doesn’t come close to offering a general theory of a market economy – or even a general theory of employment, interest, and money. And, significantly, one regrettable result of excess demand for such theorizing is a widespread failure even to understand economic downturns as fully as possible.