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From the Treatise to the General Theory: The Transformation of Keynes's Theory of Investment in Working Capital

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  • Erturk, Korkut A

Abstract

Keynes knew that in the Treatise he failed to develop a satisfactory analysis of the cumulative processes caused by the induced demand effect for working capital. In the 1932 draft he concentrated on this question and came close to formulating a dynamic theory of effective demand. As discussed in this paper, this version of his theory combines short-run determination of output with long-run changes in the costs of production, and lends itself to the study of not only the depression but also the different aspects and phases of cyclical growth. But Keynes wanted to engage the orthodoxy on its own terms, and his work made a sharp turn towards a static reformulation of his theory in 1933. This created a multitude of problems, since the static structure of the orthodox theory contradicted the dynamic essence of his theory. One important problem was the treatment of investment in working capital, which became theoretically indistinguishable from unintended variations in firms' stocks following unforeseen displacement from static equilibrium. Copyright 1998 by Oxford University Press.

Suggested Citation

  • Erturk, Korkut A, 1998. "From the Treatise to the General Theory: The Transformation of Keynes's Theory of Investment in Working Capital," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 22(2), pages 173-185, March.
    • Handle: RePEc:oup:cambje:v:22:y:1998:i:2:p:173-85
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