Chapter 17 of Keynes' General Theory: The Mystery Unveiled

In Chapter 17 of the General Theory (henceforth GT) Keynes tries to generalize the standard GT model, which can be found expounded in the preceding sixteen Chapters of his well-known book, by developing an “extended” model of portfolio choice and capital-asset pricing based on a newly devised notion of “own rate of interest”. Yet Keynes’ attempt can hardly be regarded as successful: in fact, soon after the publication of the GT, Keynes himself apparently gives up defending the peculiar traits of his “extended” model, while most early Keynesians show perplexity or even positive hostility towards the theoretical contents of Chapter 17 of the GT. In this paper we shall unveil the many mysteries still surrounding the conception, interpretation, meaning, and possible uses of the conceptual apparatus and theoretical system put forward by Keynes in Chapter 17 of his book. After clarifying Keynes’ motivations and purposes in writing that Chapter, we shall compare its central analytical concept, the “own rate of interest”, with a few concepts of “commodity” rates of interest that are explicitly cited, or implicitly hinted at, by Keynes as possible sources of inspiration for his theory: namely, we shall examine two alternative notions of real rate of interest, respectively called the “loan-in-kind” and the “payment-in-advance” rate of interest; then, after analyzing Sraffa’s notion of “futures” rate of interest, we shall conclude our review of the relevant literature by discussing Fisher’s notion of “expected” rate of interest. Finally, after formally restating Keynes’ “extended” model, as informally expounded in Chapter 17 of the GT, we shall trace back the failure of Keynes’ attempts at generalizing his theory in that Chapter to his poor value theory, which, being rooted in Marshall’s partial equilibrium analysis, proves desperately inadequate to tackle the truly general equilibrium problem posed in Chapter 17.