The General Theory of Employment, Interest and Money was written by the
English economist John Maynard Keynes. The book, generally considered to be his
magnum opus, is largely credited with creating the terminology and shape of
modern macroeconomics. Published in February 1936, it sought to bring about
a revolution, commonly referred to as the "Keynesian Revolution", in the way
economists thought – especially in relation to the proposition that a
market economy tends naturally to restore itself to full employment after
temporary shocks. Regarded widely as the cornerstone of Keynesian thought, the
book challenged the established classical economics and introduced
important concepts such as the consumption function, the multiplier,
the marginal efficiency of capital, the principle of effective demand and
liquidity preference. Summary
The central argument of The General Theory is that the level of employment
is determined, not by the price of labour as in neoclassical economics, but
by the spending of money. Keynes argues that it is wrong to assume that
competitive markets will in the long run deliver full employment or that full
employment is the natural, self-righting, equilibrium state of a
monetary economy. On the contrary, under-employment and under-investment
are likely to be the natural state unless active measures are taken. One
implication of The General Theory is that an absence of competition is not
the main issue regarding unemployment, and that even reducing wages or benefits
has no major effect. Keynes sought to do nothing less but
upend the conventional economic wisdom. He mailed a letter to his friend George
Bernard Shaw on New Year's Day, 1935: "I believe myself to be writing a book
on economic theory which will largely revolutionize—not I suppose, at once but
in the course of the next ten years—the way the world thinks about its economic
problems. I can't expect you, or anyone else, to believe this at the present
stage. But for myself I don't merely hope what I say,--in my own mind, I'm
quite sure." = Preface=
Keynes wrote four prefaces, to the English, German, Japanese and French
editions, each with a slightly different emphasis. In the English preface, he
addresses the book to his fellow economists, yet mentions he hopes it
will be helpful to others who read it. He also claims that the connection
between this book and his Treatise on Money, written five years earlier, will
most likely be clearer to him than anyone else, and that any contradictions
should be viewed as an evolution of thought.
= Book I: Introduction= The first book introduced what Keynes
asserted would be a book that changed the way the world thinks.
Chapter 1: The General Theory consists simply of this radical claim:
"I have called this book the General Theory of Employment, Interest and
Money, placing the emphasis on the prefix general. The object of such a
title is to contrast the character of my arguments and conclusions with those of
the classical theory of the subject, upon which I was brought up and which
dominates the economic thought, both practical and theoretical, of the
governing and academic classes of this generation, as it has for a hundred
years past. I shall argue that the postulates of the classical theory are
applicable to a special case only and not to the general case, the situation
which it assumes being a limiting point of the possible positions of
equilibrium. Moreover, the characteristics of the special case
assumed by the classical theory happen not to be those of the economic society
in which we actually live, with the result that its teaching is misleading
and disastrous if we attempt to apply it to the facts of experience."
Chapter 2: The Postulates of the Classical Economics
Chapter 3: The Principle of Effective Demand
= Book II: Definitions and Ideas= Chapter 4: The Choice of Units
Chapter 5. Expectation as Determining Output and Employment
Chapter 6. The Definition of Income, Saving and Investment
Chapter 7. The Meaning of Saving and Investment Further Considered
= Book III: The Propensity to Consume= Book III moves to cover what causes
people to consume, and therefore stimulate economic activity. In a
depression, he argues, the government needs to kick start the economy's motor
by doing anything necessary. In Chapter 10 he says,
"If the Treasury were to fill old bottles with banknotes, bury them at
suitable depths in disused coalmines which are then filled up to the surface
with town rubbish, and leave it to private enterprise on well-tried
principles of laissez-faire to dig the notes up again, there need be no more
unemployment and, with the help of the repercussions, the real income of the
community, and its capital wealth also, would probably become a good deal
greater than it actually is. It would, indeed, be more sensible to build houses
and the like; but if there are political and practical difficulties in the way of
this, the above would be better than nothing."
Chapter 8. The Propensity to Consume: I. The Objective Factors
Chapter 9. The Propensity to Consume: II. The Subjective Factors
Chapter 10. The Marginal Propensity to Consume and the Multiplier
= Book IV: The Inducement to Invest= The marginal efficiency of capital is
the relationship between the prospective yield of an investment and its supply
price or replacement cost. Keynes says on page 135: "I define the marginal
efficiency of capital as being equal to that rate of discount which would make
the present value of the series of annuities given by the returns expected
from the capital-asset during its life just equal to its supply price."
Chapter 11. The Marginal Efficiency of Capital
Chapter 12. The State of Long-term Expectation
Chapter 13. The General Theory of the Rate of Interest
Chapter 14. The Classical Theory of the Rate of Interest
Chapter 15. The Psychological and Business Incentives to Liquidity
Chapter 16. Sundry Observations on the Nature of Capital
Chapter 17. The Essential Properties of Interest and Money
Chapter 18. The General Theory of Employment Re-stated
Chapter 20. The Employment Function Chapter 21. The Theory of Prices
= Book VI: Short Notes Suggested by the General Theory=
"It is better that a man should tyrannise over his bank balance than
over his fellow citizens and whilst the former is sometimes denounced as being
but a means to the latter, sometimes at least it is an alternative."
"... the ideas of economists and political philosophers, both when they
are right and when they are wrong, are more powerful than is commonly
understood. Indeed the world is ruled by little else. Practical men, who believe
themselves to be quite exempt from any intellectual influence, are usually the
slaves of some defunct economist. Madmen in authority, who hear voices in the
air, are distilling their frenzy from some academic scribbler of a few years
back. I am sure that the power of vested interests is vastly exaggerated compared
with the gradual encroachment of ideas. Not, indeed, immediately, but after a
certain interval; for in the field of economic and political philosophy there
are not many who are influenced by new theories after they are twenty-five or
thirty years of age, so that the ideas which civil servants and politicians and
even agitators apply to current events are not likely to be the newest. But,
soon or late, it is ideas, not vested interests, which are dangerous for good
or evil.") Chapter 22. Notes on the Trade Cycle
Chapter 23. Notes on Merchantilism, the Usury Laws, Stamped Money and Theories
of Under-consumption Chapter 24: Concluding Notes on the
Social Philosophy towards which the General Theory might Lead
Reception Keynes did not set out a detailed policy
program in The General Theory, but he went on in practice to place great
emphasis on the reduction of long-term interest rates and the reform of the
international monetary system as structural measures needed to encourage
both investment and consumption by the private sector. Paul Samuelson said that
the General Theory "caught most economists under the age of 35 with the
unexpected virulence of a disease first attacking and decimating an isolated
tribe of South Sea islanders." = Criticisms=
From the outset there has been controversy over what Keynes really
meant. Many early reviews were highly critical. The success of what came to be
known as ‘neoclassical synthesis’ Keynesian economics owed a great deal to
the Harvard economist Alvin Hansen and MIT economist Paul Samuelson, as well as
to the Oxford economist Sir John Hicks. Hansen and Samuelson offered a lucid
explanation of Keynes's theory of aggregate demand with their elegant
45-degree Keynesian cross diagram, while Hicks created the IS/LM diagram. Both of
these diagrams can still be found in textbooks.
Just as the reception of The General Theory was encouraged by the 1930s
experience of mass unemployment, its fall from favour was associated with the
‘stagflation’ of the 1970s. Although few modern economists would disagree with
the need for at least some intervention, policies such as labour market
flexibility are underpinned by the neoclassical notion of equilibrium in
the long run. Although Keynes explicitly addresses inflation, The General Theory
does not treat it as an essentially monetary phenomenon nor suggest that
control of the money supply or interest rates is the key remedy for inflation.
This conflicts with neoclassical theory. = Endorsement=
Many of the innovations introduced by The General Theory continue to be
central to modern macroeconomics. For instance, the idea that recessions
reflect inadequate aggregate demand and that Say's Law does not hold in a
monetary economy. President Richard Nixon famously said in 1971 that "We are
all Keynesians now", a phrase often repeated by Nobel laureate Paul Krugman.
Nevertheless, starting with Axel Leijonhufvud, this view of Keynesian
economics came under increasing challenge and scrutiny and has now
divided into two main camps. The majority new consensus view, found
in most current text-books and taught in all universities, is New Keynesian
economics, which accepts the neoclassical concept of long-run
equilibrium but allows a role for aggregate demand in the short run. New
Keynesian economists pride themselves on providing microeconomic foundations for
the sticky prices and wages assumed by Old Keynesian economics. They do not
regard The General Theory itself as helpful to further research. The
minority view is represented by post-Keynesian economists, all of whom
accept Keynes's fundamental critique of the neoclassical concept of long-run
equilibrium, and some of whom think The General Theory has yet to be properly
understood and repays further study. In 2011, the book was placed on Time
Magazine's top 100 non-fiction books written in English since 1923.
Introductions to The General Theory The earliest attempt to write a student
guide was Robinson and the most successful was Hansen. These are both
quite accessible but adhere to the Old Keynesian school of the time. An
up-to-date post-Keynesian attempt, aimed mainly at graduate and advanced
undergraduate students, is Hayes, and an easier version is Sheehan. Paul Krugman
has written an introduction to the 2007 Palgrave Macmillan edition of The
General Theory. See also
Principle of effective demand Effective demand
History of economic thought Keynesian formula
Notes References
= Journal articles= Caldwell, Bruce. "Why Didn't Hayek
Review Keynes's General Theory". History of Political Economy XXX: 545–569.
doi:10.1215/00182702-30-4-545. Rueff, Jacques. "The Fallacies of Lord
Keynes General Theory". The Quarterly Journal of Economics LXI: 343–367.
doi:10.2307/1879560. Rueff, Jacques. "The Fallacies of Lord
Keynes’ General Theory: Reply". The Quarterly Journal of Economics LXII:
771–782. doi:10.2307/1883471. Samuelson, Paul. "Lord Keynes and the
General Theory". Econometrica XIV: 187–200. JSTOR 1905770.
Tobin, James. "The Fallacies of Lord Keynes’ General Theory: Comment". The
Quarterly Journal of Economics LXII: 763–770. doi:10.2307/1883470.
= Books= Amadeo, Edward, The principle of
effective demand, Aldershot UK and Brookfield US: Edward Elgar
Ambrosi, Gerhard Michael, Keynes, Pigou and Cambridge Keynesians, London:
Palgrave Macmillan Chick, Victoria, Macroeconomics after
Keynes, Oxford: Philip Allan Davidson, Paul, Money and the Real
World, London: Macmillan Davidson, Paul, Financial markets, money
and the real world, Cheltenham UK and Northampton US: Edward Elgar
Hansen, Alvin, A Guide To Keynes, New York: McGraw Hill
Harcourt, Geoff and Riach, Peter, A 'Second Edition’ of The General Theory,
London: Routledge Hayes, Mark, The economics of Keynes: a
New Guide to The General Theory, Cheltenham UK and Northampton US: Edward
Elgar. Hazlitt, Henry, The Failure of the New
Economics, Princeton, NJ: Van Nostrand. Keynes, John Maynard, The General Theory
of Employment, Interest and Money, London: Macmillan
Lawlor, Michael, The economics of Keynes in historical context, London: Palgrave
Macmillan Leijonhufvud, Axel, Keynesian economics
and the economics of Keynes, New York: Oxford University Press.
Minsky, Hyman, John Maynard Keynes, New York: Columbia University Press
Patinkin, Don, Keynes's monetary thought, Durham NC: Duke University
Press Robinson, Joan, Introduction to the
theory of employment, London: Macmillan Sheehan, Brendan, Understanding Keynes'
General Theory, London: Palgrave Macmillan
Tily, Geoff, Keynes's General Theory, the Rate of Interest and ‘Keynesian’
Economics, London: Palgrave Macmillan Trevithick, James, Involuntary
unemployment, Hemel Hempstead: Simon & Schuster
External links Introduction by Paul Krugman to The
General Theory of Employment, Interest and Money, by John Maynard Keynes
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Foreword to the German Edition of the General Theory/Vorwort Zur Deutschen
Ausgabe Full text in html5.id.toc.preview.