The General Theory of Employment, Interest, and Money

The General Theory of Employment, Interest and Money is a book written by the English economist John Maynard Keynes. The book, generally considered to be his magnum opus, is largely credited for creating the terminology 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 and especially in relation to the proposition that a market economy tends naturally to restore full employment after temporary shocks. Regarded widely as the cornerstone of Keynesian thought, the book attacked the established classical economics based upon laissez-faire, and introduced important concepts such as the consumption function, the multiplier, the marginal efficiency of capital and liquidity preference.

Overview

Keynes was advocating measures in a scenario of mass unemployment and widespread suffering amidst the social classes of societies around the world. While hundreds of socialites and politicians viewed the Great Depression, as well as the inability to restore confidence in markets, as the failure of capitalism on a broad base, Keynes viewed it as a narrow trouble brought about by technical problems, a "magneto trouble", as he wrote in 1930^[1]. In fact, Keynes' view was that something was needed to step in the breach caused by the deficiency of demand; writing that "no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community." ^[2] Keynes argued that much less intrusive government expenditure policies could ensure adequate effective demand, allowing the market economy to go on as before. Unlike the Communists who believed in a full takover of the means of production by government, Keynes advocated a lesser degree of state control over the means of production.

Over the seven decades since its publishing in the mid-1930s, the General Theory has shaped the views of politicians, businessmen and administrators around the world, where unbeknown to them, policies such as tax cuts to create jobs by putting spending money in people's pockets is the direct result of Keynesian doctrine. Briefly, the General Theory argued that the level of employment in a modern economy was determined by three factors: the marginal propensity to consume (the percentage of any increase in the income that people chose to spend on goods and services), the marginal efficiency of capital (the cut-off rate used to see whether investments are worthy, which are dependent on anticipated rates of return) and the rate of interest.

Keynes's key arguments included the idea that in an economy bedeviled by weak demand, termed also as a depression, where in his terminology there was an ignition problem (a difficulty in getting the economy to move forward more vigorously), then the government (and more broadly the public sector) could increase aggregate demand by increasing its expenditures, including by deficit spending (borrowing to finance the expenditures), and that the public-sector borrowing would not increase prices or interest rates sufficiently to undermine the short-term effectiveness of such a policy.

Although similar research was done earlier by economists such as Michał Kalecki, and Ernst Wigforss, it was Keynes' work which became the most famous. At his best Keynes was a wonderful craftsman of the English language and his fluency is in evidence all throughout the General Theory; examples of Keynes' command of the language abound in the book, for example, Chapter XII dealing with "The State of Long Term Expectation" is considered to be an example of the best writing about the stock market. However, much of the book shows Keynes at his worst, with long complicated sentences uncharacteristic of his style of writing, at least when compared to that seen in previous books and articles.

The main points of the General Theory are that:

• The economy's in-built tendency to correct deficient demand, if at all present, operates slowly and approximately, causing problems to society.

• Economies can suffer from times of overall insufficiency of demand, brought about by the cyclical nature of economic growth, which leads to involuntary unemployment.

• Governmental policies aimed at increasing demand can, in direct contrast with the slowness of the automatic clearing element of the economy, succeed in reducing unemployment quickly.

• It also becomes clear that sometimes increasing monetary supply in order to massage the economy into spending more is not wholly sufficient in stemming demand deficiency, and therefore requires governmental intervention.

To a present day economist, the above points, except possibly the monetary supply's inability to stimulate demand, are uncontroversial and accepted; and that is what made the General Theory a breakthrough in economics, since it was this book that overthrew the established 'Treasury' view that budgets always had to be balanced, and that excessive saving harmed the economy more than it benefited it.

Book I: Introduction

Chapter 1: The General Theory

"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[1] 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 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

"Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods. It is sometimes said that it would be illogical for labour to resist a reduction of money-wages but not to resist a reduction of real wages. ... Moreover, the contention that the unemployment which characterises a depression is due to a refusal by labour to accept a reduction of money-wages is not clearly supported by the facts."

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

Appendix on User Cost

Chapter 7. The Meaning of Saving and Investment Further Considered

Book III: The Propensity to Consume

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

"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 (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), 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."^[3]

Book IV: The Inducement to Invest

Chapter 11. The Marginal Efficiency of Capital

marginal efficiancy of capital means, what output that business man get on investing any amount in his business.

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

Appendix on the Rate of Interest in Marshall and Ricardo

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

Book V: Money-Wages and Prices

Chapter 19. Changes in Money-Wages

Appendix on Prof. Pigou's Theory of Unemployment

Chapter 20. The Employment Function

Chapter 21. The Theory of Prices

Book VI: Short Notes Suggested by the General Theory

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

"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."

"It is ideas, not vested interests, which are dangerous for good or evil."

Criticisms and debate

The response to the publication of the General Theory was controversial and heavy handed, dividing economists in two camps, the young economists influenced by Keynes, and the old school economists that supported a fully free market, laissez-faire economy. From Cambridge, Keynes's students published papers and books to further the Keynesian revolution. ^[4]

Keynes's book was largely ignored on the European continent, with the unfortunate exception of Nazi Germany, (where the translation of the General Theory was published "on paper rather better than usual, and the price not much higher than usual", as Keynes himself put it). The few reviews that actually emerged from there, particularly those by Gustav Cassel in 1937 from Sweden and Gottfried Haberler in 1936 from Austria, were hostile from their outset. In France, both the professional, as well as the personal, hostility of influential conservative economists such as Jacques Rueff guaranteed that Keynes' book would not even be translated until after the war in 1948.

Keynes had forecast in the General Theory that his book was likely to lead to a revolution in the way men of affairs thought about public policy, and Keynesianism (government attempts to affect demand through fiscal policy (tax, expenditure and borrowing) and monetary policy) was enormously influential in the post-Second World War period. The stagflation of the 1970s made Keynes's interventionist approach less attractive to politicians and economic theorists.In most nations' economies it became widely accepted that Keynesian demand management was difficult, and that it had subtle damaging effects including undermining the advantages of sound finance (balanced budgets) and encouraging inflation.

Influence

Despite the adverse perceptions that grew of Keynesianism in the 1970s, it still shows up in the form of new Keynesian economics, which attempts to merge neoclassical economics with some Keynesian policy conclusions.

The fear of the General Theory in America led to the delay of the study of Keynesian Economics in American classrooms. The first textbook to present Keynesianism, written by the Canadian economist Lorie Tarshis, was targeted by a right-wing campaign, which led to the cancellation of many university orders. This coordinated effort to prevent American students from learning Keynesian economics was ignored by professors at Yale University, which continued to assign the book. However, they were in turn attacked by William F. Buckley, for disseminating "evil ideas"^[5]

See also

• History of economic thought
• Keynesian beauty contest

Notes

References

• Keynes, John Maynard (1936). The General Theory of Employment, Interest and Money. London: Macmillan. ISBN 1-57392-139-4. 

External links

• Introduction by Paul Krugman to The General Theory of Employment, Interest and Money, by John Maynard Keynes
• Full text online. (with footnotes)
• Online text in screen-friendly format. (lacks footnotes)
• Foreword to the German Edition of the General Theory/Vorwort Zur Deutschen Ausgabees:Teoría general de la ocupación, el interés y el dinero

fr:Théorie générale de l'emploi, de l'intérêt et de la monnaie gl:Teoría Xeral da Ocupación, o Xuro e o Diñeiro ko:고용·이자 및 화폐의 일반이론 it:Teoria generale dell'occupazione, dell'interesse e della moneta ja:雇用・利子および貨幣の一般理論 pl:Ogólna teoria zatrudnienia, procentu i pieniądza sk:Všeobecná teória zamestnanosti, úrokov a peňazí vi:Lý thuyết tổng quát về việc làm, lãi suất và tiền tệ