| The General Theory of Employment, Interest and Money | |
|---|---|
| Author(s) | John Maynard Keynes |
| Country | United Kingdom |
| Language | English |
| Genre(s) | Nonfiction |
| Publisher | Palgrave Macmillan |
| Publication date | 1936 |
| Media type | Print Paperback |
| Pages | 472 (2007 Edition) |
| ISBN | 9780230004764 |
| OCLC Number | 62532514 |
The General Theory of Employment, Interest and Money[1] 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.[2] 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.
Contents |
Keynes's previous work paved the way for The General Theory. Keynes and other Cambridge economists developed the Cambridge cash-balance theory, a precursor for the concept of liquidity preference that was central to Keynes's later theory.[3] Keynes's A Treatise on Probability investigated the nature of uncertainty. Keynes's ideas about economic decision making and hesitancy in investment under uncertainty in The General Theory can be traced directly to his Treatise.[4]
Although The General Theory was written during the Great Depression and was taken by many to justify the assumption by government of the responsibility for the achievement and maintenance of full employment, it is for the most part a highly abstract work of theory and by no means a tract on policy. Its full meaning and significance continues to be debated even today.
As a book, its style differs from modern mainstream economic texts because its concepts are expressed almost entirely in prose with little explicit mathematical modelling, following the practice of Alfred Marshall and his other successors in 1930s Cambridge, England. This approach is neither accidental nor shortcoming, indeed Keynes (a mathematician by training) criticizes the use of mathematics in economics to hide questionable arguments behind mathematical notation.[5] The book is enlivened by some brilliant rhetorical passages, including the description of the stock market in Chapter 12 and the concluding chapter 24 on the (rather tentative) policy implications Keynes derived from his theory.
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 (aggregate demand). He 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 a lack of competition is not the fundamental problem and measures to reduce unemployment by cutting wages or benefits are not only hard-hearted but ultimately futile.
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."[6]
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.
The first book introduced what Keynes asserted would be a book that changed the way the world thinks.
"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." (p. 3)
Book III moves to cover what causes people to consume, and therefore stimulate economic activity. In a depression the government, he argued, 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 (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." (p. 129)
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."
"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." (p. 374)
"... 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." (pp. 383–4))
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[9] and the reform of the international monetary system[10] as structural measures needed to encourage both investment and consumption by the private sector.
From the outset there has been controversy over what Keynes really meant. Many early reviews were highly critical.[11]
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 both with neoclassical theory and with the experience of pragmatic policy-makers.[12]
Henry Hazlitt criticized, paragraph by paragraph, Keynes' General Theory in The Failure of the New Economics.[13]
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 (in Keynes's formulation, that "supply creates its own demand") does not hold in a monetary economy. President Richard Nixon famously said in 1971 (ironically, shortly before Keynesian economics fell out of fashion) that "We are all Keynesians now", a phrase often repeated by Nobel laureate Paul Krugman.[14] Nevertheless, starting with Axel Leijonhufvud, this view of Keynesian economics came under increasing challenge and scrutiny[15] 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.[16]
The earliest attempt to write a student guide was Robinson (1937) and the most successful (by numbers sold) was Hansen (1953). 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 (2006). Paul Krugman (a New Keynesian) has written an introduction to the 2007 Palgrave Macmillan edition of The General Theory.[14]
Sylvia Nasar, author of A Beautiful Mind' and a history of economics,' explained how important The General Theory was.
What made the General Theory so radical was Keynes's proof that it was possible for a free market economy to settle into states in which workers and machines remained idle for prolonged periods of time.... The only way to revive business confidence and get the private sector spending again was by cutting taxes and letting business and individuals keep more of their income so they could spend it. Or, better yet, having the government spend more money directly, since that would guarantee that 100 percent of it would be spent rather than saved. If the private sector couldn't or wouldn't spend, the government would have to do it. For Keynes, the government had to be prepared to act as the spender of last resort, just as the central bank acted as the lender of last resort.[17]