Name: The General Theory of Employment, Interest, and Money
Rating: 3.6 (16 reviews)
Author: John Maynard Keynes

What’s in it for me? Insights into one of the twentieth century’s most influential economics texts.

Curious about why governments intervene in economies during a crisis like the Great Depression or the 2008 recession? The General Theory of Employment, Interest, and Money by John Maynard Keynes might have the answers! First published in 1936, this book introduced fresh, unconventional ideas that shook the economic world.

Instead of the then-popular idea that economies balanced themselves out, Keynes argued that lack of demand could lead to high joblessness for extended periods. So he believed that governments needed to step in – let’s say, by spending money – to help boost demand.

The book dives deep into why we prefer to keep some cash handy (liquidity preference), the balance between wanting to spend or save (marginal utility), how demand affects economic output (principle of effective demand), and how spending can multiply and stimulate the economy (the multiplier effect).

Think this all sounds too geeky? Don’t worry! In this Blink, we peel back the layers of these complex theories and ideas, giving you the chance to wrap your head around Keynes’s game-changing approach to economics.

Classical economic theories misunderstand the causes of unemployment

In his critique of traditional economic theory, Keynes dissected a couple of core assumptions of classical economics. Let’s dive deeper into his arguments:

First, classical economists argue that a worker’s wage reflects the value they contribute to a business. They believe that if a company decides not to employ someone, the company’s loss is equal to the wage that the worker would have been paid. In other words, they think that a worker’s contribution to a company’s value is directly tied to their wage.

The second assumption of classical economics is that a worker’s wage is the lowest amount at which they’d be willing to work. This is often seen as an equilibrium point where the demand for labor meets the supply.

But Keynes took issue with these assumptions because he saw that they failed to account for a significant real-world phenomenon: involuntary unemployment.

Keynes pointed out that there are situations where workers are both willing and able to work at the current wage, but they’re unable to find employment. Traditional economists typically argue that this is actually a form of voluntary unemployment because they assume that workers are simply refusing to work for lower wages. They believe that high unemployment during economic downturns is due to workers’ refusal to accept wage cuts.

Keynes challenged this view, arguing that the unemployment rate can fluctuate significantly without any corresponding changes in workers’ wage demands or productivity. This indicates that there are other factors at play influencing the unemployment rate, factors that the classical theory doesn’t fully consider.

He believed that the classical theory’s assumptions didn’t accurately reflect the complexities of the real world, particularly in relation to involuntary unemployment and workers’ attitudes toward wages. His critique sought to expose these inadequacies and offer a more nuanced understanding of employment and wages.

Employment and unemployment are directly related to overall consumption and investment

So, let’s turn to Keynes’s own theory now. It tries to explain how employment, income, and spending habits interact in an economy.

First off, the income a community earns, which can be in the form of money or real assets, depends on the number of people employed. The total income is a function of the volume of employment.

Investment and employment are interrelated

Let’s now look at the interactions of investment decisions and employment.

At the heart of our tale, we find two star-crossed concepts – the Marginal Propensity to Consume (or MPC for short) and the economic Multiplier. They play pivotal roles in the grand theater of investment and employment dynamics.

Investment decisions aren’t always rational

Alright, let’s wrap things up by talking about the role of conventions in economic behavior.

We can start by looking at how we form expectations about the future. We give more weight to what we’re confident about, even if it may not directly apply to the situation. So, our present situation shapes our future expectations. For instance, if we see big changes on the horizon but don’t know the details, our confidence can wobble.

Key ideas in The General Theory of Employment, Interest, and Money

What is The General Theory of Employment, Interest, and Money about?

The General Theory of Employment (1936) is a deep dive into the complexities of economic activity and employment. It critically examines how factors like interest rates, human psychology, and speculation influence investment and, ultimately, employment. It argues for more direct intervention by public authorities in organizing investment to mitigate instabilities, particularly during periods of economic downturn.

About the Author

John Maynard Keynes (1883–1946) was a British economist, renowned for his innovative ideas that shaped modern macroeconomics and economic policies. Known as one of the founders of modern theoretical macroeconomics, Keynes’s work has significantly influenced economic theory and policy, justifying government intervention in the economy. In addition to the General Theory of Employment, Keynes authored several other influential works including The Economic Consequences of the Peace and A Treatise on Money.