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The General Theory of Employment, Interest and Money by John Maynard Keynes was first published in 1936, and had a lasting impact on both economic theory and state economic policies. Keynes’s primary aim was to challenge certain aspects of classical economics which were accepted as fact at the time, namely Say’s law, which states that supply will create its own demand, and the assumption that free markets automatically tend towards full employment. Keynes introduced several revolutionary concepts in this book, including effective demand, the propensity to consume, the investment multiplier and the liquidity-preference, to support his arguments in favour of greater state interventionism as a response to financial crises.
This book review and analysis is perfect for:
• Anyone interested in the history of economic theory, particularly macroeconomics
• Anyone who wants to understand the aims of state intervention in the financial market
• Students of, or anyone interested in, modern politics and economics
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On 5 February 1936, John Maynard Keynes published his General Theory of Employment, Interest and Money, which was the fruit of six years’ uninterrupted labour. This was just two days after the inauguration of the Cambridge Arts Theatre, the construction of which had been almost entirely funded by Keynes, whose wife Lydia Lopokova (Russian ballerina, 1892-1981) starred in the first performance held there. Naturally, this gave rise to no small number of jokes about which of the two events was nearer and dearer to Keynes’s heart. Shortly afterwards, Keynes suffered a heart attack which forced him to reduce his workload, but his weakened physical state did nothing to change the fact that the Keynesian Revolution was now in full swing.
The GeneralTheory is generally considered to be Keynes’s masterpiece, and represents a pivotal moment in the evolution of economic theory. In order to fully understand its message, we must first examine the life of its author and the historical context in which it was written. Keynes was an intellectual, a professor of economics at Cambridge, a talented debater, a civil servant, a financial speculator and a lover of the theatre who issued a challenge to traditional economic theory by offering a more socially-based alternative.
The book’s target audience comprises his fellow economists who remained loyal to classical economic theory, even though it had proven itself incapable of resolving the economic problems of the “real world” (p. 306), meaning problems related to unemployment and the trade cycle. At the time the General Theory was written, the world was still locked in the grip of the Great Depression, and Keynes was determined to demonstrate that the facts refuted the hypotheses put forward by classical theory.
Political laissez-faire was the cornerstone of classical economic theory, based – wrongly, according to Keynes – on the assumption that this was the key to preventing unemployment. He noted that his aim was not to attack the superstructure of economic theory, as he believed that it had been “erected with great care for logical consistency” (p. v); on the contrary, he hoped to create a general analytical framework which would encompass all of the theory which his peers were trying to express through more specific, abstract examples.
While classical economic theory was more focused on the laws that govern the economics of production, Keynesian economics analyses the ways that the various components of aggregate demand – meaning investment and the consumption of goods and services – interact within economic systems during periods of sluggish growth or recession. Keynes used this analysis to show why state intervention and recovery policies are the most effective ways of overcoming an economic crisis and dealing with high unemployment rates, even if this results in a budget deficit. Keynes’s key idea was that economics can be social in nature.
The use of the word “general” in the title symbolises Keynes’s subversion of established economic theory. While the concept of “underemployment equilibrium” is the cornerstone of Keynes’s colossal theoretical structure, the concepts of “effective demand” and the “consumption function” are two other key tools that he developed to show that the prevailing confidence in the market’s capacity to regulate itself was ill-founded, as the facts proved the opposite to be true.
Key informationReference edition: Keynes, J. M. (2013) The General Theory of Employment, Interest and Money. Charleston: CreateSpace.1st edition: 1936Author: John Maynard Keynes (British economist, born in Cambridge in 1883; died in Firle in 1946).Field: Keynesian economicsKey words:Underemployment equilibrium: a situation which falls short of achieving full employment, even though wage supply and demand are in equilibrium.Effective demand: the sum of all spending which determines the aggregate income of an economic system.Propensity to consume: the relationship between a community’s revenue and its spending for the purpose of consumption.Speculation: a risky financial procedure which involves anticipating market fluctuations and buying goods with the aim of re-selling them later at a profit.
John Maynard Keynes was born in Cambridge on 5 June 1883. As a boy, Keynes was shy, extraordinarily intelligent and somewhat arrogant. His academic success at Eton gave him the opportunity to study mathematics and classics at King’s College, Cambridge. During his studies there he met Alfred Marshall (British economist, 1842-1924), whose influence led him to focus his attention on the field of economics.
During his time at university, Keynes joined the Cambridge Apostles, a semi-secret debating society whose other members included many individuals who would go on to shape the British cultural landscape. Keynes formed particularly close relationships with Duncan Grant (Scottish painter, 1885-1978), intellectuals such as Bertrand Russell (British philosopher, 1872-1970) and George Edward Moore (British philosopher, 1873-1958), and novelists such as Lytton Strachey (1880-1932) and Virginia Woolf (1882-1941).
Keynes was chiefly interested in the worlds of business and politics, and displayed a pragmatic attitude towards both. After finishing his studies, he took the civil service entrance exam and was offered a position in the India Office.
Did you know?
The person who places first in the entrance exam for the British civil service is traditionally offered a position in the Treasury. In an ironic twist of fate, Keynes only managed to place second because of a poor result in the economics section of the test!
Keynes’s light workload at the India Office gave him the opportunity to write the first draft of a treatise on the Indian monetary system (published in 1913 under the title Indian Currency and Finance) and an essay on probability theory. Although Keynes had never considered his academic career a priority, he resigned from the civil service in 1908 to return to King’s College.
In 1909, the first draft of what would eventually become A Treatise on Probability (published in 1921) paved the way for him to begin actively teaching at Cambridge, and he went on to become a lecturer on economic science, a fellow of King’s College and, thanks to Marshall’s support, editor-in-chief of The Economic Journal and secretary of the Royal Economic Society.
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