The General Theory of Employment, Interest and Money

Summary

The General Theory of Employment, Interest and Money, published by Macmillan in London in February 1936, is John Maynard Keynes's attempt to explain why an economy can remain for long periods with many people out of work. Written during the Great Depression, it argues that the classical economics Keynes had been taught describes only a special case, one of full employment, and that a more general theory is needed for the world as it is. The book has six books in twenty-four chapters. Book I sets out the problem. Keynes challenges two postulates of classical theory, chiefly the idea that workers can always price themselves into jobs by accepting lower money wages, and he rejects the principle, associated with J. B. Say, that supply creates its own demand. In its place he puts the principle of effective demand: the level of employment depends on how much firms expect to sell, which depends on total spending on consumption and investment. There can therefore be involuntary unemployment, people willing to work at current wages who cannot find work. Book II defines the units and terms, insisting that saving and investment are always equal in total, though the decisions behind them are made by different people for different reasons. Book III treats the propensity to consume: as incomes rise, people spend more but not by as much. From this follows the multiplier: an increase in investment raises income by a larger amount, because each round of spending becomes someone else's income. Book IV, the longest, examines the inducement to invest. Investment depends on the marginal efficiency of capital, the expected return on new capital goods, compared with the rate of interest. Chapter 12 describes how long-term expectations rest on fragile convention, comparing the stock market to a newspaper beauty contest and attributing much enterprise to animal spirits, a spontaneous urge to act rather than calculation. Keynes then argues that the rate of interest is not the price that balances saving and investment but the reward for parting with liquidity; it is set by liquidity preference and the quantity of money, and may stay too high to call forth enough investment. Book V considers money wages and prices and argues that cutting money wages is an unreliable remedy for unemployment. Book VI offers short notes on the trade cycle, on the mercantilists, usury laws, Silvio Gesell and Mandeville's Fable of the Bees, and closes with Concluding Notes on social philosophy. There Keynes proposes that the state influence the propensity to consume through taxation and the interest rate, and accept a somewhat comprehensive socialisation of investment, while defending private enterprise and individual liberty in most of economic life. He ends by asserting the long-run power of ideas over vested interests. Because the work is still under copyright in the United States, the library offers summary and guide only, with two brief quotations.

Top Lessons

• One person's spending is another's income

  The multiplier rests on a simple observation: when a firm spends on a new factory, the builders spend their wages, and so on in diminishing rounds. Keynes uses it to argue that a fall in investment can shrink income far more than its own size. The idea changed how governments thought about depressions.

• Expectations and animal spirits

  In chapter 12 Keynes argues that most long-term investment cannot be based on exact calculation, because the future is uncertain. Business confidence rests on convention and on a spontaneous urge to act. When confidence collapses, investment can fall regardless of how sound the underlying projects are.

• Saving is not always a public virtue

  Keynes argues that if everyone tries to save more in a slump, total income may fall so that total saving does not rise at all. He revisits Mandeville's Fable of the Bees and earlier writers who worried about underconsumption. The argument sits uneasily with the traditional praise of thrift, and readers have debated where each view applies.

• Ideas rule the world

  The book closes by claiming that the ideas of economists and political philosophers matter more than vested interests, often decades after they are written. Keynes intended his own book to change policy through changing minds. The claim can be tested against the book's own later history and the rival ideas it provoked.

Verified Quotes

Medical Lens

The book is economic, not medical, but chapter 12 builds its theory of investment on psychology: confidence, convention, spontaneous optimism and the animal spirits that move enterprise when calculation cannot. Keynes compares the entrepreneur's setting aside of the thought of ultimate loss to a healthy man's setting aside of the expectation of death. Readers interested in the psychology of decision under uncertainty can read the chapter alongside later work in behavioural economics, though that link is a later interpretation.

• Chapter 12, section VII

  Animal spirits and spontaneous optimism as the basis of enterprise, with the comparison to a healthy man's disregard of death.