The General Theory of Employment, Interest and Money

The General Theory of Employment, Interest and Money (1936) is John Maynard Keynes’s founding statement of macroeconomics: the argument that a market economy can settle into an equilibrium with persistent involuntary unemployment, and that output and employment are governed by aggregate effective demand rather than by a self-correcting tendency to full employment. It is the primary Keynesian source in this wiki and the text the Austrian critique takes as its target.

What the Book Argues

Keynes builds the theory in a few connected moves. First, he rejects the classical postulate (and Say’s Law) that supply creates its own demand and that a market economy automatically tends to full employment; full employment is, for him, a special case. Second, output and employment are set by effective demand — the sum of expected consumption and investment. Consumption follows a stable consumption function (the “fundamental psychological law” that people consume a fraction of additional income), so a rising share of income is saved; unless investment absorbs that saving, demand and employment fall short. Third, investment depends on the marginal efficiency of capital weighed against the rate of interest and is driven by volatile expectations (“animal spirits”); the interest rate is itself a monetary phenomenon set by liquidity preference, not by the supply of saving. Because saving and investment are governed by different actors and motives, the system has no reliable mechanism returning it to full employment. The conclusion is interventionist: a low rate of interest, public spending, and a “comprehensive socialisation of investment” to stabilise aggregate demand.

“The effective demand associated with full employment is a special case, only realised when the propensity to consume and the inducement to invest stand in a particular relationship to one another.”

— John Maynard Keynes, The General Theory of Employment, Interest and Money

Why It Matters in This Wiki

This is the Keynesian counterpoint the wiki’s Austrian corpus argues against. It is the primary source behind Austrian Economics vs Keynesianism, where Keynes’s demand-deficiency diagnosis and his prescription of cheap credit and stimulated consumption are set against the Austrian Business Cycle Theory of Hayek and Rothbard after Mises — for whom that same low interest rate and credit expansion are the cause of the boom-bust cycle, not its cure. The interest rate is the hinge of the disagreement: a monetary lever for Keynes, the price of time preference for the Austrians.

Provenance: the ingested raw is the clean Project Gutenberg Australia digital edition (public domain in Australia); quotations can be verified directly against it. Still under US copyright (1936).

See Also

• John Maynard Keynes - the author
• Austrian Economics vs Keynesianism - the comparison this book grounds
• Austrian Business Cycle Theory - the rival account of the cycle
• Time Preference and Interest - the interest rate Keynes treats as a monetary lever and the Austrians as a price
• Prices and Production and Other Works - Hayek’s business-cycle counterpoint
• America’s Great Depression - Rothbard’s Austrian reading of the slump Keynes theorised
• Say’s Law - The classical principle that production is the ultimate source of demand — goods are paid for with goods — so a general glut of everything is impossible

Sources

• The General Theory of Employment, Interest and Money (Full Text) - Keynes’s 1936 text; Project Gutenberg Australia clean digital edition