The General Theory of Employment, Interest and Money by John Maynard Keynes: Summary

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:54

The General Theory of Employment, Interest and Money was written by British economist John Maynard Keynes. This book became his magnum opus. The author of "The General Theory of Employment, Interest and Money" was the first to define the form and list of terms of modern macroeconomics. After the publication of the work in February 1936, the so-called Keynesian revolution took place. Many economists have moved away from the classic belief that the market can restore full employment on its own after temporary shocks. The book introduced for the first time such well-known concepts as the multiplier, consumption function, marginal productivity of capital, effective demand, and liquidity preference.

John Maynard Keynes in Brief

The future founder of modern macroeconomics was born in 1883 in Cambridge. His ideas were destined to fundamentally change the theory and practice of acceptancegovernment decisions in the economic field. John Maynard Keynes is considered one of the most influential scientists of the 20th century. He refuted the postulate of the classical theory about the effectiveness of the "invisible hand" of the market. Keynes came to the conclusion that the overall level of economic activity is determined by aggregate demand. Therefore, it is on the latter that the state should focus as the main regulator, whose task is to soften business cycles. After the Second World War, almost all developed countries built their policies in accordance with Keynesian views. Interest in this area began to wane in the 1970s due to the inability to control high levels of inflation. However, after the financial crisis of 2007-2008. many countries began to return to Keynesian methods of regulation and active government intervention in the national economy, as Keynes bequeathed. "The General Theory of Employment, Interest and Money" is considered the main work of the scientist. It contains all the basic terms and models of this trend.

"The General Theory of Employment, Interest, and Money": book

The main idea of Keynes's magnum opus is that the unemployment rate is determined not by the price of labor, as neoclassical see it, but by aggregate demand. The founder of macroeconomics believed that full employment cannot be provided solely by market mechanisms. Therefore, the intervention of a third force, that is, the state, is necessary. The work "The General Theory of Employment, Interest and Money" explains that underutilization of productioncapacities and underinvestment is a natural state of affairs in a market economy, which is regulated exclusively by an "invisible hand". The scientist proves that the lack of competition is not the main problem, sometimes even a decrease in salaries does not create additional vacancies. Keynes praised his book from the very beginning. He believed that she could turn all traditional views upside down. In a letter to his friend Bernard Shaw in 1935, John Keynes wrote: “I believe I am in the process of writing a book on economic theory that will make a major breakthrough-not immediately, of course, but over the next ten years-in how the world deals with emerging problems. economic problems." This seminal work consists of 6 books (volumes), or 24 chapters.

Preface

The General Theory of Employment, Interest and Money was immediately published in four languages: English, German, Japanese and French. Keynes wrote a preface to each edition. The emphasis in them was placed a little differently. In the English edition, Keynes advises his work to all economists, but expresses the hope that it will be useful to all who read it. He also notes, though not obvious at first glance, but still the relationship between it and his other book, written five years earlier - "A Treatise on Money".

Introduction

What is the work "The General Theory of Employment, Interest and Money"? Briefly, its essence can be described as follows: demand creates supply, the reverse situation is impossible. First chapteronly takes up half a page. There are three sections in this volume:

• "General Theory".
• “The postulates of classical economics.”
• "Efficient Demand Principle".

In the above sections, Keynes explains why he believes that this book can change the way economists think about how the economy works. He says that the title of the work was chosen specifically to emphasize the differences with the classical theory, the application of the conclusions of which is effective only in certain cases, and not always.

Book II: "Definitions and Ideas"

It consists of four chapters:

• "Selecting units of measurement".
• "Expectations as determinants of production and employment."
• "Determining income, saving and investing".
• "Fuller consideration."

Propensity to consume

The third volume explains consumption and how it stimulates economic activity. Keynes believes that during a depression, the government needs to restart the "engine" with additional spending. This book contains three chapters:

• "Objective factors".
• "Subjective determinants".
• "Marginal propensity to consume and multiplier".

According to Keynes, the market does not have the ability to self-regulate. He did not believe that full employment is a natural state that is necessarily established in the long run. SoState intervention is so important. Economic growth, according to representatives of Keynesianism, depends entirely on competent fiscal and monetary policy.

Incentive to Invest

Marginal productivity of capital is the ratio between potential income and its initial cost. Keynes equates it with the discount rate. The fourth book consists of 10 chapters:

• "Marginal Productivity of Capital".
• "The state of long-term expectations."
• "The General Theory of Interest".
• "Classical Theory".
• "Psychological and business incentives for liquidity."
• "Various observations on the nature of capital."
• "Basic properties of interest and money."
• "The general theory of employment, re-formulated."
• "Unemployment function".
• "Price theory".

Brief Notes

Finish outstanding macroeconomic work ("The General Theory of Employment, Interest and Money") comments by the author himself in three chapters:

• “About the trading cycle.”
• “On mercantilism, usury laws, stamped money and theories of underconsumption.”
• “On social philosophy.

In the last chapter, Keynes writes: “…the ideas of economists and political philosophers, whether or not they are right, are much more influential than is commonly believed. Indeed, the world is governed somewhat differently. Practical people who consider themselves completely independent of the thoughts of scientists are usually the slaves of some late economist. Crazies in power draw their ideas from last year's articles by some hacks from the world of science. I am sure that the power of vested interests is greatly exaggerated compared to the gradual spread of the influence of ideas. Of course, not immediately, but after a certain period of time; in the field of economics and political philosophy, ideas can still influence theories in 25-30 years. And it is ideas, not vested interests, that are dangerous on the path to well-being or unhappiness.”

Support and criticism

"The General Theory of Employment, Interest and Money" does not contain a detailed guide to the management of the economy. However, Keynes showed in practice how investment and consumption of the private sector are affected by a decrease in long-term interest rates and reforms in the international monetary system. Paul Samuelson wittily said that Keynesianism "has hit many young economists like an unexpected new disease attacks and wipes out an isolated tribe of South Sea islanders."

From the very beginning, The General Theory of Employment, Interest and Money was a rather controversial work. Nobody knew exactly what Keynes had in mind. The first reviewers were very critical. Keynesianism owes much of its success to the so-called "neoclassical synthesis" and in particular to Alvin Hansen, Paul Samuelson and John Hicks. It was they who developed a clear explanation of the theory of aggregatedemand. Hansen and Samuelson came up with the "Keynesian cross", and Hicks created the IS-LM (investment-savings) model. The General Theory became widespread after the Great Depression. The market couldn't handle the shocks on its own, so government intervention seemed inevitable.

In practice

Many of the innovations first proposed in The General Theory remain key to modern macroeconomics. However, the main idea that recessions are caused by insufficient aggregate demand has not caught on. University courses now mainly teach the so-called new Keynesian economics. It adopts neoclassical concepts of long run equilibrium. Neo-Keynesians do not consider The General Theory useful for further study. However, many economists still consider it significant. In 2011, the book was included in the list of the best contemporary non-fiction.

Use in Economics

The first attempt to adapt The General Theory for students was Robinson's 1937 textbook. However, Hansen's leadership proved to be the most successful. A more modern textbook was released in 2006 by Hayes. Then came a simplified version that Sheehyun wrote. Paul Krugman wrote the introduction to a new edition of Keynes' General Theory, published in 2007. However, gradually the original source loses its significance. It is generally accepted among economists today that the postulate is that to regulate the economy with the help ofaggregate demand is possible only in the short term, and over a longer period of time, the equilibrium can be established independently using market mechanisms.