John Maynard Keynes’ book The General Theory of Employment, Interest and Money published 1936 was a paradigm shift from the classical school. His book was a new understanding of money and markets. Whereas Keynes’ Treatise on Money was an extension of the theory of time, his General Theory started what is known as the “Keynesian revolution”.
My recommendation as a college Economics Professor is, you need to read the original the General Theory, not someone’s interpretation of Keynes theory, as you will discover a radical difference.
This is why I present his book here for you to read or skim.
Download The General Theory of Employment, Interest Money by John Maynard Keynes in ebook formats for free
Download for free the General Theory here.
The incommensurability of Classical economics with economics
Keynes’ General Theory was significant because it reinterpreted the way markets function. Markets were not seen as simply a self-correcting mechanism, but rather, a complex dynamic between, consumers, investors, and government where human emotion was coupled with economic incentives.
Most notably John Maynard Keynes’ book The General Theory of Employment, Interest, and Money rewrote the textbook understanding of supply and demand behavior in aggregate, and the role of government in terms of countercyclical policies. This newfound role of government action was written in the context of a time of great economic upheaval known as the Great Depression. It appealed to academics and policymakers as it explained market failures to adjust to equilibrium. Keynesian economics theory was important, not only because of the logic behind the theory but specifically, the application empowered the espousers to help the situation of the time.
Think about it. This one book was the basis of such much change in government intervention in economic affairs. Do you think that was correct?
Did Keynes deepen the dichotomies in economics with his General Theory?
Whatever you think of the rigor of Keynes logics, the effect on economics was divisive. This is a positive, rather than a normative statement. The book furthered the dichotomy between monetary and real economics as well as microeconomics and macroeconomics. This is a controversial topic but worth consideration and examination. Some will argue it is only now we are seriously trying to address the micro-foundations of macroeconomics as well as the synthesis between monetary and real economics, for example, Michael Woodford’s Interest and Prices. Do you think Keyes’ book added or subtracted to the advancement of economics?
Read the General Theory not someone’s interpretation of Keynes
Many people have studied Keynesian Economics for an interest, studied AP economics or took college classes. Students might even be able to give the pros and the cons, yet never actually read anything by Keynes. Legions of economic students, even at the graduate level are immersed in Keynesian theory, yet have never read one word of the actual writings of John Maynard Keynes.
Policymakers have made their living off of promoting Keynesian ideas, yet have never read The General Theory of Employment, Interest, and Money. Can you that?
I teach Economics at a college level and working on my Ph.D. I tell my students it is critical to read primary source material from original thinkers. This is always better than the textbook, the web or even my understanding as a Professor. If you want to understand Keynesian economics, read Keynes’. Become an eye-witness to the history of economic thought. If you want to understand any ideas in economics, read the words of the world philosophers of the past. If you are inspired make your own interpretation in the content of the time and place you live in by reflecting on the primary source material.
Great minds come around only once every hundred years or so, read their words, not someone’s interpretation of them.Mark Biernat
If you actually read Keynes you will find, often subsequent economist developed theoretical models that are not congruent with Keynes’ original writings. Ideas that were never in the General Theory are associated with Lord Keynes.
Ideas found in the General Theory of Employment, Interest and Money
Some ideas from are:
- consumption function – The relationship between consumption spending and disposable income.
- principle of effective demand – Total goods and services demanded that determine the rate of employment.
- liquidity preference – The preference to hold money compared to other assets.
- Sticky wages – Downward rigidity of wages because worker are reluctant to take pay cuts when a company or economy is in financial trouble, therefore the intersection of aggregate demand and aggregate supply can be suboptimal resulting in unemployment.
- demand not supply – The classical economics understood Say’s law, that supply creates its own demand as valid, however, Keynes believed that demand was the key component of determining the level of the economy.
- low employment equilibrium – The ideas that equilibrium was not synonymous with the optimally efficient use of resources because of irregularities that exist in the market system.
- Interventionism – Governments role was central in managing the business cycle.
Gave new predominance to these ideas:
- multiplier – A change in autonomous spending results in a larger change in real GDP
- marginal efficiency of capital – “the rate of discount that would make the present value of the series of annuities given by the returns expected from the capital asset during its life just equal its supply price.” – (Keynes General Theory (p.135).
Ideas which are Keynesian are interpretations of Keynes and formalization which have not been questioned to the core and some which were not in his General Theory, such as the IS-LM curves. Therefore, there is no better way to understand the pros and cons of Keynesian economics than reading or skimming, The General Theory of Employment, Interest and Money.
Aggregate demand shift + sticky wages = equilibrium below full employment
If aggregate demand was the main driver behind the increase in GDP and prices including nominal wages were sticky, the economy could be stuck at equilibrium below full employment.
For example, if the aggregate the demand curve shifts to the left and output reduced through a drop in consumption (Y=C+I+G+NX), however, wages do not equilibrate, in other words, wages do not drop, rather they are sticky, there will be persistent unemployment. This unemployment will reinforce the cycle of depressed consumption.
The Keynesian prescription
If aggregate demand and aggregate supply intersect at a level below full employment then, the solution is to boost aggregate demand. It does not matter how, public works, tax cuts any fiscal stimulus will get the lifeblood of the economy circulating through the circular flow. The goal of Keynesian economics is to stimulate the economy through fiscal stimulus when markets fail.
What do you think of the economics of John Maynard Keynes?
Above is a downloadable free version of the complete General Theory of Employment, Interest Money. If you have any commentary on the impact of Keynes’ theory or your understanding of this book, please share this in the comments below or contact me.