A First-Time-Reader's Guide to J. M.

Keynes's General Theory of Employment, Interest,

and Money

Keynes's General Theory is not an easy read. This reader's guide is aimed at students who are
familiar with the simple Keynesian Cross, ISLM analysis, and AggS/AggD analysis. The
characterization of the individual chapters (indicated below in brackets) tell the student which
chapters to skip (digression, doctrinal, and pot pourri) and what to look for in the other chapters
(simple Keynesianism, building blocks for ISLM, vision). In Chapters 4 through 7, Keynes is
trying to wriggle himself loose from the idiosyncratic definitions in his Treatise on Money. Ship
these chapters--at least on your first reading of the book. You may also want to skip pp. 101-104
and, on Keynes's own invitation, pp. 280-286. All this skipping reduces your reading load from
384 pages to 266 pages.

Principles-level Keynesianism is evident in Chapter 10. The "building-block" chapters (8, 11,
and 13) can be combined to yield ISLM. The late chapters that deal with prices (20 & 21)
provide the basis for AggS/AggD. The "vision" chapters underlie Keynes's recommendations for
economic reform (as contrasted with policy prescription.)


An Annotated Table of Contents
PREFACE
BOOK I: Introduction
CHAPTER 1: The General Theory [throat-clearing remarks]
CHAPTER 2: The Postulates of the Classical Economics [hook]
CHAPTER 3: The Principle of Effective Demand [anticipation]
BOOK II: Definitions and Ideas
CHAPTER 4: The Choice of Units [digression]
CHAPTER 5: Expectations as Determining Output and Employment [digression]
CHAPTER 6: The Meaning of Income, Saving and Investment [digression]
Appendix on User Cost [digression within a digression]
CHAPTER 7: The Meaning of Saving and Investment, Further Considered [digression]
BOOK III: The Propensity to Consume
CHAPTER 8: The Propensity to Consume: I. The Objective Factors [building block]
CHAPTER 9: The Propensity to Consume: II. The Subjective Factors [elaboration &
qualification]
CHAPTER 10: The Marginal Propensity to Consume and the Multiplier [simple
Keynesianism]
BOOK IV: The Inducement to Invest
CHAPTER 11: The Marginal Efficiency of Capital [building block]
CHAPTER 12: The State of Long-Term Expectation [vision]
CHAPTER 13: The General Theory of the Rate of Interest [building block]
CHAPTER 14: The Classical Theory of the Rate of Interest [compare and contrast]
Appendix on the Rate of Interest (Marshall, Ricardo, et al.) [doctrinal]
CHAPTER 15: The Psychological and Business Incentives to Liquidity [building block]
CHAPTER 16: Sundry Observations on the nature of Capital [vision]
CHAPTER 17: The Essential Properties of interest and Money [vision]
CHAPTER 18: The General Theory of Employment Restated [stocktaking]
BOOK V: Money-Wages and Prices
CHAPTER 19: Changes in Money-Wages [politics of P and M]
Appendix on Prof. Pigou's Theory of Unemployment [doctrinal]
CHAPTER 20: The Employment Function [economics of P and Q]
CHAPTER 21: The Theory of Prices [modified quantity theory of money]
BOOK VI: Short Notes Suggested by the General Theroy
CHAPTER 22: Notes on the Trade Cycle [compare and contrast]
CHAPTER 23: Notes on Mercantilism et al.[pot pourri]
CHAPTER 24: Concluding Notes on the Social Philosophy [vision]


So, where do you start reading? My recommendation, of which I'm sure Keynes would
disapprove, is to start with page 180. Here we find the only diagram in the General Theory.
Redraw it for Keynes. Reverse the axes, labeling the vertical axis i (for the interest rate) and the
horizontal axis L.F. (for loanable funds, a.k.a. investable resources). Omit the Y
2
and the Y
3

curves (and the r
2
) and highlight the intersection of supply and demand corresponding to r
1
. To
understand the significance of your diagram, read the whole of Chapter 14 in which Keynes
addresses himself to the questions What is the Classical Theory of the Rate of Interest?--and
What's Wrong with It? And now, read the rest of the book.
Keynes uses terminology that is now unconventional. The following terms, frequently used in the
General Theory, can easily be translated into more modern ones:
money-wage: The money wage is simply the nominal wage--the wage measured in current
dollars.
labor-unit: The labor unit is an unskilled workerhour. All labor and sometimes all factors of
production are measured in terms of unskilled-equivalent workerhours.
wage-unit: The wage-unit is the wage received for a labor unit.
wage-good: A wage-good is a good that a wage earner might buy; it's a consumption good.
non-wage-good: A non-wage-good is good that an interest-collector (or profit-maker) might
buy; it's a capital good, or investment good.
Keynes uses some terms that seem to have an obvious meaning, but don't. Prime among such
terms is the elusive (or illusive?) "involuntary unemployment." The various implied meanings in
modern texts make it all the more difficult to get Keynes's original intended meaning:
During a recession, a laid-off worker, who had been earning $6.00 per hour, is offered a job at
the current minimum-wage of $5.35. He declines, but his young and unskilled son expresses a
willingness to take that very job, even at a wage rate of $5.00. Although the firm would gladly
hire the son at this sub-minimum wage, it cannot actually do so precisely because of the
minimum-wage law. Keynes would categorize the father as being involuntarily unemployed and
the son as being voluntarily unemployed. Can you define "involuntary employment" such that it
(1) makes sense and (2) squares with this example? Bob Lucas argues that there is no such thing
as involuntary unemployment; he insists that even the unemployment experienced during the
depths of the Great Depression (25 percent in 1933) must be considered "voluntary." Bob Solow
says that he wishes Bob Lucas could experience involuntary unemployment first hand. Do these
two Bobs misunderstand one another? Or do they just dislike one another?
Once we get the meaning of "involuntary unemployment," we have to grapple with the
assumption about the wage rate that makes this category of unemployment possible:
What role does the assumption of fixed or sticky wages play in Keynes's theory of involuntary
unemployment-or in modern Keynesian theory? Is it the nominal wage rate or the real wage rate
that is resistant to change? Critics of Keynesianism might say that (1) if, for some reason, the
wage rate cannot adjust to reflect, say, a reduced demand for labor, then the explanation of
unemployment is a trivial one; and (2) if the wage rate can and does adjust to reflect a reduced
demand for labor, then there is no unemployment to be explained. Can you save Keynes--or
modern Keynesians--from this sort of criticism?