''The General Theory of Employment, Interest and Money'' 1

The General Theory of Employment, Interest and

Money
The General Theory of Employment,
Interest and Money

Author John Maynard Keynes

Country United Kingdom

Language English

Genre(s) Nonfiction

Publisher Palgrave Macmillan

Publication date 1936

Media type Print Paperback

Pages 472 (2007 Edition)

ISBN 9780230004764

OCLC Number [1]

62532514

The General Theory of Employment, Interest and Money was written by the English economist John Maynard
Keynes. The book, generally considered to be his magnum opus, is largely credited with creating the terminology
and shape of modern macroeconomics.[2] Published in February 1936 it sought to bring about a revolution,
commonly referred to as the "Keynesian Revolution", in the way economists thought - especially in relation to the
proposition that a market economy tends naturally to restore itself to full employment after temporary shocks.
Regarded widely as the cornerstone of Keynesian thought, the book challenged the established classical economics
and introduced important concepts such as the consumption function, the multiplier, the marginal efficiency of
capital, the principle of effective demand and liquidity preference.

Background
Keynes's previous work paved the way for The General Theory. Keynes and other Cambridge economists developed
the Cambridge cash-balance theory, a precursor for the concept of liquidity preference that was central to Keynes's
later theory.[3] Keynes's A Treatise on Probability investigated the nature of uncertainty. Keynes's ideas about
economic decision making and hesitancy in investment under uncertainty in The General Theory can be traced
directly to his Treatise.[4]
Although The General Theory was written during the Great Depression and was taken by many to justify the
assumption by government of the responsibility for the achievement and maintenance of full employment, it is for
the most part a highly abstract work of theory and by no means a tract on policy. Its full meaning and significance
''The General Theory of Employment, Interest and Money'' 2

continues to be debated even today.

As a book, its style differs from modern mainstream economic texts because its concepts are expressed almost
entirely in prose with little explicit mathematical modelling, following the practice of Alfred Marshall and his other
successors in 1930s Cambridge, England. This approach is neither accident nor shortcoming, indeed Keynes (a
mathematician by training) criticizes the use of mathematics in economics to hide fluffy arguments behind
mathematical notation [5] . The book is enlivened by some brilliant rhetorical passages, including the description of
the stock market in Chapter 12 and the concluding chapter 24 on the (rather tentative) policy implications Keynes
derived from his theory.

Summary
The central argument of The General Theory is that the level of employment is determined, not by the price of labour
as in neoclassical economics, but by the spending of money (aggregate demand). He argues that it is wrong to
assume that competitive markets will, in the long run, deliver full employment or that full employment is the natural,
self-righting, equilibrium state of a monetary economy. On the contrary, under-employment and under-investment
are likely to be the natural state unless active measures are taken. One implication of The General Theory is that a
lack of competition is not the fundamental problem and measures to reduce unemployment by cutting wages or
benefits are not only hard-hearted but ultimately futile.

Preface
Keynes wrote four prefaces, to the English, German, Japanese and French editions, each with a slightly different
emphasis. In the English preface, he addresses the book to his fellow economists, yet mentions he hopes it will be
helpful to others who read it. He also claims that the connection between this book and his Treatise on Money,
written five years earlier, will most likely be clearer to him than anyone else, and that any contradictions should be
viewed as an evolution of thought.

Book I: Introduction
The first book introduced what Keynes asserted would be a book that changed the way the world thinks.
• Chapter 1: The General Theory (only half a page long) consists simply of this radical claim:
"I have called this book the General Theory of Employment, Interest and Money, placing the emphasis
on the prefix general. The object of such a title is to contrast the character of my arguments and
conclusions with those of the classical theory of the subject, upon which I was brought up and which
dominates the economic thought, both practical and theoretical, of the governing and academic classes
of this generation, as it has for a hundred years past. I shall argue that the postulates of the classical
theory are applicable to a special case only and not to the general case, the situation which it assumes
being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the
special case assumed by the classical theory happen not to be those of the economic society in which we
actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the
facts of experience." (p. 3)
• Chapter 2: The Postulates of the Classical Economics[6]
• Chapter 3: The Principle of Effective Demand
''The General Theory of Employment, Interest and Money'' 3

Book II: Definitions and Ideas

• Chapter 4: The Choice of Units [7]
• Chapter 5. Expectation as Determining Output and Employment
• Chapter 6. The Definition of Income, Saving and Investment
• Chapter 7. The Meaning of Saving and Investment Further Considered

Book III: The Propensity to Consume

Book III moves to cover what causes people to consume, and therefore stimulate economic activity. In a depression
the government, he argued, needs to kick start the economy's motor by doing anything necessary. In Chapter 10 he
says,
"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused
coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on
well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of
course, by tendering for leases of the note-bearing territory), there need be no more unemployment and,
with the help of the repercussions, the real income of the community, and its capital wealth also, would
probably become a good deal greater than it actually is. It would, indeed, be more sensible to build
houses and the like; but if there are political and practical difficulties in the way of this, the above would
be better than nothing." (p. 129)
• Chapter 8. The Propensity to Consume: I. The Objective Factors [8]
• Chapter 9. The Propensity to Consume: II. The Subjective Factors
• Chapter 10. The Marginal Propensity to Consume and the Multiplier

Book IV: The Inducement to Invest

The marginal efficiency of capital is the relationship between the prospective yield of an investment and its supply
price or replacement cost. Keynes says on page 135: "I define the marginal efficiency of capital as being equal to
that rate of discount which would make the present value of the series of annuities given by the returns expected
from the capital-asset during its life just equal to its supply price."
• Chapter 11. The [[marginal efficiency of capital [9]]]
• Chapter 12. The State of Long-term Expectation
• Chapter 13. The General Theory of the Rate of Interest
• Chapter 14. The Classical Theory of the Rate of Interest
• Chapter 15. The Psychological and Business Incentives to Liquidity
• Chapter 16. Sundry Observations on the Nature of Capital
• Chapter 17. The Essential Properties of Interest and Money
• Chapter 18. The General Theory of Employment Re-stated

Book V: Money-Wages and Prices

This book focuses on various theories of unemployment, including Arthur Pigou's.
• Chapter 19. Changes in Money-Wages [10]
In this chapter Keynes demonstrates that with short-term interest rates near zero, lower wages for all workers
(compared to lower wages for a particular group of workers) will not lead to higher employment. This was to tackle
the argument that in depressions, what needs to happen is wage cuts, to get people to hire labour again.
• Chapter 20. The Employment Function
• Chapter 21. The Theory of Prices
''The General Theory of Employment, Interest and Money'' 4

Book VI: Short Notes Suggested by the General Theory

"It is better that a man should tyrannise over his bank balance than over his fellow citizens and whilst
the former is sometimes denounced as being but a means to the latter, sometimes at least it is an
alternative." (p. 374)
"... the ideas of economists and political philosophers, both when they are right and when they are
wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.
Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually
the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling
their frenzy from some academic scribbler of a few years back. I am sure that the power of vested
interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed,
immediately, but after a certain interval; for in the field of economic and political philosophy there are
not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the
ideas which civil servants and politicians and even agitators apply to current events are not likely to be
the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil." (pp.
383-4))
• Chapter 22. Notes on the Trade Cycle [11]
• Chapter 23. Notes on Merchantilism, the Usury Laws, Stamped Money and Theories of Under-consumption
• Chapter 24: Concluding Notes on the Social Philosophy towards which the General Theory might Lead

Reception
Keynes did not set out a detailed policy program in The General Theory, but he went on in practice to place great
emphasis on the reduction of long-term interest rates[12] and the reform of the international monetary system[13] as
structural measures needed to encourage both investment and consumption by the private sector.

Criticism
From the outset there has been controversy over what Keynes really meant. Many early reviews were highly
critical.[14]
The success of what came to be known as ‘neoclassical synthesis’ Keynesian economics owed a great deal to the
Harvard economist Alvin Hansen and MIT economist Paul Samuelson, as well as to the Oxford economist Sir John
Hicks. Hansen and Samuelson offered a lucid explanation of Keynes’s theory of aggregate demand with their elegant
45 degree Keynesian cross diagram, while Hicks created the IS/LM diagram. Both of these diagrams can still be
found in textbooks.
Just as the reception of The General Theory was encouraged by the 1930s experience of mass unemployment, its fall
from favour was associated with the ‘stagflation’ of the 1970s. Although few modern economists would disagree
with the need for at least some intervention, policies such as labour market flexibility are underpinned by the
neoclassical notion of equilibrium in the long run. Although Keynes explicitly addresses inflation, The General
Theory does not treat it as an essentially monetary phenomenon nor suggest that control of the money supply or
interest rates is the key remedy for inflation. This conflicts both with neoclassical theory and with the experience of
pragmatic policy-makers[15] . Furthermore the main Keynesian prescription for inflation, incomes policy, has lost
credibility.
However, many of the innovations introduced by The General Theory continue to be central to modern
macroeconomics. For instance, the idea that recessions reflect inadequate aggregate demand and that Say's Law (in
Keynes's formulation, that "supply creates its own demand") does not hold in a monetary economy. President
Richard Nixon famously said in 1971 (ironically, shortly before Keynesian economics fell out of fashion) that "We
are all Keynesians now", a phrase often repeated by Nobel laureate Paul Krugman.[16]
''The General Theory of Employment, Interest and Money'' 5

Endorsement
Nevertheless, starting with Axel Leijonhufvud, this view of Keynesian economics came under increasing challenge
and scrutiny[17] and has now divided into two main camps.
The majority new consensus view, found in most current text-books and taught in all universities, is New Keynesian
economics, which accepts the neoclassical concept of long-run equilibrium but allows a role for aggregate demand in
the short run. New Keynesian economists pride themselves on providing microeconomic foundations for the sticky
prices and wages assumed by Old Keynesian economics. They do not regard The General Theory itself as helpful to
further research.
The minority view is represented by Post Keynesian economists, all of whom accept Keynes’s fundamental critique
of the neoclassical concept of long-run equilibrium, and some of whom think The General Theory has yet to be
properly understood and repays further study.

Introductions to The General Theory

The earliest attempt to write a student guide was Robinson (1937) and the most successful (by numbers sold) was
Hansen (1953). These are both quite accessible but adhere to the Old Keynesian school of the time. An up-to-date
Post Keynesian attempt, aimed mainly at graduate and advanced undergraduate students, is Hayes (2006). Paul
Krugman (a New Keynesian) has written an introduction to the 2007 Palgrave Macmillan edition of The General
Theory.[16]

Notes
[1] http:/ / worldcat. org/ oclc/ 62532514
[2] Richard N Cooper, "The General Theory of Employment, Money, and Interest," (http:/ / www. foreignaffairs. com/ articles/ 53257/
richard-n-cooper/ the-general-theory-of-employment-money-and-interest) Foreign Affairs (New York); Sep/Oct 1997
[3] Skidelsky, Robert. John Maynard Keynes: 1883-1946. Penguin: 2003. p. 131.
[4] Minsky, Hyman P. (2008). John Maynard Keynes. McGraw-Hill Professional. p. 64. ISBN 97800715930148.
[5] Roger E. Backhouse, 'An Abstruse and Mathematical Argument: The Use of Mathematical Reasoning in the General Theory', in Bradley
Bateman et al . (editors) The Return to Keynes; The Belknap Press of Harvard University Press,; Cambridge; 2010
[6] "Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the
price of wage-goods. It is sometimes said that it would be illogical for labour to resist a reduction of money-wages but not to resist a reduction
of real wages. ... Moreover, the contention that the unemployment which characterises a depression is due to a refusal by labour to accept a
reduction of money-wages is not clearly supported by the facts."
[7] http:/ / www. marxists. org/ reference/ subject/ economics/ keynes/ general-theory/ ch04. htm
[8] http:/ / www. marxists. org/ reference/ subject/ economics/ keynes/ general-theory/ ch08. htm
[9] http:/ / www. marxists. org/ reference/ subject/ economics/ keynes/ general-theory/ ch11. htm
[10] http:/ / www. marxists. org/ reference/ subject/ economics/ keynes/ general-theory/ ch19. htm
[11] http:/ / www. marxists. org/ reference/ subject/ economics/ keynes/ general-theory/ ch22. htm
[12] See Tily (2007)
[13] See Davidson (2002)
[14] Keynes's book was largely ignored on the European continent, with the unfortunate exception of Nazi Germany, (where the translation of the
General Theory was published "on paper rather better than usual, and the price not much higher than usual", as Keynes himself put it). In the
foreword to the German edition of the General Theory (see external link), Keynes states that "the theory of aggregated production, which is
the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the
theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire."
The few reviews that actually emerged from mainland Europe, particularly those by Gustav Cassel in 1937 from Sweden and Gottfried
Haberler in 1936 from Austria, were hostile from their outset. In France, both the professional, as well as the personal, hostility of influential
conservative economists such as Jacques Rueff guaranteed that Keynes' book would not even be translated until after the war in 1948.

The libertarian and Austrian economist Henry Hazlitt wrote a scathing review of the book, see Hazlitt(1959).
[15] The transmission of monetary policy, Monetary Policy Committee, Bank of England (http:/ / www. bankofengland. co. uk/ publications/
other/ monetary/ montrans. pdf)
[16] Krugman, Paul. "Introduction to the General Theory" (http:/ / www. pkarchive. org/ economy/ GeneralTheoryKeynesIntro. html).
www.pkarchive.org. . Retrieved 2008-12-25.
''The General Theory of Employment, Interest and Money'' 6

[17] See Leijonhufvud (1968), Davidson (1972), Minsky (1975), Patinkin (1976), Chick (1983), Amadeo (1989), Trevithick (1992), Harcourt and
Riach (1997), Ambrosi (2003), Lawlor (2006), Hayes (2006), Tily (2007)

References
• Amadeo, Edward (1989) The principle of effective demand, Aldershot UK and Brookfield US: Edward Elgar
• Ambrosi, Gerhard Michael (2003) Keynes, Pigou and Cambridge Keynesians, London: Palgrave Macmillan
• Chick, Victoria (1983) Macroeconomics after Keynes, Oxford: Philip Allan
• Davidson, Paul (1972) Money and the Real World, London: Macmillan
• Davidson, Paul (2002) Financial markets, money and the real world, Cheltenham UK and Northampton US:
Edward Elgar
• Hansen, Alvin (1953) A Guide to Keynes, New York: McGraw Hill
• Harcourt, Geoff and Riach, Peter (eds) (1997) A ‘Second Edition’ of The General Theory, London: Routledge
• Hayes, Mark (2006) The economics of Keynes: a New Guide to The General Theory, Cheltenham UK and
Northampton US: Edward Elgar.
• Hazlitt, Henry (1959) The Failure of the New Economics, Princeton, NJ: Van Nostrand.
• Keynes, John Maynard (1936) The General Theory of Employment, Interest and Money, London: Macmillan
(reprinted 2007)
• Lawlor, Michael (2006) The economics of Keynes in historical context, London: Palgrave Macmillan
• Leijonhufvud, Axel (1968) Keynesian economics and the economics of Keynes, New York: Oxford University
Press.
• Minsky, Hyman (1975) John Maynard Keynes, New York: Columbia University Press
• Patinkin, Don (1976) Keynes’s monetary thought, Durham NC: Duke University Press
• Robinson, Joan (1937) Introduction to the theory of employment, London: Macmillan
• Tily, Geoff (2007) Keynes's General Theory, the Rate of Interest and ‘Keynesian’ Economics, London: Palgrave
Macmillan
• Trevithick, James (1992) Involuntary unemployment, Hemel Hempstead: Simon & Schuster

External links
• Introduction by Paul Krugman to The General Theory of Employment, Interest and Money, by John Maynard
Keynes (http://www.pkarchive.org/economy/GeneralTheoryKeynesIntro.html)
• Full text online. (http://homepage.newschool.edu/het//texts/keynes/gtcont.htm) (with footnotes)
• Full text PDF book. (http://www.scribd.com/doc/11392072/
The-General-Theory-of-Employment-Interest-and-Money) (with footnotes, typeset)
• Online text in screen-friendly format. (http://etext.library.adelaide.edu.au/k/k44g/) (lacks footnotes)
• Foreword to the German Edition of the General Theory/Vorwort Zur Deutschen Ausgabe (http://tmh.floonet.
net/articles/foregt.html)
Article Sources and Contributors 7

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