General Theory of Employment Interest and Money

The General Theory of Employment Interest and Money is generally considered to be the masterwork of the English economist John Maynard Keynes. To a great extent it created the terminology of modern macro-economics. It was published in February 1936. The book ushered in a revolution, referred to as the "Keynesian Revolution", in the way economists and men in public affairs thought about the economy, and especially how they thought about the feasibility and wisdom of public sector management of the aggregate level of demand in the economy.

In Keynes' book Essays in Persuasion he looked back on his frustrating attempts to influence public opinion during the Great Depression of the early 1930s. The "General Theory" represented Keynes's attempt to shift opinion by altering (the framework of thought by revolutionising) macro-economics.

Briefly, the "General Theory" argued that the level of aggregate demand in a modern economy was determined by a range of factors including the propensity to consume (the percentage of any increase in their income that people chose to spend on goods and services), the propensity to save (the percentage of any increase in their incomes that they chose to save), the attractiveness of fixed capital investment (dependent on anticipated rates of return) and the level of interest rates. Keynes's key arguments included that in an economy bedevilled by weak demand (e.g. a depression), where in his terminology there was an ignition problem (a difficulty in getting the economy to move forward more vigorously), then the government (more broadly the public sector) could increase aggregate demand by increasing its expenditures, including by borrowing to finance the expenditures, and that the public-sector borrowing would not increase interest rates sufficiently to undermine the effectiveness of such a policy.

Keynes forecast in the "General Theory" that his book was likely to lead to a revolution in the way men of affairs thought about public policy, and Keynesianism (government attempts to affect demand through tax, expenditure and borrowing and monetary policy) was enormously influential in the post-Second World War period. The stagflation of the 1970s made Keynes's interventionist approach less fashionable with politicians and economic theorists. Economists like Milton Friedman predicted the fall of the Bretton Woods system, and inflation problems was to a lesser extent discussed in Keynes magnus opus. In most economies it came to be believed that Keynesian demand management was difficult, and that it had subtle damaging effects including undermining the advantages of sound finance (balanced budgets) and encouraging inflation. To some extent Keynesianism suffered from its own success in that the post-war period largely avoided periods of devastating unemployment and lost production. However, Keynesianism still shows up in the form of new Keynesian economics, which attempts to merge neoclassical economics with some Keynesian policy conclusions.

At his best Keynes was a wonderful craftsman of the English language and his wonderful fluency of usage is in evidence at times in the General Theory, e.g. Chapter 12 dealing with "The State of Long Term Expectation" is one of the best single chapters about the stock market ever written.

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