who wrote the general theory of employment interest and money
John Maynard Keynes
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The General Theory of Employment, Interest and Money The General Theory of Employment, Interest and Money of 1936 is the last and most important book by the English economist John Maynard Keynes. It created a profound shift in economic thought, giving macroeconomics a central place in economic theory and contributing much of its terminology – the "Keynesian Revolution". It had equally powerful consequences in economic policy, being interpreted as providing theoretical support for government spending in general, and for budgetary deficits, monetary intervention and counter-cyclical policies in particular. It is pervaded with an air of mistrust for the rationality of
The General Theory of Employment, Interest and Money
2124671
The General Theory of Employment, Interest and Money The General Theory of Employment, Interest and Money of 1936 is the last and most important book by the English economist John Maynard Keynes. It created a profound shift in economic thought, giving macroeconomics a central place in economic theory and contributing much of its terminology – the "Keynesian Revolution". It had equally powerful consequences in economic policy, being interpreted as providing theoretical support for government spending in general, and for budgetary deficits, monetary intervention and counter-cyclical policies in particular. It is pervaded with an air of mistrust for the rationality of
The General Theory of Employment, Interest and Money
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publishing, the book has been translated into over 10 languages. Economic Development of the North Atlantic Community: Historical Introduction to Modern Economics (1967). Dudley's second major work. Proudhon, Gesell and Keynes: An Investigation of Some "anti-Marxian Socialist" Antecedents of Keynes' General Theory of Employment, Interest and Money (1997). Dudley's third major work. The Economics of John Maynard Keynes The Economics of John Maynard Keynes: The Theory of Monetary Economy is a non-fiction work by Dudley Dillard which seeks to make "The General Theory of Employment, Interest and Money" by John Maynard Keynes understandable to both the economist and to the
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Liquidity preference In macroeconomic theory, liquidity preference is the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book "The General Theory of Employment, Interest and Money" (1936) to explain determination of the interest rate by the supply and demand for money. The demand for money as an asset was theorized to depend on the interest foregone by not holding bonds (here, the term "bonds" can be understood to also represent stocks and other less liquid assets in general, as well as government bonds). Interest rates, he argues, cannot be a reward
Liquidity preference
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Where Keynes Went Wrong Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts is a non-fiction work by Hunter Lewis. It was first published in 2009. This 384 page book for both general reader and economist questions the validity of John Maynard Keynes’s assumptions. Lewis argues that The General Theory of Employment, Interest and Money is based almost exclusively on Keynes’s intuition rather than on demonstrated logic or solid evidence. Lewis begins by demystifying Keynes by giving his elaboration of Keynes's writings in General Theory of Employment, Interest, and Money and other works. Using claims
Where Keynes Went Wrong
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sensible empirical foundations in a true monetary economy". Liquidity preference In macroeconomic theory, liquidity preference is the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book "The General Theory of Employment, Interest and Money" (1936) to explain determination of the interest rate by the supply and demand for money. The demand for money as an asset was theorized to depend on the interest foregone by not holding bonds (here, the term "bonds" can be understood to also represent stocks and other less liquid assets in general, as well as government bonds).
Liquidity preference
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economy. But monetary aggregates remain a leading economic indicator. with "some evidence that the linkages between money and economic activity are robust even at relatively short-run frequencies." Knut Wicksell criticized the quantity theory of money. John Maynard Keynes criticized the quantity theory of money in "The General Theory of Employment, Interest and Money". Keynes had originally been a proponent of the theory, but he presented an alternative in the "General Theory". Keynes argued that the price level was not strictly determined by the money supply. Changes in the money supply could have effects on real variables like output. Ludwig von
Quantity theory of money
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or 1699: his will was written in May 1698 and his executors received probate on 6 February 1699. During the later part of his life, Nicholas Barbon wrote extensively on economic theory. His pamphlets and books on political economy are considered important because of their innovative views on money, trade (especially free trade) and supply and demand. His works, especially "A Discourse of Trade" (written in 1690), influenced and drew praise from 20th-century economists such as John Maynard Keynes (in "The General Theory of Employment, Interest and Money") and Joseph Schumpeter. He was one of several late 17th-century economic, social
Nicholas Barbon
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Dennis Robertson (economist) Sir Dennis Holme Robertson (23 May 1890 – 21 April 1963) was an English economist who taught at Cambridge and London Universities. Robertson, the son of a Church of England clergyman, was born in Lowestoft and educated as a scholar of Eton and at Trinity College, Cambridge, where he read Classics and Economics, graduating in 1912. Robertson worked closely with John Maynard Keynes in the 1920s and 1930s, during the years when Keynes was developing many of the ideas that later were incorporated in his "General Theory of Employment, Interest and Money". Keynes wrote that at that
Dennis Robertson (economist)
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Greek letters for missing data in its formulas and of flouting logic. He wrote, "Correlations are not explanations and besides, they can be as spurious as the high correlation in Finland between foxes killed and divorces." Professor Myrdal was an early supporter of the theses of John Maynard Keynes, although he maintained that the basic idea of adjusting national budgets to slow or speed an economy was first developed by him and articulated in his book "Monetary Economics", published in 1932, four years prior to Keynes' "General Theory of Employment, Interest and Money". William Barber’s comment upon Myrdal’s work on
Gunnar Myrdal
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The Failure of the New Economics The Failure of the "New Economics" (1959) is a book by Henry Hazlitt offering a detailed critique of John Maynard Keynes' work "The General Theory of Employment, Interest and Money" (1936). Hazlitt's work represents the most detailed critical analysis of "The General Theory" ever undertaken from an Austrian perspective. Hazlitt embarked on this project because, in his view, although general critiques of Keynes and "The General Theory" had been made, no critic had completed a detailed, paragraph-by-paragraph, analysis of the work and accordingly followers of Keynes could argue that previous critiques were shallow and
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anything to our understanding." The Failure of the New Economics The Failure of the "New Economics" (1959) is a book by Henry Hazlitt offering a detailed critique of John Maynard Keynes' work "The General Theory of Employment, Interest and Money" (1936). Hazlitt's work represents the most detailed critical analysis of "The General Theory" ever undertaken from an Austrian perspective. Hazlitt embarked on this project because, in his view, although general critiques of Keynes and "The General Theory" had been made, no critic had completed a detailed, paragraph-by-paragraph, analysis of the work and accordingly followers of Keynes could argue that previous
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be exchanged for new bills; attempts to hold money thus result in it expiring and becoming worthless. Along similar lines, John Maynard Keynes approvingly cited the idea of a carrying tax on money, (1936, "The General Theory of Employment, Interest and Money") but dismissed it due to administrative difficulties. More recently, a carry tax on currency was proposed by a Federal Reserve employee (Marvin Goodfriend) in 1999, to be implemented via magnetic strips on bills, deducting the carry tax upon deposit, the tax being based on how long the bill had been held. It has been proposed that a negative
Interest rate
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R. Hicks, and James Meade all presented papers describing mathematical models attempting to summarize John Maynard Keynes' "General Theory of Employment, Interest, and Money". Hicks, who had seen a draft of Harrod's paper, invented the IS–LM model (originally using the abbreviation "LL", not "LM"). He later presented it in "Mr. Keynes and the Classics: A Suggested Interpretation". Hicks later agreed that the model missed important points of Keynesian theory, criticizing it as having very limited use beyond "a classroom gadget", and criticizing equilibrium methods generally: "When one turns to questions of policy, looking towards the future instead of the past,
IS–LM model
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The Economics of John Maynard Keynes The Economics of John Maynard Keynes: The Theory of Monetary Economy is a non-fiction work by Dudley Dillard which seeks to make "The General Theory of Employment, Interest and Money" by John Maynard Keynes understandable to both the economist and to the non-economist. It was first published in 1948. In addition to explaining the economic theories of Keynes, Dillard also includes a chapter on Keynes’s philosophical development and the “social philosophy toward which it leads.” Throughout the book, Dillard provides summaries and examines Keynes' concepts on employment, income, saving, marginal propensity to consume, the
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ultimately benefit all of society. John Maynard Keynes was a very influential classical economist as well, having written his General Theory of Employment, Interest, and Money in 1936. Neoclassical development theory became influential towards the end of the 1970s, fired by the election of Margaret Thatcher in the UK and Ronald Reagan in the USA. Also, the World Bank shifted from its Basic Needs approach to a neoclassical approach in 1980. From the beginning of the 1980s, neoclassical development theory really began to roll out. One of the implications of the neoclassical development theory for developing countries were the Structural
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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), and an easier version is Sheehan (2009). Paul Krugman has written an introduction to the 2007 Palgrave Macmillan edition of "The General Theory. The General Theory of Employment, Interest and Money The General Theory of Employment, Interest and Money of 1936 is the last and most important book by the English economist John Maynard
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shook off the picture of the interest rate being purely monetary, with a corresponding assumption that changes in the return on capital took their effect solely on income. Viner, Knight and Étienne Mantoux understood Keynes as advancing the Chapter 13 view; Hicks and Franco Modigliani who followed him adopted the Chapter 15 generalisation. Hansen recognised that Keynes often wrote as if liquidity preference was a function of interest rate alone, but saw this as a persistent error. Samuelson accepted 'the classical theory of interest and capital' which determines the interest rate from the same equation as Keynes (and Samuelson himself)
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indirectly, on purchasing the product" (from chapter 2 of his "General Theory"). See the article on The General Theory of Employment, Interest and Money for a summary of Keynes's view. Although hoarding of money was not a direct cause of unemployment in Keynes's theory, his concept of saving was unclear and some readers have filled the gap by assigning to hoarding the role Keynes gave to saving. An early example was Jacob Viner, who in his 1936 review of the "General Theory" said of hoarding that Keynes' attaches great importance to it as a barrier to "full" employment' (p152) while
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regardless of provenance, are grouped in academia under the rubric of "Keynesian economics", due to Keynes's role in consolidating, elaborating, and popularizing them. Keynes himself specifically discussed underconsumption (which he wrote "under-consumption") in "The General Theory of Employment, Interest and Money," in Chapter 22, Section IV, and Chapter 23, Section VII. The theory of underconsumption has been criticized by classical economists such as James Mill, by Karl Marx (explicitly in his crisis theory), Frederick Engels, and many subsequent Marxists, and by Austrian economics. Underconsumption was criticized by Adam Smith, who wrote "What is prudence in the conduct of every private
Underconsumption
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economic theory by Richard Kahn in a 1931 paper cited by Keynes in his own discussion. Kahn's mechanism is based on looking at an initial expenditure and noting that it will end up in the pockets of various employees and suppliers who in turn will spend a proportion of what they receive, thereby creating more employment; and so forth. Robinson, Samuelson and Hansen include it in their accounts. Mantoux wrote that "The entire demonstration, it would seem... rests on this function". Samuelson explained the multiplier in these terms: Let's suppose that I hire unemployed resources to build a $1000 woodshed.
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or suggest that control of the money supply or interest rates is the key remedy for inflation, unlike neoclassical theory. Lastly, Keynes' economic theory was criticized by Marxian economists, who said that Keynes ideas, while good intentioned, cannot work in the long run due to the contradictions in capitalism. A couple of these, that Marxians point to are the idea of full employment, which is seen as impossible under private capitalism; and the idea that government can encourage capital investment through government spending, when in reality government spending could be a net loss on profits. The earliest attempt to write
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asserts that the rate of interest already performs another function in the economy, that of equating demand and supply of money, and that it cannot adjust to maintain two separate equilibria. In his view it is the monetary role which wins out. This is why Keynes's theory is a theory of money as much as of employment: the monetary economy of interest and liquidity interacts with the real economy of production, investment and consumption. Keynes sought to allow for the lack of downwards flexibility of wages by constructing an economic model in which the money supply and wage rates were
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in the course of the next ten years — the way the world thinks about its economic problems. I can't expect you, or anyone else, to believe this at the present stage. But for myself I don't merely hope what I say,— in my own mind, I'm quite sure. The first chapter of the "General theory" (only half a page long) has a similarly radical tone: 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
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prices, and proposed a modification to Keynes's model. After this a succession of more elaborate models were constructed, many associated with the Phillips curve. Keynes's optimistic prediction that an increase in money supply would be taken up by an increase in employment led to Jacob Viner's pessimistic prediction that "in a world organized in accordance with Keynes' specifications there would be a constant race between the printing press and the business agents of the trade unions". Models of wage pressure on the economy needed frequent correction and the standing of Keynesian theory suffered. Geoff Tily wrote ruefully: Finally, the most
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an own rate of interest to be 'one of the most incredible' of the 'confusions in the "General Theory" '. In §I–IV Keynes gives a sympathetic notice to the 17th century mercantilists who, like himself, believed interest to be a monetary phenomenon and saw high interest rates as harmful. He accepts their conclusion that in principle export restrictions may prevent the flow of money abroad and lead to economic advantages at home. For similar reasons Keynes sees justice in scholastic prohibitions of usury. He remarks in §V that Adam Smith had supported a maximum legal rate of interest. Smith's reasoning
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in classical economics, but by the level of aggregate demand. If the total demand for goods at full employment is less than the total output, then the economy has to contract until equality is achieved. Keynes thus denied that full employment was the natural result of competitive markets in equilibrium. In this he challenged the conventional ('classical') economic wisdom of his day. In a letter to his friend George Bernard Shaw on New Year's Day, 1935, he wrote: I believe myself to be writing a book on economic theory which will largely revolutionize — not I suppose, at once but
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but this quality was belied by the "General Theory", which in the words of Étienne Mantoux attained "a degree of obscurity without precedent in his past work". Frank Knight, another hostile critic, commented on "the exasperating difficulty of following his exposition". More significant is the view of writers sympathetic to Keynes. Michel DeVroey comments that "many passages of his book were almost indecipherable". Paul Davidson wrote that... ...even after reading the "General Theory" in 1936, <nowiki>[</nowiki>Paul<nowiki>]</nowiki> Samuelson, perhaps reflecting <nowiki>[</nowiki>Robert<nowiki>]</nowiki> Bryce's view of the difficulty of understanding Keynes's book, found the "General Theory" analysis "unpalatable" and not comprehensible. Hazlitt quotes
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"Physiology of industry" (1889). argue that there are three components to the Keynesian revolution: a policy revolution, a theoretical (or intellectual) revolution, and a textbook revolution. These are addressed in turn. Keynes's revolutionary theory was set out in his book "General Theory of Employment, Interest and Money", commonly referred to by the abbreviated title "General Theory". While working on the book, Keynes wrote to George Bernard Shaw, saying "I believe myself to be writing a book on economic theory which will largely revolutionize, not I suppose at once but in the course of the next ten years – the way
Keynesian Revolution
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1936 "General theory of employment, interest, and money". In his initial account of liquidity preference (the demand for money) in Chapter 13, this demand is solely a function of the interest rate; and since the supply is given and equilibrium is assumed, the interest rate is determined by the money supply. In his later account (Chapter 15), interest cannot be separated from other economic variables and needs to be analysed together with them. See The General Theory for details. It is thought that Jacob Bernoulli discovered the mathematical constant e by studying a question about compound interest. He realized that
Interest
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express a wish for the broadest and earliest possible dissemination of his new ideas. Keynes's work on the "General Theory" began as soon as his "Treatise on Money" had been published in 1930. He was already dissatisfied with what he had written and wanted to extend the scope of his theory to output and employment. By September 1932 he was able to write to his mother: 'I have written nearly a third of my new book on monetary theory'. In autumn 1932 he delivered lectures at Cambridge under the title 'the monetary theory of production' whose content was close to
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own account, Macmillan & Co., the 'publishers' (in reality they were distributors), could not object to the expense of Keynes' method of operating. They came out of Keynes' profit (Macmillan & Co. merely received a commission). Keynes' object was to simplify the process of circulating drafts; and eventually to secure good sales by fixing the retail price lower than would Macmillan & Co. The advantages of self-publication can be seen from Étienne Mantoux's review: When he published "The General Theory of Employment, Interest and Money" last year at the sensational price of 5 shillings, J. M. Keynes perhaps meant to
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The level of employment "N̂" is given by the horizontal position at which the pink curve has a value of formula_2, and this is evidently a decreasing function of "W". This diagram cannot have been in Keynes's mind when he wrote (Chapter 2, p12) that "one would have expected the classical school to argue" that if money-wages change then the effect on prices would leave "the level of unemployment practically the same as before". The theoretical system we have described is developed over chapters 4–18, and is anticipated by a chapter which – amidst a proliferation of symbols – interprets
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seems perverse to deny that investment is financed (or stimulated) by capital expenditure. Schumpeter provided the following summary of Keynes's theory: Current saving and current investment, being identically equal, cannot determine anything. Planned (ex ante) saving and planned (ex ante) investment determine income (total net output)... G. L. S. Shackle later wrote that: Myrdalian ex ante language would have saved the General Theory from describing the flow of investment and the flow of saving as identically, tautologically equal, and within the same discourse, treating their equality as a condition which may, or not, be fulfilled. All forms of saving may
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free-market decision making. Keynes denied that an economy would automatically adapt to provide full employment even in equilibrium, and believed that the volatile and ungovernable psychology of markets would lead to periodic booms and crises. The "General Theory" is a sustained attack on the 'classical' orthodoxy of its time. It introduced the concepts of the consumption function, the principle of effective demand and liquidity preference, and gave new prominence to the multiplier and the marginal efficiency of capital. The central argument of "The General Theory" is that the level of employment is determined not by the price of labour, as
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regarded this, as they regarded other supply curves, as simply influencing the allocation of resources. But here too, even from a classical point of view, Keynes can be seen to be correct, at least assuming fixed wage rates. The classics (who had written little about unemployment) had not taken account of Lavington's observation that interest is the opportunity cost of holding money. They should have reasoned that an increase in the marginal efficiency of capital leads to an increase in the interest rate which increases the cost of holding money and therefore leads to faster circulation; that this has the
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recessions could happen, but not long-term depressions. He was able to address this further in "The General Theory of Employment, Interest and Money". In his General Theory, Keynes argued against the seesaw theory and said that the economy was more like an elevator that can stop at any level. This is because once the economy reaches the bottom, individuals would have no excess income to save. No savings results in no investment so the economy cannot save itself. Without the savings, there is no pressure to lower interest rates, so there is no incentive for businesses to invest. In his
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in Keynes's theory lies in the schedule of the marginal efficiency of capital which, as we have seen, is defined in Chapter 11 in terms of "expected" returns. Keynes differs here from Fisher whom he largely follows, but who defined the 'rate of return over cost' in terms of an actual revenue stream rather than its expectation. Keynes was certainly correct in this, and the point has a particular significance in his theory. Keynes differed from his classical predecessors in assigning a role to the schedule of the marginal efficiency of capital in determining the level of employment. The classics
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– certainly surprising from the proponent of the 'invisible hand' of markets – was based on a fear that a high rate of interest would lead to loans being cornered by spendthrifts and get-rich-quick 'projectors'. §VI is devoted to the theories of 'the strange, unduly neglected prophet Silvio Gesell' who had proposed a system of 'stamped money' to artificially increase the carrying costs of money. 'The idea behind stamped money is sound', says Keynes, but subject to technical difficulties, one of which is the existence of other outlets for liquidity preference such as jewellery and formerly land. It is interesting
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a demand for investment. This was the line pursued by Jacob Viner, who wrote of Keynes that: He finds fault with the "classical" economists for their alleged neglect of the gulf between the desire to save and the desire to invest, i.e., for their neglect of "liquidity preferences"... It was a shortcoming of the Ricardian wing of the classical school that... they steadfastly adhered to their position that hoarding was so abnormal a phenomenon as not to constitute a significant contributing factor to unemployment... Hoarding constitutes a fairly small proportion of saving, and Viner accordingly doubted that it could play
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as the natural exceeded the market interest rate . In these conditions, borrowers turn a profit and deposit cash into bank reserves, which expands money supply. This can lead to a cumulative process where inflation increases continuously without an expansion in the monetary base. Wicksell's work influenced Keynes and the Swedish economists of the Stockholm School. Modern macroeconomics can be said to have begun with Keynes and the publication of his book "The General Theory of Employment, Interest and Money" in 1936. Keynes expanded on the concept of liquidity preferences and built a general theory of how the economy worked.
History of macroeconomic thought
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one in which employment is low enough and the standard of life sufficiently miserable to bring savings to zero'. The misery does not depend on any assumption of static wages. If the return to capital falls to zero then according to Keynes's theory there will be no investment, and income must collapse to the point at which the propensity to save disappears. However his conclusions are not pessimistic because he postulates that steps may be taken to adjust the interest rate to ensure full employment (p220), that 'enormous social changes would result' and that 'this may be the most sensible
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general theory of employment'. In these lectures Keynes presented the marginal efficiency of capital in much the same form as it took in Chapter 11, his 'basic chapter' as Kahn called it. He gave a talk on the same subject to economists at Oxford in February 1935. This was the final building block of the "General Theory". The book was finished in December 1935 and published in February 1936. Keynes was an associate of Lytton Strachey and shared much of his outlook. According to Hazlitt his "reputation as a great economist rested from the beginning on his purely "literary" brilliance",
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of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees. Keynes's theory of the trade cycle is a theory of the slow oscillation of money income which
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destructive step of all was Samuelson's and <nowiki>[Robert]</nowiki> Solow's incorporation of the Phillips curve into 'Keynesian' theory in a manner which traduced not only Phillips but also Keynes's careful work in the "General Theory", Chapter 21, substituting for its subtlety an immutable relationship between inflation and employment. The 1970s combination of inflation and stagnating economic activity was at odds with this relationship, and therefore 'Keynesianism', and by association Keynes were rejected. Monetarism was merely waiting in the wings for this to happen. Keynes's assumption of wage behaviour was not an integral part of his theory – very little in his
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Chapter 15. His arguments offer ample scope for criticism, but his final conclusion is that liquidity preference is a function mainly of income and the interest rate. The influence of income (which really represents a composite of income and wealth) is common ground with the classical tradition and is embodied in the Quantity Theory; the influence of interest had also been noted earlier, in particular by Frederick Lavington (see Hicks's 'Mr. Keynes and the "Classics" '). Thus Keynes's final conclusion may be acceptable to people who question the arguments along the way. However he shows a persistent tendency to think
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interest rate on the velocity of circulation is small enough to be ignored. This allows us to treat "V" as constant and solve the first and third equations (the 'first postulate' and the quantity theory) together, leaving the second equation to determine the interest rate from the result. We then find that the level of employment is given by the formula formula_1. The graph shows the numerator and denominator of the left-hand side as blue and green curves; their ratio – the pink curve – will be a decreasing function of "N" even if we don't assume diminishing marginal returns.
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the "Treatise" except in giving prominence to a liquidity preference theory of interest. There was no consumption function and no theory of effective demand. Wage rates were discussed in a criticism of Pigou. In autumn 1933 Keynes's lectures were much closer to the "General Theory", including the consumption function, effective demand, and a statement of 'the inability of workers to bargain for a market-clearing real wage in a monetary economy'. All that was missing was a theory of investment. By spring 1934 Chapter 12 was in its final form. His lectures in autumn of that year bore the title 'the
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To which Jacob Viner retorted that: By analogous reasoning he could deny that wages are the reward for labor, or that profit is the reward for risk-taking, because labor is sometimes done without anticipation or realization of a return, and men who assume financial risks have been known to incur losses as a result instead of profits. Keynes goes on to claim that the demand for money is a function of the interest rate alone on the grounds that: The rate of interest is... the "price" which equilibrates the desire to hold wealth in the form of cash with the
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way of getting rid of many of the objectionable features of capitalism' (p221). Keynes begins by defining 'own rates of interest'. If the market price for purchasing the commitment to supply a bushel of wheat every year in perpetuity was the price of 50 bushels, then the 'wheat rate of interest' would be 2%. He then tries to find the property which justifies us in regarding the money rate as the true rate. His arguments didn't satisfy his supporters who accepted Pigou's contention that it makes no difference which rate is used. Hazlitt went further, considering the very concept of
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income: the richer people are, the more wealth they will seek to put aside. The profitability of investment, on the other hand, is determined by the relation between the return available to capital and the interest rate. The economy needs to find its way to an equilibrium in which no more money is being saved than will be invested, and this can be accomplished by contraction of income and a consequent reduction in the level of employment. In the classical scheme it is the interest rate rather than income which adjusts to maintain equilibrium between saving and investment; but Keynes
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same effect on prices as an increase in the money supply; and that higher prices at a given wage level lead to higher employment. They might have thought this to be a weak effect, but they could not with consistency have denied its existence. On the other hand, Keynes may have considered the effect to be larger than it really is. He defines his multiplier "k" as 1 / "S" '("Y" ), and this gives the response of income to a change in the schedule of the marginal efficiency of capital "for a given interest rate". However the interest rate
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but he went on in practice to place great emphasis on the reduction of long-term interest rates and the reform of the international monetary system as structural measures needed to encourage both investment and consumption by the private sector. Paul Samuelson said that the General Theory "caught most economists under the age of 35 with the unexpected virulence of a disease first attacking and decimating an isolated tribe of South Sea islanders." 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
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employment", and described Chapter 11 – the point of divergence – as needing to be completely rewritten. John Hicks occupied the opposite extreme, basing his interpretation on Book IV in 'Mr Keynes and the "Classics" ', and thereby for the first time making this part of the "General theory" intelligible to other economists. He was a relatively faithful interpreter of selected elements of Keynes's theory while also bringing Keynes close to previous orthodoxy. His reading has been severely criticised by partisans of the more radical elements of Keynes's thinking. Even Hicks nudges the Book IV doctrine in the direction of
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of money are indeed "measured in terms of wage-units" (p246). In Chapter 14 Keynes contrasts the classical theory of interest with his own, and in making the comparison he shows how his system can be applied to explain all the principal economic unknowns from the facts he takes as given. The two topics can be treated together because they are different ways of analysing the same equation. Keynes's presentation is informal. To make it more precise we will identify a set of 4 variables – saving, investment, the rate of interest, and the national income – and a parallel set
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by income). It is analogous to the curve giving the amount of gold which can be extracted from the soil at a price less than "p". Nonetheless the schedule of the marginal efficiency of capital was a demand function in Keynes's eyes. For fixed industrial conditions, we conclude that 'the amount of investment... depends on the rate of interest' as John Hicks put it in 'Mr Keynes and the "Classics" '. Keynes proposes two theories of liquidity preference (i.e. the demand for money): the first as a theory of interest in Chapter 13 and the second as a correction in
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of 4 equations which jointly determine them. The graph illustrates the reasoning. The red S lines are shown as increasing functions of "r" in obedience to classical theory; for Keynes they should be horizontal. The first equation asserts that the reigning rate of interest r̂ is determined from the amount of money in circulation M̂ through the liquidity preference function and the assumption that L (r̂ ) = M̂. The second equation fixes the level of investment Î given the rate of interest through the schedule of the marginal efficiency of capital as I(r̂ ). The third equation tells us
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in terms of the Chapter 13 theory while nominally accepting the Chapter 15 correction. Chapter 13 presents the first theory in rather metaphysical terms. Keynes argues that: It should be obvious that the rate of interest cannot be a return to saving or waiting as such. For if a man hoards his savings in cash, he earns no interest, though he saves just as much as before. On the contrary, the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period.
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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 influences, 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... But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil. Keynes did not set out a detailed policy program in "The General Theory",
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Cambridge version of the quantity theory led to both Keynes's attack on the quantity theory and the Monetarist revival of the theory. Marshall recognized that "k" would be determined in part by an individual's desire to hold liquid cash. In his "General Theory of Employment, Interest and Money", Keynes expanded on this concept to develop the idea of liquidity preference, a central Keynesian concept. Cambridge equation The Cambridge equation formally represents the Cambridge cash-balance theory, an alternative approach to the classical quantity theory of money. Both quantity theories, Cambridge and classical, attempt to express a relationship among the amount of
Cambridge equation
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a system parameter, namely the schedule of the marginal efficiency of capital. There will be an associated response for employment, and given Keynes's use of wage units this too can be expressed as a dimensionless constant. It might reasonably be termed the "employment multiplier" and one might well "assume (as a first approximation) that the employment multiplier is equal to the investment multiplier" (p248). Keynes assigns a value 1 / (1–"c" ) to his investment multiplier, where "c" is the marginal propensity to consume. This is correct under his Chapter 13 theory of liquidity preference but he does not notice
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theory, with the effect being borne by prices if income increases during a period of full employment, and by employment in other circumstances. Keynes's assumption about wage behaviour has been the subject of much criticism. Hazlitt pointed out that wage rates adapted partially to depression conditions and Keynes can hardly have been unaware of this. The consequence may be that effects on employment are weaker than his model implies, but not that they disappear. Lerner pointed out in the 40s that it was optimistic to hope that the workforce would be content with fixed wages in the presence of rising
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the preface to the French edition he says that the book “registers my final escape from the confusions of the Quantity Theory”. But none of his references to the quantity theory make sense if taken literally, whereas all make perfect sense if understood as referring instead to the neutrality of money, a concept which had been introduced to economics in 1931 by Hayek. The word ‘neutrality’ occurs nowhere in the "General Theory". Keynes’s interest is not in how total income/output in money terms adjust to changes in money supply, but in how individual measures – prices, wages, employment – are
Keynes’s theory of wages and prices
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interest. He interpreted his treatment of liquidity as implying a purely monetary theory of interest. Keynes's younger colleagues of the Cambridge Circus and Ralph Hawtrey believed that his arguments implicitly assumed full employment, and this influenced the direction of his subsequent work. During 1933 he wrote essays on various economic topics “all of which are cast in terms of movement of output as a whole”. At the time that Keynes's wrote the General Theory, it had been a tenet of mainstream economic thought that the economy would automatically revert to a state of general equilibrium: it had been assumed that,
Keynesian economics
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the role he thought Keynes assigned to it. Keynes, in his reply, did not seem to understand why Viner had imagined hoarding to be an important part of his theory. In fact his model of liquidity allows no scope for either the supply or the demand for hoarding: the quantity of money is fixed and each individual person desires to hold a static amount. Supporters as well as critics of Keynes have adopted hoarding explanations. Paul Davidson, after rejecting Samuelson's reading of the "General Theory", reported that a 1977 paper by 'the perennial renegade' F. H. Hahn had generalised monetary
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in a society with an elastic money and credit system. This draws a line after the second item in the list. Alternatively it might be said that when money is lent, the decision to lend is made by the saver and the decision to invest by the borrower, and that these may not conform with each other. This draws a line somewhere around the middle of the list and seems to be the assumption made by Frank Knight, who commented that: It almost seems as if the money which is saved is completely distinct from the money which is lent
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book depends on it – and was avowedly a simplification: in fact it was the simplest assumption he could make without imposing an unnatural cap on money income. Keynes drew a lot of help from his students in his progress from the "Treatise on Money" (1930) to the "General Theory" (1936). The Cambridge Circus, a discussion group founded immediately after the publication of the earlier work, reported to Keynes through Richard Kahn, and drew his attention to a supposed fallacy in the "Treatise" where Keynes had written: Thus profits, as a source of capital increment for entrepreneurs, are a widow's
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available quantity of cash... which, as Frank Knight commented, seems to assume that demand is simply an inverse function of price. The upshot from these reasonings is that: Liquidity-preference is a potentiality or functional tendency, which fixes the quantity of money which the public will hold when the rate of interest is given; so that if "r" is the rate of interest, "M" the quantity of money and "L" the function of liquidity-preference, we have "M" = "L"("r" ). This is where, and how, the quantity of money enters into the economic scheme. And specifically it determines the rate of
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Wage unit The wage unit is a unit of measurement for monetary quantities introduced by Keynes in his 1936 book "The General Theory of Employment, Interest and Money" ("General Theory"). A value expressed in wage units is equal to its price in money units divided by the wage (in money units) of a man-hour of labour. The classical economists believed that the value of a product could be identified with the number of man-hours of labour which went into its production. This value was inherently real. Economic values can always be expressed in monetary terms except in a barter economy.
Wage unit
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supply is the domain of monetary policy. The effect of a change in the quantity of money is considered at p298. The change is effected in the first place in money units. According to Keynes's account on p295, wages will not change if there is any unemployment, with the result that the money supply will change to the same extent in wage units. We can then analyse its effect from the diagram, in which we see that an increase in M̂ shifts r̂ to the left, pushing Î upwards and leading to an increase in total income (and employment) whose
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Robinson wrote: "Its sharp and concentrated statement provides a better introduction to the general theory of employment, interest and money than any that has yet been produced." Except for a small number of economists (in particular econometrists) familiar with his work, Kalecki's contributions, originally printed in Polish, failed to gain recognition. In October 1933 he read his essay to the International Econometrics Association in Leiden and in 1935 published it in two major journals: "Revue d'Economie Politique" and "Econometrica". Although the readers of both journals were not particularly impressed, Kalecki's article received favourable comments from such leading economists as Ragnar
Michał Kalecki
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as the 'first postulate of classical economics' and summarising it as saying that 'The wage is equal to the marginal product of labour'. The first postulate can be expressed in the equation y' ("N" ) = "W" / "p", where y ("N" ) is the real output when employment is "N", and "W" and "p" are the wage rate and price rate in money terms (and hence "W" / "p" is the wage rate in real terms). A system can be analysed on the assumption that "W" is fixed (i.e. that wages are fixed in money terms) or that "W"
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that it needs to be modified in the light of his Chapter 15 theory. A respending multiplier would be expected to take he value of 1 / (1–"x" ) where "x" is the marginal propensity to spend. Keynes describes the Chapter 10 multiplier as being set in motion by an "increment of investment" (p117) and gives the example of "increased public works" (p116). He explicitly differentiates it from Kahn's multiplier, which he terms the "employment multiplier" but which is still not the same as the employment multiplier which might be seen as implicit in Chapter 18. Although the Chapter 10
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interest, which therefore cannot be determined by the traditional factors of 'productivity and thrift'. Chapter 15 looks in more detail at the three motives Keynes ascribes for the holding of money: the 'transactions motive', the 'precautionary motive', and the 'speculative motive'. He considers that demand arising from the first two motives 'mainly depends on the level of income' (p199), while the interest rate is 'likely to be a minor factor' (p196). Keynes treats the speculative demand for money as a function of "r" alone without justifying its independence of income. He says that... what matters is not the "absolute" level
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is therefore not a function of the level of employment alone since it will also vary with prices. The first postulate assumes that prices can be represented by a single variable. Strictly it should be modified to take account of the distinction between marginal wage cost and marginal prime cost. The classics took the second equation as determining the rate of interest, the third as determining the price level, and the first as determining employment. Keynes believed (perhaps incorrectly: see wage unit) that the last two equations could be solved together for "Y" and "r" , which is not possible
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used to determine the level of employment. Resistance to monetary reductions in wages is one of Keynes's key premises, introduced in Chapter 2. In his discussion of Pigou's "Theory of unemployment" he criticises Pigou's view 'that unemployment is primarily due to a wage policy which fails to adjust itself sufficiently to changes in the real demand for labour'. When considering wage rates himself he argues against the desirability of reductions in the real wage "firstly" by claiming that the theory he has developed so far shows that they would bring no benefit (Chapter 19 §II), and "secondly" by remarks along
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the basis of the Chapter 13 theory and that the second theory was added as an afterthought without its consequences being followed through. The 'restatement' of the theory in Chapter 18 is notable for its not applying the Chapter 15 correction accurately: one influence on liquidity preference (the rate of interest) is treated as an 'independent variable' and the other (income) as acting through a 'repercussion'. There were no serious obstacles in Keynes's path, and Hicks showed how to handle the Chapter 15 liquidity preference correctly. What he couldn't change is the interpretation Keynes placed on his doctrines, which never
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externally determined (the latter in money terms), and in which the main variables were fixed by the equilibrium conditions of various markets in the presence of these facts. Many of the quantities of interest, such as income and consumption, are monetary. Keynes often expresses such quantities in "wage units" (Chapter 4): to be precise, a value in wage units is equal to its price in money terms divided by "W", the wage (in money units) per man-hour of labour. Keynes generally writes a subscript "w" on quantities expressed in wage units, but in this account we omit the "w". When,
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is not given, and Keynes should have looked at the income component of the joint response of income and interest rate to a change in the schedule using his Chapter 15 model of liquidity preference. In his 'restatement' of Chapter 18 (pp248f) he again treats the interest rate as given and discusses the effect of 'an increase in the rate of investment', concluding that 'the ratio... between an increment of investment and the corresponding increment of aggregate income... is given by the multiplier'. He then mentions the 'repercussions' arising from changes in liquidity preference due to an increase in employment,
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the lines that 'there is no means of securing uniform wage reductions' ("ibid."). He kept the second argument 'on reserve' (in words attributed to Schumpeter by W. H. Hutt ). Once the wage rate had been absorbed into other quantities through use of the wage unit it disappeared from sight in the "General Theory". Keynes doesn't include it among the 'independent variables' listed near the beginning of Chapter 18. Viner took him at his word that there was 'no place' for 'unemployment due to downward-rigidity of money-wages' in his system. Mantoux came to the opposite conclusion: It would seem that
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variables – interest rate and income – and these are the same two variables as are related by the equation between the propensity to save and the schedule of the marginal efficiency of capital. It follows that neither equation can be solved in isolation and that they need to be considered simultaneously. The 'first postulate' of classical economics was also accepted as valid by Keynes, though not used in the first four books of the "General Theory". The Keynesian system can thus be represented by three equations in three variables as shown below, roughly following Hicks. Three analogous equations can
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"k". The lower bound is attained under a pre-Lavington classical model in which "interest" has no effect on liquidity preference, and the upper bound under the Chapter 13 theory in which "income" has no effect; in general the position of κ between the extremes will depend on the relative magnitudes of the two influences. Chapter 12 discusses the psychology of speculation and enterprise. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over days to come, can only be taken as a result of animal spirits – of a spontaneous urge
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and borrowed, and that the former, if it ever reaches a bank, or any lending agency, is still kept entirely separate. The significance of the separation of roles is rejected every bit as forcefully by Keynes himself in §V of Chapter 7. This explanation too had acceptance among some of Keynes's 'Book I' supporters. Joan Robinson wrote: Decisions to save and decisions to invest are taken quite independently of each other... Under a completely socialist system the government would decide how much investment was desirable... But in the system under which we live the decision to save and the decision
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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. In
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diagrams can still be found in textbooks. Post-Keynesians argue that the neoclassical Keynesian model is completely distorting and misinterpreting Keynes' original meaning. 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
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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
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being fixed in real terms. He attributes the second postulate to the classics subject to the qualification that unemployment may result from wages being fixed by legislation, collective bargaining, or 'mere human obstinacy' (p6), none of which can be identified with the marginal disutility of labour and all of which are likely to fix wages in money terms. Keynes's economic theory is based on the interaction between demands for saving, investment, and liquidity (i.e. money). Saving and investment are necessarily equal, but different factors influence decisions concerning them. The desire to save, in Keynes's analysis, is mostly a function of
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capital as a proportion of its cost. The 'schedule of the marginal efficiency of capital' is the function which, for any rate of interest "r", gives us the level of investment which will take place if all opportunities are accepted whose return is at least "r". By construction this depends on "r" alone and is a decreasing function of its argument; it is illustrated in the diagram, and we shall write it as I(r ). This schedule is a characteristic of the current industrial process which Irving Fisher described as representing the 'investment opportunity side of interest theory'; and in
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Employment". In these writing Keynes formulated a theory of uncertainty about the future that exploded the entire edifice of traditional economics which rested, implicitly, on the notion of timeless equilibrium conceptions which implied full access to knowledge on the part of all actors. In outlining this Shackle sought to marry what he considered Keynes' best insights in the "Treatise on Money" with his later notion of liquidity preference in the "General Theory". In doing so Shackle formed a coherent, speculative theory of interest rates in which interest rates are set in line with financial speculators' expectations in the face of
G. L. S. Shackle
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in three unknowns. And finally, since Keynes's discussion takes place in Chapter 14, it precedes the modification which makes liquidity preference depend on income as well as on the rate of interest. Once this modification has been made the unknowns can no longer be recovered sequentially. The state of the economy, according to Keynes, is determined by four parameters: the money supply, the demand functions for consumption (or equivalently for saving) and for liquidity, and the schedule of the marginal efficiency of capital determined by 'the existing quantity of equipment' and 'the state of long-term expectation' (p246). Adjusting the money
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thereby treating the role of interest in determining liquidity preference as primary and the role of income as a secondary correction separate from the main analysis. Hansen comments: But this is wrong. His mistake follows from the fact that he often, perhaps generally, made the rate of interest depend exclusively on liquidity preference and the quantity of money. Keynes compounds this error when he writes in his reply to Viner that... ...there is always a formula, more or less of this kind, relating the output of consumption-goods which it pays to produce to the output of investment-goods; and I have
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employment is reached, it will thenceforward be the wage-unit and prices which will increase in exact proportion to the increase in effective demand. Keynes's theory of the trade cycle is based on 'a cyclical change in the marginal efficiency of capital' induced by 'the uncontrollable and disobedient psychology of the business world' (pp313, 317). The marginal efficiency of capital depends... on current expectations... But, as we have seen, the basis for such expectations is very precarious. Being based on shifting and unreliable evidence, they are subject to sudden and violent changes. Optimism leads to a rise in the marginal efficiency
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/ "p" is fixed (i.e. that they are fixed in real terms) or that "N" is fixed (e.g. if wages adapt to ensure full employment). All three assumptions had at times been made by classical economists, but under the assumption of wages fixed in money terms the 'first postulate' becomes an equation in two variables ("N" and "p" ), and the consequences of this had not been taken into account by the classical school. Keynes proposed a 'second postulate of classical economics' asserting that the wage is equal to the marginal disutility of labour. This is an instance of wages
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individuals and also any other current public expenditure which is so financed. Strictly speaking, the latter should be reckoned as negative saving... and it is difficult to interpret this as not implying that public demand for borrowing corresponds to a demand for dis-saving – not just for the exchequer (which is immaterial to the level of employment) but for society as a whole. Hansen suggested that adjustments to the money supply might absorb the gap between demands for saving and investment: If expectations are favorable for investment, though funds are currently lacking, means of purchase can readily be made available
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requires it to be possible for income to move upwards or downwards. If he had assumed that wages were constant, upward motion of income would have been impossible at full employment, and he would have needed some mechanism to frustrate upward pressure if it arose in such circumstances. His task is made easier by a less restrictive (but nonetheless crude) assumption concerning wage behaviour: let us simplify our assumptions still further, and assume... that the factors of production... are content with the same money-wage so long as there is a surplus of them unemployed... ; whilst as soon as full
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will be greater than 1. Keynes's account is not intelligible until his economic system has been fully set out (see below). In Chapter 10 he describes his multiplier as being related to the one introduced by R. F. Kahn in 1931, but the two have little in common. The mechanism of Kahn's multiplier lies in an infinite series of transactions, each conceived of as creating employment: if you spend a certain amount of money, then the recipient will spend a proportion of what he or she receives, the second recipient will spend a further proportion again, and so forth. Enough
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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. Keynes's main theory (including its dynamic elements) is presented in Chapters 2-15, 18, and 22, which are summarised here. A shorter account will be found in the article on Keynesian economics. The remaining chapters of Keynes's book contain amplifications of various sorts and are described later in this article. The first Book of the General Theory is a repudiation of Say's Law. The classical view for which Keynes made Say a
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General Theory of Employment, Interest and Money", Keynes asserts, in effect, that the demand for money in the present derives from the uncertainty of our knowledge about the future - and that the fact that human knowledge of the future is "fluctuating, vague and uncertain, renders wealth a peculiarly unsuitable subject for the methods of the classical economic theory." The kind of uncertainty that Keynes is referring to is the same kind that Lachmann associates with radical subjectivism. In fact, according to Keynes, "We simply do not know." This sentiment is echoed in Shackle's subsequent, firm assertion, on the same
Kaleidics
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contending. Mr Keynes and the "Classics" John Hicks's 1937 paper Mr. Keynes and the "Classics"; a suggested interpretation is the most influential study of the views presented by J. M. Keynes in his "General Theory of Employment, Interest, and Money" of February 1936. It gives “a potted version of the central argument of the "General Theory" ” as an equilibrium specified by two equations (shown as intersecting curves in the "IS-LM" diagram) which dominated Keynesian teaching until Axel Leijonhufvud published a critique in 1968. Leijonhufvud's view that Hicks misrepresented Keynes's theory by reducing it to a static system was in
Mr Keynes and the "Classics"
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Mr Keynes and the "Classics" John Hicks's 1937 paper Mr. Keynes and the "Classics"; a suggested interpretation is the most influential study of the views presented by J. M. Keynes in his "General Theory of Employment, Interest, and Money" of February 1936. It gives “a potted version of the central argument of the "General Theory" ” as an equilibrium specified by two equations (shown as intersecting curves in the "IS-LM" diagram) which dominated Keynesian teaching until Axel Leijonhufvud published a critique in 1968. Leijonhufvud's view that Hicks misrepresented Keynes's theory by reducing it to a static system was in turn
Mr Keynes and the "Classics"
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cruse which remains undepleted however much of them may be devoted to riotous living. The "Circus" disbanded in May 1931, but three of its members – Kahn and Austin and Joan Robinson – continued to meet in the Robinsons' house in Trumpington St. (Cambridge), forwarding comments to Keynes. This led to a 'Manifesto' of 1932 whose ideas were taken up by Keynes in his lectures. Kahn and Joan Robinson were well versed in marginalist theory which Keynes did not fully understand at the time (or possibly ever), pushing him towards adopting elements of it in the "General Theory". During 1934
The General Theory of Employment, Interest and Money