The General Theory of Employment, Interest and Money

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The General Theory of Employment, Interest and Money
GT Palgrave.jpg
Author John Maynard Keynes
Country United Kingdom
Language English
Genre Nonfiction
Publisher Palgrave Macmillan
Publication date
Media type Print Paperback
Pages 472 (2007 Edition)
ISBN 978-0-230-00476-4
OCLC 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.[1] Published in February 1936, it sought to bring about a revolution, commonly referred to as the "Keynesian Revolution", in the way some economists believe. 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.

Keynes’s aims in the General Theory[edit]

The central argument of The General Theory  is that the level of employment is determined not by the price of labour, as in classical economics, but by the spending of money (aggregate demand). Keynes 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, underemployment and underinvestment are likely to be the natural state unless active measures are taken. One implication of The General Theory  is that an absence of competition is not the main issue regarding unemployment; even reducing wages or benefits has no major effect.

Keynes sought to do nothing less but upend the conventional economic wisdom. He mailed a letter to his friend George Bernard Shaw on New Year's Day, 1935:

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 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.[2]

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 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.

The General theory[edit]

See Keynesian economics for an account of the theoretical ideas developed by Keynes in his book.

The writing of the General Theory[edit]

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 cruse which remains undepleted however much of them may be devoted to riotous living.[3]

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.[4] Kahn and Joan Robinson were well versed in marginalist theory which Keynes did not fully understand at the time (or possibly ever),[5] pushing him towards adopting elements of it in the General Theory. During 1934 and 1935 Keynes submitted drafts to Kahn, Robinson and Roy Harrod for comment.

There has been uncertainty ever since over the extent of the collaboration, Schumpeter describing Kahn’s “share in the historic achievement” as not having “fallen very far short of co-authorship” [6] while Kahn denied the attribution. However there is a magical element which strikes readers of Kahn’s multiplier or of Robinson’s Introduction[7] which Keynes steers away from in Book IV, taking him closer to the neo-classical interpretation of John Hicks.[8]

Keynes’s method of writing was unusual:

Keynes drafted rapidly in pencil, reclining in an armchair. The pencil draft he sent straight to the printers. They supplied him with a considerable number of galley proofs, which he would then distribute to his advisers and critics for comment and amendment. As he published on his 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.[9]

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 express a wish for the broadest and earliest possible dissemination of his new ideas.[10]

Observations on its readability[edit]

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”,[11] 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”.[12] Frank Knight, another hostile critic, commented on “the exasperating difficulty of following his exposition”.[13]

More significant is the view of writers sympathetic to Keynes. Michel DeVroey comments that “many passages of his book were almost indecipherable”.[14]

Paul Davidson wrote that...

...even after reading the General Theory in 1936, [Paul] Samuelson, perhaps reflecting [Robert] Bryce’s view of the difficulty of understanding Keynes’s book, found the General Theory analysis “unpalatable” and not comprehensible.[15]

Hazlitt quotes Samuelson as saying:

It bears repeating that the General Theory is an obscure book so that would-be anti-Keynesians must assume their position largely on credit unless they are willing to put in a great deal of work and run the risk of seduction in the process.[16]

He declares himself surprised by “Samuelson’s implication that the very obscurity of the book is an embarrassment, not to the disciples of Keynes, but chiefly to his critics”.[17]

Raúl Rojas dissents, saying that “obscure neo-classical reinterpretations” are “completely pointless since Keynes’ book is so readable”.[18]


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[19] and the reform of the international monetary system[20] 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."[21]


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 (but originating with anti-Keynesian economist Milton Friedman, said in a way different from Krugman's interpretation).[22] Nevertheless, starting with Axel Leijonhufvud, this view of Keynesian economics came under increasing challenge and scrutiny[23] 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.

In 2011, the book was placed on Time's top 100 non-fiction books written in English since 1923.[24]


From the outset there has been controversy over what Keynes really meant. Many early reviews were highly critical. 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 John Hicks. Hansen and Samuelson offered a lucid explanation of Keynes's theory of aggregate demand with their elegant 45° Keynesian cross diagram while Hicks created the IS/LM diagram. Both of these 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 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 Marxist-oriented 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 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.[22]

Differences of interpretation[edit]

Keynes had been an outspoken and iconoclastic commentator on economic policy during the early 1930s, often dissenting from the views of more classically minded figures such as Ralph Hawtrey and A. C. Pigou. In the General theory  he was able to provide a more theoretical justification for the views he had been expressing. In the course of writing it his views matured, and inconsistencies can be seen which may be attributed to their changing in the course of his writing it, or his wishing to maintain continuity with his earlier position, or a desire to be provocative, or (possibly) simple confusion.

Generally the later statements in the book (mostly in Book IV) are less radical than the reader expects from the earlier chapters. For exegetical purposes the later statements need to be given precedence (because these are the ones Keynes supports by considered arguments) but economists are free to interpret the book along the lines they find most satisfactory. The main axis of disagreement between Keynesian interpreters lies in the relative weights they give to Books I and IV. Joan Robinson may be taken as the archetypal Book I Keynesian: she preferred Kalecki to Keynes,[25] ignored the Book IV inducement to invest in her Introduction to the theory of employment, and described Chapter 11 – the point of divergence – as needing to be completely rewritten.[26] 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 must be considered the most faithful interpreter of Keynes while also being the closest 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 Book I.

Both Hicks and Robinson sought to build consistent theories from the discordant elements of the General theory. Alvin Hansen saw no discordance,[27] and Paul Samuelson syncretically combined Books I and IV with ‘classical’ economics without obvious worries about consistency.[28]

A reason for being influenced by Book I rather than Book IV, besides doctrinal preference, lies in the difficulty of reading the General theory : each part of it has been less influential than its predecessor as readers’ stamina falls away.

Italian Wikipedia contains a Book I interpretation of the Teoria generale.

The demand for investment[edit]

In Chapter 3 Keynes presents an argument whose outlines are hard to trace beneath a layer of symbols. Aggregate demand is the sum of two items: D1, which is certainly the propensity to consume, and D2 which is ‘the volume of investment’; and this sum is equal to aggregate supply which can be identified with total income. It follows that D2 must equal the propensity to save, and that if the two items are functionally distinct then the equality must provide an equilibrium condition.

We thus get a constraint from the equality of demands for saving and investment which at the same time are ‘merely different aspects of the same thing’.[29] In this Keynes sets himself in opposition to the classics, who had held that...

every increased act of saving by an individual brings into existence a corresponding act of increased investment...[30]

with the result that saving and investment were functionally equal in respect of both supply and demand. It needs to be understood that from the classical point of view a person can save by lending without bringing any investment into being; but lending is cancelled out by borrowing and it is the remaining (uncancelled) acts of saving which the classics identified with acts of investment. Keynes has already rejected the classical view:

Those who think this way are deceived, nevertheless, by an optical illusion, which makes two essentially different activities appear the same.[31]

Keynes fully accepts the identity of supply  of saving and investment, establishing it as a book-keeping identity under appropriate definitions in Chapter 6, but his rejection of the identity of demands is complete: he maintains that the demand for saving is a steeply increasing function of income while the demand for investment is independent of income. The gap between them may be arbitrarily large.

He gives no explanation of the difference between his and the classical view, and does not seem conscious that anything needs to be said about the matter. Reviewers were confronted with an unexplained step in his reasoning which left them no clear target to review. At least six different accounts have been proposed of the gap between the demands for saving and investment, most of which have been supported by a faction amongst Keynes’s followers.

Explanation based on hoarding[edit]

A natural explanation is that saving can find an outlet in hoarding (the increase in one’s holdings of money) whose demand is not 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...[32]

Viner quite reasonably doubted that hoarding could play 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; but then, in the last paragraph, rejects the ‘tacit assumption that every individual spends the whole of his income either on consumption or on buying, directly or indirectly, newly produced capital-goods’.[33])

Supporters as well as critics of Keynes have adopted hoarding explanations. Paul Davidson, after rejecting Samuelson’s reading, reported that a 1977 paper by F. A. Hahn had generalised monetary hoarding to ‘non-reproducible assets’:

Some forty years after Keynes, Hahn rediscovered Keynes’s point that a stable involuntary unemployment equilibrium could exist even in a Walrasian system with flexible wages and prices  whenever there are “resting places for savings in other than reproducible assets”... [since] any non-reproducible asset allows for a choice between employment inducing and non-employment inducing demand.[34]

Explanation based on the endogeneity of money supply[edit]

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 in a society with an elastic money and credit system.[35]

Explanation based on lending[edit]

If one regards lending as a component of net saving then it is clear that it does not by itself bring any investment into being. This interpretation gains some support from Keynes’s words. He says that:

So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive...[36]

and that:

...there is always an alternative to the ownership of real capaital-assets, namely the ownership of money and debts...[37]

but the position is not intellectually attractive and has not received subsequent support.

Explanation based on the separation of roles[edit]

Another possible explanation of the gulf is 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 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 and borrowed, and that the former, if it ever reaches a bank, or any lending agency, is still kept entirely separate.[38]

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 to invest are not bound together, and the motives governing them are quite different... The individual saver has no direct influence upon the rate of investment. If entrepreneurs see a profit to be made by investment, investment will take place, and if they do not it will not. The initiative lies with the entrepreneurs, not with the savers. The savers, as a group, are helpless in the hands of the entrepreneurs...[39]

She treats the equality of saving and investment as arising not through any direct nexus but by the economy expanding or contracting to equalise the amounts (which it cannot do without a significant lag). She doesn’t tell us whether decisions to save are independent of decisions to lend, or whether savers’ decisions to lend are independent of entrepreneurs’ decisions to borrow, or whether entrepreneurs’ decisions to borrow are independent of their decisions to invest.

Hansen mostly follows the separation of roles explanation. He writes that:

Under modern conditions savers and real investors are to a high degree different groups...[40]

This observation would not have been denied by the classics, who nonetheless rejected Hansen’s conclusion. Accepting the role of lending, they saw savers as indirect purchasers of capital (or of the derived revenue streams) through banks and entrepreneurs (who are certainly different groups) in much the same way as customers purchase goods through the retail and production chain.

Explanation based on the gap between plans and reality[edit]

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)... [41]

He may have been influenced by Samuelson’s attempt to reconcile the simultaneous identity and non-identity of saving and investment by regarding the terms ‘desired’ and ’planned’ as synonymous.

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.[42]

Explanation based on Chapter 11[edit]

The vagueness of Book I is excusable from a Book IV perspective since Book I merely sets the scene. The ‘investment demand schedule’ is finally defined in Chapter 11, which Kahn called the ‘basic chapter’ of the General Theory. The definition is careful and precise, and is recognisably (although Keynes does not draw attention to the fact) the definition of a supply schedule. This leaves Chapter 3 (and the Keynes/Samuelson cross) in the position of adding consumption demand to investment supply in the belief that the sum ought to equal total income. Robinson’s aversion to Chapter 11 is intelligible.

Hicks in this matter straddles Books I and IV.[43] He acknowledges the significance of the schedule of the marginal efficiency of capital, but lets it become “the amount of investment (looked at as demand for capital)”: expressions which are not technical terms and imply more clearly than Keynes did that the schedule is a true demand function. Later he adds income as a parameter to it, justifying doing so by saying that “we can call in question the sole dependence of investment on the rate of interest, which looks rather suspicious...”. Keynes remonstrated mildly.[44]

The extra parameter makes it possible to give the schedule the behaviour of a true demand function and ignore its definition in terms of the marginal efficiency of capital. There are technical reasons to do with the wage unit which make it hard to use the schedule defined by Keynes in the way he intended, so the flexibility at least escapes from an impasse. However if Keynes’s definition is rejected another one is needed to take its place.

Samuelson accepts all the elements of Keynes’s theory. He follows the definition of the schedule of the marginal efficiency of capital in some detail, calling it the ‘investment demand curve’ or ‘demand-for-investment schedule’, and unhesitatingly adds it to the true consumption demand function when presenting the Keynes/Samuelson cross.

Chapter 11 not only provides a possible explanation of the gap between demands, it also specifies the size of the gap; and the size is difficult to accommodate under some of the other explanations, especially those based on hoarding and on the ex post / ex ante  distinction.

The multiplier[edit]

Keynes makes reference to Richard Kahn’s multiplier when introducing the subject, designating it the employment multiplier  in distinction to his own investment multiplier. Kahn’s mechanism is based on the premise that spending creates employment, and concludes that a proportion of the money earned will be spent again creating more employment, and so forth. Robinson, Samuelson and Hansen include it in their accounts. Mantoux wrote “The entire demonstration, it would seem, nevertheless rests on this function”.

Samuelson explained the multiplier in these terms:

Let’s suppose that I hire unemployed resources to build a $1000 woodshed. My carpenters and lumber producers will get an extra $1000 of income... If they all have a marginal propensity to consume of 2/3, they will now spend $666.67 on new consumption goods. The producers of these goods will now have extra incomes... they in turn will spend $444.44... Thus an endless chain of secondary consumption respending  is set in motion by my primary  investment of $1000.[45]

There is no sign of this argument being present in the General Theory  even when Keynes refers to the ‘employment multiplier’. Samuelson is being entirely arbitrary in viewing secondary employment as arising from carpenters’ consumption spending but not from their investment spending, while seeing the train as being set in motion by a primary investment rather than primary consumption. Keynes’s multiplier is tied by nature to investment as its origin and necessarily has a value of 1 / (1–c ) where c  is the marginal propensity to consume. Kahn’s has neither of these properties unless by fiat : it should be 1 / (1–x ) where x  is the marginal propensity to spend.

According to Hansen,[46] Kahn claimed that x  was less than one for a variety of reasons, of which only hoarding seems significant, and none of which was available to Keynes. Hansen then tries to reconcile the two multipliers. He allows Keynes’s multiplier to be triggered by any  expenditure by the expedient of defining ‘investment expenditure’ as including ‘private-consumption outlays’.[47] He then argues unconvincingly that Kahn’s multiplier should take the value 1 / (1–c ) rather than 1 / (1–x ).[48]

Keynes’s multiplier is not properly described until Chapter 18, where it emerges as an intermediate term in a calculation. Hicks is relatively faithful to Keynes when he says that “the third equation becomes the multiplier equation, which performs such queer tricks”. Any presentation of the Keynesian theory of unemployment which ignores the multiplier, or simply embodies it in the equations, is consistent with Keynes’s Book IV account since there is no need to focus attention on a relatively unimportant intermediate term.

Shackle regarded Keynes’s departure from Kahn’s multiplier as...

...a retrograde step... For when we look upon the Multiplier as an instantaneous functional relation... we are merely using the word Multiplier to stand for an alternative way of looking at the marginal propensity to consume.[49]

Liquidity preference[edit]

The contradictions in Keynes’s doctrine of liquidity occur within Book IV, between Chapters 13 and 15. Keynes never explains why he has two different accounts. It appears that the General Theory  was conceived on 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’.[50] 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 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 was unconvinced by Keynes’s Chapter 13 reasoning:

He denies that interest is the “reward” for saving on the ground that, if a man hoards his savings in cash, he earns no interest, tho he saves just as much as before (p. 167), and claims that, on the contrary, it is the reward for surrender of liquidity. 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.[51]

The objection loses its force when we look at Chapter 15 in which not only does demand for money not determine the rate of interest, but the connection between the two is largely unpredictable, and interest is free to return to its traditional role of balancing the loans market.

Knight and Étienne Mantoux, like Viner, understood Keynes as advancing the Chapter 13 view; Hicks and Franco Modigliani who followed him adopted the Chapter 15 generalisation.[52] Hansen didn’t take seriously Keynes’s view of liquidity preference as a function of interest rate alone, and interpreted the reasoning he based on it as erroneous use of a function depending also on income.

Samuelson accepted ‘the classical theory of interest and capital’ which determines the interest rate from the same equation as Keynes (and Samuelson himself) used to determine the level of employment.

The effect of wage rates on employment[edit]

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 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 [53]).

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 Keynes acknowledges the necessity of reducing real wages to diminish unemployment.

Robinson denied that reductions in wages would be beneficial. Without providing an analysis (under the Keynesian or any other model) she asserted that when wages fell ‘money incomes fall as much as costs, and money demand is reduced accordingly’. Hansen viewed Keynes as ‘agnostic’ and was so himself.

Modigliani analysed the Keynesian model as developed by Hicks and concluded that ‘except in a limiting case’ it was ‘rigid wages’ which accounted for Keynesian unemployment. The limiting case was that of the liquidity trap.

See also[edit]


  1. ^ Richard N Cooper, "The General Theory of Employment, Money, and Interest,"[1] Foreign Affairs (New York); Sep/Oct 1997
  2. ^ Cassidy, Johnson (10 October 2011). "The Demand Doctor". The New Yorker. 
  3. ^ Kahn, “The making of Keynes’ General Theory ” (1984), p106.
  4. ^ M. C. Marcuzzo, “The Collaboration between J. M. Keynes and R. F. Kahn from the Treatise  to the General Theory ”, History of Political Economy, June 2002, p435.
  5. ^ M. C. Marcuzzo, op. cit. p441.
  6. ^ “History of economic analysis”, 1954.
  7. ^ Joan Robinson, “Introduction to the theory of employment”, 1937.
  8. ^ See particularly the final sentence of §I of Chapter 18 of the General Theory, where Keynes seems to step back from claiming that the multiplier can be used to reduce unemployment. Hicks presented his interpretation in “Mr. Keynes and the classics”, reprinted in “Critical essays in monetary theory” (1967).
  9. ^ Kahn, op. cit., p171.
  10. ^ Translated in Henry Hazlitt (ed.), “The critics of Keynesian economics”, 1960.
  11. ^ “The critics of Keynesian economics”, p9.
  12. ^ “Mr. Keynes’ General Theory”, trans. in H. Hazlitt, op. cit., p97.
  13. ^ Frank Knight, “Unemployment: And Mr. Keynes's Revolution in Economic Theory”, p113, Canadian Journal of Economics, 1937.
  14. ^ “Dead or Alive? The Ebbs and Flows of Keynesianism Over the History of Macroeconomics” in Thomas Cate (ed). “Keynes’s General Theory Seventy-five years later“ (2012).
  15. ^ “Samuelson and the Keynes/Post-Keynesian revolution...” (2007), citing D. C. Colander and H. Landreth, “The Coming of Keynesianism To America”, p159.
  16. ^ “The failure of the ‘New Economics’ ” (1959), p89.
  17. ^ “The failure of the ‘New Economics’ ”, pp2f, quoting “The development of economic thought”, ed. by Henry William Spiegel, 1952.
  18. ^ “The Keynesian Model in the General Theory: A Tutorial”, (2012).
  19. ^ See Tily (2007)
  20. ^ See Davidson (2002)
  21. ^ Samuelson 1946, p. 187.
  22. ^ a b Krugman, Paul. "Introduction to the General Theory". Retrieved 25 December 2008. 
  23. ^ 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)
  24. ^ "All-Time 100 Nonfiction Books". Time. 30 August 2011. 
  25. ^ Joan Robinson and John Eatwell, “An introduction to modern economics”.
  26. ^ Kahn, op. cit., p256.
  27. ^ A guide to Keynes, 1953.
  28. ^ P. A. Samuelson, “Economics: an introductory analysis”, 1948 and many subsequent editions.
  29. ^ General theory, p74.
  30. ^ p178.
  31. ^ p21.
  32. ^ “Mr. Keynes on the causes of unemployment” in Hazlitt, op. cit., p51.
  33. ^ “The theory of employment”: reply to Viner in “Quarterly journal of economics”, 1937.
  34. ^ “Samuelson and the Keynes/Post-Keynesian revolution...” (2007), citing Hahn, “Keynesian Economics and General Equilibrium Theory” in “The Microfoundations of Macroeconomics”, ed. by G. C. Harcourt.
  35. ^ op. cit., p27.
  36. ^ p160.
  37. ^ p212.
  38. ^ “Unemployment: And Mr. Keynes's Revolution in Economic Theory”, in Hazlitt, op. cit..
  39. ^ pp9, 10, 13.
  40. ^ op. cit., p154; see also p32.
  41. ^ “History of economic analysis” (1954).
  42. ^ "What did the General Theory do?" (1989), in J. Pheby (ed), “New Directions in Post-keynesian Economics”.
  43. ^ “Mr Keynes and the classics.”
  44. ^ Kahn, op. cit., p160.
  45. ^ 16th edition consulted.
  46. ^ op. cit., p89.
  47. ^ op. cit., p90.
  48. ^ op. cit., pp90–96.
  49. ^ “Time in economics” (1958), cited by G. M. Ambrosi, “Keynes, Pigou and the Cambridge Keynesians” (2003).
  50. ^ Alvin Hansen, “Guide to Keynes” pp165f.
  51. ^ Hazlitt, op. cit.
  52. ^ Hazlitt, op. cit., for Mantoux and Modigliani.
  53. ^ Hazlitt, op. cit.

Journal articles[edit]


  • 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.
  • Markwell, Donald (2006). John Maynard Keynes and International Relations: Economic Paths to War and Peace. Oxford: Oxford University Press.
  • Markwell, Donald (2000). Keynes and Australia. Sydney: Reserve Bank of Australia.
  • 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.
  • Sheehan, Brendan (2009). Understanding Keynes' General Theory. London: Palgrave 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[edit]