Keynes: The General Theory of Employment, Interest and Money

John Maynard Keynes (1883-1946) was a British economist best known for his General Theory of Employment, Interest and Money, which was published in 1936, a time of mass global unemployment and depression. People were beginning to come to the conclusion that capitalism had failed and that the only way to restore economic normality would be to nationalise means of production. Many were even considering other systems, socialism was rising and the idea of communism may have been coming across as a glamorous alternative to capitalism.

The general Theory argues against the classical economic theory that without government interference, the market would naturally establish full employment equilibrium, meaning that supply would create its own demand and employment levels would indicate this. He suggests that liberalism is not the answer. It was widely argued by classic economists that in times of high unemployment, workers should be willing to lower their wages in order to allow businesses to continue to be profitable. Keynes was realistic about the fact that in reality, people are usually unwilling to do this; he describes this notion as naive. He believed that wages regulate demand. Money needs to be injected by the state, wages can be raised which would raise demand for jobs and therefore increase production. Lowering wages would mean people would have less money to consume, meaning production would slow down, causing more unemployment. This would continue in a circle, ruining the economy. He also refutes Say’s law, the idea that if a product is good, supply will automatically create demand.

Keynes argues in the general theory that demand is what is important in governing economic activity. In a state of unemployment, the only way to increase employment and productivity is for the government to increase expenditure, either for consumption, or investment. He wrote in 1928 ""Let us be up and doing, using our idle resources to increase our wealth, With men and plans unemployed, it is ridiculous to say that we cannot afford these new developments. It is precisely with these plants and these men that we shall afford them". He saw that financial failures often had narrow and technical causes, and argued the solution could also be narrow and technical.

Paul Krugman (Nobel prize winner!) sums up the conclusions reached in 'The General Theory' with four bullet points.

1. Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment

2. The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully

3. Government policies to increase demand, by contrast, can reduce unemployment quickly

4 . Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach

It should be noted that Keynes was not in favour of complete governmental control of the entire economy, he thought that less intrusive policy would still ensure adequate demand, which would therefore allow the market to flourish successfully.

There have been a number of criticisms made at Keynes, one key criticism being that he mistook an episode for a trend. He believed that the situation in the 1930s would be the norm going forward, in reality, interest rates have never been as low since (despite a sharp drop in recent years).

Krugman states that When Keynes first proposed these ideas, they were unthinkable. He believes that one of the great achievements of The General Theory is that it proposed the ideas so well as to make them thinkable. Another blatant success is that many of Keynes' ideas now seem obvious, where they were once seen as radical, even scary, innovations. His ideas were even described as ‘evil’ by William Buckley.

One possible reason for the success of The General Theory is that Keynes chose to limit down the scope of his writing, he chose not to speculate upon the reasons that the economy found its way into depression in the first place, simply on how more employment could be created in order to get out of it. It is a static model rather than a dynamic model. Keynes wanted to allow us to discard the idea that every boom must be followed by a bust. Krugman states that in reality, most people nowadays, perhaps without realising it, are in fact Keynesian. If a politician promises to create employment through lowering taxes, giving the public more money to spend, this is a Keynesian philosophy, similarly the idea that the recent global economic crisis was caused by a loss of confidence between banks and businesses, this too is a Keynesian idea. As a piece of economic theory, Krugman rates it as highly as Adam Smith’s Wealth of Nations, in that it changes the way in which we look at the world.

It has been argued that many of Keynes' ideas have been watered down by sympathisers keen to find compromise with classical economists, a year after the book was published, Keynes suffered a heart attack and had to spend most of his time resting, He did begin to recover in 1939, by which point most of his efforts were focused on a financial system helping Britain to afford World War 2. He died in 1946.

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