The General Theory of Employment, Interest and Money

The General Theory of Employment, Interest and Money is a book by the English economist John Maynard Keynes, published in February 1936. It was written during the Great Depression, the economic crisis that shook the industrialised economies at the start of the 1930s, and its appearance transformed the way economic problems were understood. Keynes had tried without much success to influence public opinion and policymakers during those years, and this work sets out his theoretical proposal in systematic form.

The central argument is that the level of employment is determined not by the price of labour, as classical economics held, but by the level of aggregate demand. If total demand for goods at full employment is lower than total output, the economy must contract until equilibrium is reached, and this equilibrium can involve mass unemployment. Keynes therefore denied that full employment was the natural result of competitive markets in equilibrium. To make his case he attacked Say's law, according to which supply creates its own demand, and noted that money wages do not fall easily because of contracts, legislation, trade unions and workers' resistance.

The book holds that employment depends on three factors: the marginal propensity to consume, the marginal efficiency of capital and the rate of interest. In a depressed economy, the public sector can raise aggregate demand through increased spending, even at the cost of a deficit, without rising interest rates cancelling the effect. The work introduced concepts such as the consumption function, the principle of effective demand, liquidity preference and the multiplier.

Its structure moves from definitions to the main theory and ends with reflections on social philosophy. Chapter 12, on the state of long-term expectation, is widely regarded as one of the finest texts on stock markets, although much of the book is written in dense prose with long, complex sentences, far from the fluency of Keynes's earlier works.

Its reception was enormous. The so-called Keynesian Revolution shaped postwar economic policy, with public spending, deficits and monetary regulation. After the stagflation of the 1970s the interventionist approach lost ground, but its ideas survive in the so-called New Keynesian economics, which combines neoclassical elements with conclusions from Keynesian policy.