title of book by John
Maynard Keynes (1883-1946) outlining the general concept of Keynesian economics. The book was published in 1936.
*Context*
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Prior to the Great
Depression, opinions about how to properly manage the economy were dominated by Neoclassical economics, which advocated little government intervention. In particular, unemployment was regarded as the consequence of workers failing to accept wages sufficiently low to permit full employment.
During the Great
Depression, unemployment soared to 25% in the
USA and
Germany. Economics had no advice to give to leaders anxious to do
something, and none of the neoclassical predictions were coming true. The
government of the
UK commissioned J.M. Keynes to lead a commission of
top British economists in a general review of economic theory; their finding were summarized by Keynes in *The General Theory*.
*The Findings*
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The Cambridge team did not have access to statistics of national income and product accounting (NIPA). They did have some data on unemployment and prices, especially from the
USA.
Keynes also identified several inherent logical problems with neoclassical economic theory about saving and investment. The theory said that all economic output of an economy would tend to be consumed; all saving would be invested; and all workers would be employed, *provided wages fell low enough*.
Keynes noted the economic mechanism by which investment occurs has little to do with the existing rate of saving; both are influenced by interest rates, but other forces come into
play (e.g., liquidity preference for saving, business opportunities and user cost for investment). Hence, aggregate demand can
drift very far out of alignment with output (or potential output).
Another finding was that employment rates actually did not respond in a predictable way to the fall in wages. The
US economy suffered periods when a reduction in the wage level lead to increases in employment, despite the assumption that workers would have withdrawn from the labor market.
Finally, Keynes proposed the use of monetary policy and fiscal policy for regulating business cycles.
