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when a reduction in the wage level lead to increases in employment, despite the assumption that workers would have withdrawn from the labor market.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.
The *The General Theory of Employment, Interest, and
Money* completely shook up the
world of economic policy. Hereafter, governments took responsibility for economic conditions or they lost
power.
