The General Theory of Employment, Interest and Money

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The General Theory of Employment, Interest and Money
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 economists thought, 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.


The central argument of The General Theory is that the level of employment is determined not by the price of labour, as in neoclassical 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]


Keynes wrote four prefaces, to the English, German, Japanese and French editions, each with a slightly different emphasis. In the English preface, he addresses the book to his fellow economists but mentions he hopes it will be helpful to others who read it. He also claims that the connection between this book and his Treatise on Money, written five years earlier, will most likely be clearer to him than anyone else. Any contradictions should be viewed as an evolution of thought.

Book I: Introduction

The first book introduced what Keynes asserted would be a book that changed the way the world thinks.

  • Chapter 1: The General Theory (only half a page long) consists simply of this radical claim:

"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." (p. 3)

  • Chapter 2: The Postulates of the Classical Economics[3][4]
  • Chapter 3: The Principle of Effective Demand

Book II: Definitions and Ideas

  • Chapter 4: The Choice of Units
  • Chapter 5. Expectation as Determining Output and Employment
  • Chapter 6. The Definition of Income, Saving and Investment
  • Chapter 7. The Meaning of Saving and Investment Further Considered

Book III: The Propensity to Consume

Book III moves to cover what causes people to consume, and therefore stimulate economic activity. In a depression, he argues, the government needs to kick start the economy's motor by doing anything necessary. In Chapter 10 he says,

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." (p. 129)

Book IV: The Inducement to Invest

The marginal efficiency of capital is the relationship between the prospective yield of an investment and its supply price or replacement cost. Keynes says on page 135: "I define the marginal efficiency of capital as being equal to that rate of discount which would make the present value of the series of annuities given by the returns expected from the capital-asset during its life just equal to its supply price."

  • Chapter 11. The Marginal Efficiency of Capital
  • Chapter 12. The State of Long-term Expectation
  • Chapter 13. The General Theory of the Rate of Interest
  • Chapter 14. The Classical Theory of the Rate of Interest
  • Chapter 15. The Psychological and Business Incentives to Liquidity
  • Chapter 16. Sundry Observations on the Nature of Capital
  • Chapter 17. The Essential Properties of Interest and Money
  • Chapter 18. The General Theory of Employment Re-stated
  • Chapter 20. The Employment Function
  • Chapter 21. The Theory of Prices

Book VI: Short Notes Suggested by the General Theory

"It is better that a man should tyrannise over his bank balance than over his fellow citizens and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative." (p. 374)

"... the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil." (pp. 383–4))

  • Chapter 22. Notes on the Trade Cycle
  • Chapter 23. Notes on Merchantilism, the Usury Laws, Stamped Money and Theories of Under-consumption
  • Chapter 24: Concluding Notes on the Social Philosophy towards which the General Theory might Lead


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[5] and the reform of the international monetary system[6] 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."[7]


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.

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.


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).[8] Nevertheless, starting with Axel Leijonhufvud, this view of Keynesian economics came under increasing challenge and scrutiny[9] 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 Magazine's top 100 non-fiction books written in English since 1923.[10]


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.[8]

See also


  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.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  3. John Maynard Keynes. "John Maynard Keynes (1936) ''The General Theory of Employment, Interest and Money'' ''Chapter 2 : The Postulates of the Classical Economics''". Retrieved 29 March 2013.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  4. "Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods. It is sometimes said that it would be illogical for labour to resist a reduction of money-wages but not to resist a reduction of real wages.... Moreover, the contention that the unemployment which characterises a depression is due to a refusal by labour to accept a reduction of money-wages is not clearly supported by the facts."
  5. See Tily (2007)
  6. See Davidson (2002)
  7. Samuelson 1946, p. 187.
  8. 8.0 8.1 Krugman, Paul. "Introduction to the General Theory". Retrieved 25 December 2008.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  9. 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)
  10. "All-Time 100 Nonfiction Books". Time. 30 August 2011.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>


Journal articles


  • 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.
  • 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