General Theory of Employment Interest and Money

The General Theory of Employment Interest and Money is generally considered to be the masterwork of the English economist John Maynard Keynes. To a great extent it created the terminology of modern macro-economics. It was published in February 1936. The book ushered in a revolution, referred to as the "Keynesian Revolution", in the way economists and men in public affairs thought about the economy, and especially how they thought about the feasibility and wisdom of public sector management of the aggregate level of demand in the economy.

In Keynes' book Essays in Persuasion he looked back on his frustrating attempts to influence public opinion during the Great Depression of the early 1930s. The "General Theory" represented Keynes's attempt to shift opinion by altering (the framework of thought by revolutionising) macro-economics.

Briefly, the "General Theory" argued that the level of aggregate demand in a modern economy was determined by a range of factors including the propensity to consume (the percentage of their income that people chose to spend on goods and services), the propensity to save (the percentage of their incomes that they chose to save), the attractiveness of capital investment (dependent on anticipated rates of return) and the level of interest rates. Keynes's key arguments included that in an economy bedevilled by weak demand (e.g. a depression), where in his terminology there was an ignition problem (a difficulty in getting the economy to move forward more vigorously), then the government (more broadly the public sector) could increase aggregate demand by increasing its expenditures, including by borrowing to finance the expenditures, and that the public sector borrowing would not increase interest rates sufficiently to undermine the wisdom of such a policy.

Keynes forecast in the "General Theory" that his book was likely to lead to a revolution in the way men of affairs thought about public policy, and Keynesianism (using government tax, expenditure and borrowing policy to try to affect demand) was enormously influential in the post-Second World War period. More recently, especially in the 1990s, Keynesianism fell from favour. In most economies it came to be believed that Keynesian demand management was difficult, and that it had subtle damaging effects including undermining the advantages of sound finance (government expenditures being financed by current income) and encouraging inflation. To some extent Keynesianism suffered from its own success in that the post-war period largely avoided periods of devastating unemployment and lost production.

At his best Keynes was a wonderful craftsman of the English language and his wonderful fluency of usage is in evidence at times in the General Theory, e.g. Chapter 12 dealing with "The State of Long Term Expectation" is one of the best single chapters about the stock market ever written.