The General Theory of Employment, Interest and Money by John Maynard Keynes
"The General Theory of Employment, Interest and Money," published in 1936 by economist John Maynard Keynes, fundamentally reshaped the understanding of economic theory during a time of great upheaval, particularly amid the Great Depression. Keynes challenged the prevalent belief that markets are self-correcting and argued that national governments must play an active role in revitalizing economies. He introduced concepts such as "hoarders" and "spenders," illustrating how individual behaviors impact overall economic health. In his view, both groups can inadvertently contribute to economic downturns, as "hoarders" restrict spending by saving excessively, while "spenders" may lack the savings to weather financial crises.
Keynes emphasized that the unpredictability of human behavior, alongside factors like interest rates and industrial output, plays a crucial role in fiscal stability. He advocated for significant government intervention during economic crises, arguing that only substantial public spending could stimulate demand, create jobs, and restore confidence in the marketplace. The work sparked intense debate in the years following its release and remains influential in discussions about economic policy, particularly regarding the balance between government intervention and free-market practices. Overall, Keynes's theories underscore the complexity of economic systems and the vital role of governmental actions in addressing severe economic challenges.
The General Theory of Employment, Interest and Money by John Maynard Keynes
Author John Maynard Keynes
Identification Groundbreaking and controversial book on the sources of and possible solutions to economic depressions
Date Published in 1936
Considered by many scholars as the masterpiece of twentieth century economic thought, Keynes’s The General Theory of Employment, Interest and Money grew out of his continued investigation and theorizing on connections among consumers, investors, business and banking policies, national governments, and uncertainty in business booms and busts. Keynes argued that national governments must intercede in the business and banking spheres to revive economies during severe economic depressions and aid in fiscal recovery efforts.
John Maynard Keynes had long been a student of probability and uncertainty in areas ranging from national economies to consumer behaviors. As a professor of economics at Cambridge University, Keynes developed his theories on business cycles, investments, and savings. Keynes conceived of economies as continually evolving structures in which individual decisions to save, spend, or invest profits or wages could affect the entire national fiscal health. With the onset of the Great Depression in 1929 and 1930, Keynes observed that markets and economies were not self-correcting, as economists had maintained since the nineteenth century. There was no “invisible hand” that would magically solve unemployment or reenergize the stock markets or banks. He argued that only national governments had the ability to revitalize business, trade, and employment during severe downturns.
In early 1931, he began writing his analysis of why economies boom and collapse and how individual and corporate behaviors shape these cycles. Keynes became economic adviser to the British government and traveled to the United States to meet with President Franklin D. Roosevelt and his economic advisers in 1934. The almost complete collapse of the American fiscal and economic structure shocked Keynes, and he fully supported Roosevelt’s National Industrial Recovery Act. However, Keynes warned that American government spending was too little to propel business and banks into motion, nor would this practice solve mass unemployment. With the worldwide Depression continuing in intensity, Keynes, recalling his meetings with economic leaders in the United States and both businesses and governments seeking remedies to high unemployment and losses of investments and profits, completed The General Theory of Employment, Interest and Money in 1936.
The General Theory of Employment, Interest and Money is filled with pages of algebraic formulas, interspersed with acute observations. What Keynes determined is that economies, as with all things created and controlled by humans, are unpredictable and volatile. Human behavior and human nature can affect fiscal cycles as much as interest rates, industrial output, and international trade. What Keynes argued in The General Theory of Employment, Interest and Money is that there are several paradoxes and contradictions in capitalism. These contradictions can lead to robust fiscal security or complete collapse. According to Keynes, there are two types of economic actors, “hoarders” and “spenders.” “Spenders” keep money flowing with purchases of goods and services but then lack savings to fall back on should a recession or depression occur. “Hoarders” plow most of their profits and wages into savings or financial investment vehicles (stocks and bonds), thereby depriving businesses and wage-earners of their money. The paradox Keynes highlighted in this dichotomy was that both “hoarders” and “spenders” had the ability to affect entire national economies, but neither had the ability to survive economic downturns. “Hoarders” would lose savings tied up in stocks and private accounts, and “spenders” would have no extra money to spend. Moreover, the perceptions and confidence of individual wage-earners, consumers, businesses, and bankers would all play into national and international economies. If there were little confidence in recovery, people and businesses would simply save their money, if they had any, and cut production. What was needed was an outside stimulus to kick-start spending. That is where governments could enter the marketplace, creating employment and wages, resetting interest rates, restructuring banking and loan practices, and providing social confidence in the system.
Impact
The General Theory of Employment, Interest and Money was hotly debated during the late 1930’s and remains a controversial text. Though Keynes firmly believed in capitalism and private enterprise, he realized that under some conditions such as those of the Great Depression, government intervention was not only desirable but also necessary for economic recovery. Though he supported both British and American government recovery efforts during the 1930’s, Keynes believed that the Depression was so severe that only massive government spending—more than any of the British or American leaders had proposed—could help the economic recovery.
Bibliography
Blackhouse, Roger E., and Bradley W. Bateman. The Cambridge Companion to Keynes. New York: Cambridge University Press, 2006.
Heilbroner, Robert L. The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers. New York: Touchstone Books, 1986.
Skidelsky, Robert. The Economist as Savior, 1920-1937. Vol. 2 in John Maynard Keynes. New York: Penguin Books, 1992.