The general theory of employment, interest and money of John Maynard Keynes: a summary

"The general theory of employment, interest and money" was written by the British economist John Maynard Keynes. This book became his magnum opus. The author of the "General Theory of Employment, Interest and Money" was the first to determine the form and list of terms of modern macroeconomics. After the publication of the work in February 1936, the so-called Keynesian revolution took place. Many economists have moved away from the classic belief that the market can independently restore full employment after temporary shocks. The book was the first to present such well-known concepts as multiplier, consumer function, marginal productivity of capital, effective demand and liquidity preference.

John Maynard Keynes: brief information

The future ancestor of modern macroeconomics was born in 1883 in the city of Cambridge. His ideas were destined to fundamentally change the theory and practice of making state decisions in the economic field. John Maynard Keynes is considered one of the most influential scientists of the 20th century. He refuted the postulate of the classical theory about the effectiveness of the "invisible hand" of the market. Keynes came to the conclusion that the overall level of economic activity is determined by the aggregate demand. Therefore, it is at the latter and the state should be focused as the main regulator whose task is to soften the business cycles. After the Second World War, almost all developed countries built their policies in accordance with Keynesian views. Interest in this area began to weaken in the 1970s due to the inability to control high levels of inflation. However, after the financial crisis of 2007-2008, Many countries began to return to Keynesian methods of regulation and active government intervention in the national economy, as Keynes bequeathed. "The general theory of employment, interest and money" is considered the main work of the scientist. It contains all the main terms and models of this direction.

"The general theory of employment, interest, and money": a book

The main idea of Keynes's magnum opus is that the level of unemployment is determined not by the price of labor, as neoclassicists see, but by aggregate demand. The founder of macroeconomics believed that full employment can not be provided solely by market mechanisms. Therefore, the intervention of a third force, that is, the state, is necessary. The work "The general theory of employment, interest and money" explains that underloading of productive capacity and underinvestment is a natural state of things in a market economy that is governed exclusively by an "invisible hand". The scientist proves that the lack of competition is not the main problem, sometimes even a reduction in salaries does not create additional vacancies. Keynes appreciated his book from the very beginning. He believed that she could turn all the traditional views upside down. In a letter to his friend Bernard Shaw in 1935, John Keynes wrote: "I believe that I am writing a book on economic theory, which will be a big breakthrough - not immediately, but over the next ten years - in how the world solves the emerging Economic problems ". This fundamental work consists of 6 books (volumes), or 24 chapters.

Foreword

"The general theory of employment, interest and money" immediately came out in four languages: English, German, Japanese and French. To each of the editions Keynes wrote the preface. The emphasis in them was slightly different. In the English edition, Keynes advises his work on all economists, but expresses the hope that it will be useful to all who read it. He also notes, albeit apparently unobvious at first glance, but nevertheless the relationship between it and another book written five years earlier - "A Treatise on Money".

Introduction

What is the work "The general theory of employment, interest and money"? Briefly, its essence can be described as follows: demand creates a proposal, the reverse situation is impossible. The first chapter takes only half a page. There are three sections in this volume:

• "General theory."
• "Postulates of the classical economy."
• "The principle of effective demand."

In the sections listed above, Keynes explains why he believes that this book can change the views of economists about the mechanisms of the functioning of the economy. He says that the title of the work was chosen specifically to emphasize the differences with the classical theory, the use of conclusions of which is effective only in individual cases, and not always.

Book II: "Definitions and Ideas"

It consists of four chapters:

• "Selection of units of measurement."
• "Expectations as determinants of production and employment".
• "Determining income, saving and investing."
• "A more thorough examination."

"Propensity to consume"

The third volume explains the essence of consumption and describes how it stimulates economic activity. Keynes believes that during the depression, the government needs to restart the "engine" with additional costs. This book includes three chapters:

• "Objective factors".
• "Subjective determinants."
• "Marginal propensity to consume and a multiplier."

According to Keynes, the market does not have the capacity for self-regulation. He did not believe that full employment is a natural condition that must be established in the long run. Therefore, state interference is so important. Economic growth, according to representatives of Keynesianism, entirely depends on a sound fiscal and monetary policy.

"Motivation to invest"

Marginal productivity of capital is the ratio between the potential income and its initial value. Keynes equates it to the discount rate. The fourth book consists of 10 chapters:

• "Marginal productivity of capital."
• "The state of long-term expectations."
• "The general theory of interest."
• "Classical theory."
• "Psychological and business incentives to liquidity."
• "Various observations about the nature of capital."
• "Fundamental properties of interest and money."
• "The general theory of employment, newly formulated."
• "The function of unemployment."
• "Theory of prices."

Short notes

They finish the outstanding macroeconomic work (The General Theory of Employment, Interest and Money), the author's comments in three chapters:

• "On the trading cycle."
• "On mercantilism, usurious laws, stamped money and theories of underconsumption."
• "On social philosophy.

In the last chapter, Keynes writes: "... the ideas of economists and political philosophers, regardless of whether they are right, are much more influential than is commonly believed. Indeed, the world is governed somewhat differently. Practical people who consider themselves completely independent of the thoughts of scientists are usually slaves of some late economists. Crazy in power extract their ideas from last year's articles of some scribes from the world of science. I am sure that the power of mercenary interests is greatly exaggerated in comparison with the gradual spread of the influence of ideas. Of course, not immediately, but after a certain period of time; In the field of economics and political philosophy, ideas can influence theory in 25-30 years. And these ideas, and not selfish interests, are dangerous on the road to prosperity or misfortune. "

Support and criticism

"The general theory of employment, interest and money" does not contain a detailed guide to managing the economy. However, Keynes showed in practice how the long-term interest rates and reforms in the international monetary system influence the investment and consumption of the private sector. Paul Samuelson wittily said that Keynesianism "struck many young economists as an unexpected new disease attacks and destroys an isolated tribe of islanders in the South Sea."

From the very beginning, "The general theory of employment, interest and money" was quite a controversial work. No one knew exactly what Keynes had in mind. The first reviewers were very critical. Keynesianism largely owes its success to the so-called "neoclassical synthesis" and in particular to Alvin Hansen, Paul Samuelson and John Hicks. They have developed a clear explanation of the theory of aggregate demand. Hansen and Samuelson came up with a "Keynesian cross", and Hicks created the IS-LM (investment-saving) model. A wide distribution of "General Theory" received after the Great Depression. The market could not cope on its own with shocks, so government intervention seemed inevitable.

On practice

Many innovations, first proposed in the "General Theory", remain key in modern macroeconomics. However, the main idea that the cause of recessions is insufficient aggregate demand has not taken root. In the university courses now mainly teach the so-called new Keynesian economy. It adopts neoclassical concepts of long-term equilibrium. Neo-Keynesians do not consider the "General Theory" useful for further study. However, many economists still consider it significant. In 2011, the book was included in the list of the best contemporary non-fiction literature.

Use in studying the economy

The first attempt to adapt the "General theory" for students was the textbook Robinson, released in 1937. However, the most successful was Hansen's leadership. A more modern textbook was released in 2006 by Hayes. Then came a simplified version, which Shihen wrote. Paul Krugman became the author of the introduction to the new edition of the "General Theory" Keynes, published in 2007. However, gradually the primary source loses its significance. It is generally accepted among economists today that it is possible to regulate the economy with the help of aggregate demand only in the short term, and for a longer period of time, equilibrium can be established independently through market mechanisms.