The General Theory of Employment, Interest, and Money by John Maynard Keynes

John Maynard Keynes is widely considered one of the most influential economists of the 20th century. He famously outlined his General Theory of Employment, Interest, and Money in a 1936 book. This treatise revolutionized economics by changing the way economists analyze and view aggregate ideas like employment and inflation.

The General Theory of Employment, Interest, and Money is generally considered to be Keynes’s magnum opus, and it stands as one of the most influential economic theories of all time. In it, Keynes aimed to provide a “general theory” of economics that could be used to explain and analyze economic activity.The basic premise of the book was that changes in aggregate demand, or the production and consumption of goods and services, are the primary determinants of economic activity.

Keynes argued that aggregate demand can be volatile and can increase or decrease rapidly, leading to large swings in economic activity and employment. Accordingly, he suggested that economic activity could be stabilized through the manipulation of aggregate demand by governments. This, he said, could be accomplished by fiscal and monetary policy.

Keynes suggested that the most important factor affecting employment is the relationship between the wage rate and the marginal efficiency of capital, or the amount of profit companies earn from investing in capital. When wage rates exceed the marginal efficiency of capital, businesses reduce production and hire fewer workers. Conversely, when wage rates are below the marginal efficiency of capital, businesses increase production, leading to greater employment.

Keynes also argued that changes in savings and investment—which largely depend on the level of overall economic activity and the interest rate—are important determinants of economic activity. When people save more, businesses can invest those funds in capital and increase production, leading to more employment. Conversely, if people save less and spend more, businesses will be encouraged to borrow funds to invest in capital and expand production, also leading to more employment.

Lastly, Keynes argued that the total supply of money is an important determinant of economic activity. He argued that when the money supply is increased, economic activity and employment tend to increase, while when the money supply is decreased, economic activity and employment tend to decrease.

In the end, Keynes’s General Theory of Employment, Interest, and Money revolutionized economic thought, and it is still widely taught and applied today. The insights contained in the book, such as the idea that aggregate demand is a primary determinant of economic activity, stand as a cornerstone of macroeconomic theory. Keynes’s theory was also influential for its emphasis on the interactions between the different components of an economy and the resulting implications for the overall functioning of the economy. In highlighting the need for governments to use fiscal and monetary policies to stabilize aggregate demand, Keynes provided an intellectual basis for active fiscal and monetary policies.