The General Theory of Employment, Interest and Money

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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. 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 difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
  • The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
    • Preface
    • Paraphrased variant: The difficulty lies not so much in developing new ideas as in escaping from old ones.
  • Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire.
    • Preface to the German Edition
  • The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight—as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry.
    • Book 1, Chapter 2, Section 4, p. 16
  • All production is for the purpose of ultimately satisfying a consumer.
    • Book 2, Chapter 5, Section 1, p. 46
  • Obstinacy can bring only a penalty and no reward.
    • Book 3, Chapter 9, Section 2, p. 111
  • Thus public works even of doubtful utility may pay for themselves over and over again at a time of severe unemployment, if only from the diminished cost of relief expenditure.
    • Book 3, chapter 10, Section 5, p. 127
  • Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.
    • Book 3, Chapter 10, Section 6
  • If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it 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.
    • Book 3, Chapter 10, Section 6, p. 129
  • Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York.
    • Book 3, Chapter 10, Section 6, p. 131
  • It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain.
    • Book 4, Chapter 12, Section 2, p. 148
  • "professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole;"
    • Book 4, Chapter 12, Section 5, p. 156
  • Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.
    • Book 4, Chapter 12, Section 5, p. 158
  • Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.
    • Book 4, Chapter 12, Section 7, p. 161
    • Paraphrased variant: The markets are moved by animal spirits, and not by reason.
The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future.
  • It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges.
    • Book 4, Chapter 12, Section 6, p. 159
  • Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market.
    • Book 4, Chapter 12, Section 6, p. 159
  • The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation in the United States.
    • Book 4, Chapter 12, Section 6, p. 160 (Tobin Tax?)
  • The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future.
    • Book 4, Chapter 12, Section 5, p. 155
  • I expect to see the State, which is in a position to calculate the marginal efficiency of capital goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment;
    • Book 4, Chapter 12, Section 8, p. 164
  • "To dig holes in the ground", paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.
    • Book 4, Chapter 16, Section 3, p. 220
  • If I am right in supposing it to be comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism.
    • Book 4, Chapter 16, Section 4, p. 221
  • Thus those reformers, who look for a remedy by creating artificial carrying-costs for the money through the device of requiring legal-tender currency to be periodically stamped at a prescribed cost in order to retain its quality as money, or in analogous ways, have been on the right track; and the practical value of their proposals deserves consideration.
    • Book 4, Chapter 17, Section 3, p. 234
  • We are, as I have said, one equation short.
    • Book 5, Appendix to Chapter 19, p. 276
  • For the importance of money essentially flows from its being a link between the present and the future.
    • Book 5, Chapter 21, Section 1, p. 293
  • Too large a proportion of recent "mathematical" economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.
    • Book 5, Chapter 21,Section 3, p. 298
  • Once doubt begins it spreads rapidly.
    • Book 6, Chapter 22, Section 2, p. 317
  • We reach a condition where there is a shortage of houses, but where nevertheless no one can afford to live in the houses that there are.
    • Book 6, Chapter 22, Section 3, p. 322
  • The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.
    • Book 6, Chapter 22, Section 3, p. 322
  • I am myself impressed by the great social advantages of increasing the stock of capital until it ceases to be scarce.
    • Book 6, Chapter 22, Section 4, p. 325
  • Thus, the weight of my criticism is directed against the inadequacy of the theoretical foundations of the laissez-faire doctrine upon which I was brought up and for many years I taught;
    • Book 6, Chapter 23, Section 2, p. 339
  • Never in history was there a method devised of such efficacy for setting each country's advantage at variance with its neighbours' as the international gold (or, formerly, silver) standard.
    • Book 6, Chapter 23, Section 3, p. 349
  • The destruction of the inducement to invest by an excessive liquidity-preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds.
    • Book 6, Chapter 23, Section 5, p. 351
  • I believe that the future will learn more from the spirit of Gesell than from that of Marx.
    • Book 6, Chapter 23, Section 6, p. 355
  • The idea behind stamped money is sound.
    • Book 6, Chapter 23, Section 5, p. 357
  • The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.
    • Book 6, Chapter 24, Section 1, p. 372
  • 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.
    • Ch. 24 "Concluding Notes" p. 374
  • But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.
    • Book 6, Ch. 24, Section 2, p. 376
  • The advantage to efficiency of the decentralization of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against self-interest may have gone too far. ...[I]ndividualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty... compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life... the loss of which is the greatest of all losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.
    • Ch. 24, "Concluding Notes" p. 380
  • Whilst... the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to the nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.
    • Ch. 24, "Concluding Notes" p. 380
  • 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.
    • Ch. 24 "Concluding Notes" p. 383-384

Quotes about General Theory[edit]

  • His book, The General Theory of Employment, Interest and Money, published in 1936, has already become one of the classics of economic thought. Unfortunately for the undergraduate and for the general reader, the General Theory is addressed to professional economists and is not very intelligible to others. However, the fundamental ideas underlying Keynes’ work are relatively simple and can be understood by anyone who is acquainted with broad problems of economic policy such as unemployment and inflation.
    • Dudley Dillard, The Economics of John Maynard Keynes (1948), Preface
  • The General Theory refuted the notion that labor markets determined employment, and so the idea that unemployment could be remedied by wage cuts. It begins by pointing out that workers do not bargain for their real wages, and continues with an attack on the concept of a supply curve of labor in real-wage terms. Therefore employment must be explained by a theory of demand for output as a whole, with two key elements: a theory of consumption spending, based on psychological propensities to consume from income, from which multiplier effects can be derived; and a theory of business investment, based on the state of long-term expectations and the cost of capital resources. To this one adds the ability of modern governments to spend directly on their own account and one has the key elements of Keynes's economics. A 1937 summing-up emphasized the role of unquantified uncertainty, and in 1940 Keynes returned to policy-making with a pamphlet on inflation, How to Pay for the War.
    • James K. Galbraith, "Keynes, John Maynard (1883–1946)", in Coole, Diana H.; Gibbons, Michael; Ellis, Elisabeth et al., The encyclopedia of political thought (2014)
  • When Keynes came to write his General Theory of Employment, Interest and Money (first published in 1936), he was concerned—obsessed might be a better word—with the problem of stability and disruption. In contrast to the classical economists and their neoclassical heirs (his own teachers) he was convinced that conditions of uncertainty—with the attendant social and political insecurity—should be treated as the norm rather than the exception in capitalist economies. In short, he was proposing a theory of the world he had just lived through: far from being the default condition of perfect markets, stability was an unpredictable and even scarce byproduct of unregulated economic activity. Intervention, in one form or another, was the necessary condition for economic well-being and, on occasion, for the very survival of markets themselves. In a distinctively English key, this conclusion amounted to a version of Zweig: we once thought everything was stable, now we know that all is in flux.
    • Tony Judt, in Tony Judt and Timothy Snyder, Thinking the twentieth century (2012), Ch. 1. The Name Remains: Jewish Questioner
  • Keynes’s magnum opus of 1936 completely recast macro-economic thinking about government policy. And it was this recasting that was important, rather than the theory itself. A new generation of policy makers was now furnished with a language and a logic on which to base the case for state intervention in economic life. Keynes’s work was thus as ambitious and influential as a grand narrative of the way capitalism works as any of the great nineteenth-century works which it contradicted.
    • Tony Judt, in Tony Judt and Timothy Snyder, Thinking the twentieth century (2012), Ch. 9. The Banality of Good: Social Democrat
  • I must confess that the labour I have spent on The General Theory of Employment, Interest, and Money leaves me with a feeling of keen disappointment.The chief value of the book has seemed to lie in the hard labour involved in reading it,which enforces intensive grappling with the problems.
    • Frank H. Knight, "Unemployment: And Mr. Keynes's Revolution in Economic Theory"
  • Thank you for your letter. I will try to take your words to heart. There must be something in what you say, because there generally is. But I’ve made another shot at old K. M. last week, reading the Marx-Engels correspondence just published, without making much progress. I prefer Engels of the two. I can see that they invented a certain method of carrying on and a vile manner of writing, both of which their successors have maintained with fidelity. But if you tell me that they discovered a clue to the economic riddle, still I am beaten – I can discover nothing but out-of-date controversialising.

    To understand my state of mind, however, you have to know that I believe myself to be writing a book on economic theory which will largely revolutionalise – not, I suppose, at once but in the course of the next ten years – the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the final upshot will be in its effect on action and affairs. But there will be a great change, and, in particular, the Ricardian foundations of Marxism will be knocked away.

    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.

    • John Maynard Keynes, letter to George Bernard Shaw in January 1935, published in The Collected Writings of J. M. Keynes, vol. XIV, ed. Donald Moggeridge (Cambridge: Cambridge University Press, 1973), p. 492.
  • Over the past 70 years The General Theory has shaped the views even of those who haven’t heard of it, or who believe they disagree with it. A businessman who warns that falling confidence poses risks for the economy is a Keynesian, whether he knows it or not. A politician who promises that his tax cuts will create jobs by putting spending money in peoples’ pockets is a Keynesian, even if he claims to abhor the doctrine. Even self-proclaimed supply-side economists, who claim to have refuted Keynes, fall back on unmistakably Keynesian stories to explain why the economy turned down in a given year.
    • Paul Krugman, Introduction to The General Theory of Employment, Interest, and Money (2006)
  • Stripped down, the conclusions of The General Theory might be expressed as four bullet points:
    • Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment
    • The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully
    • Government policies to increase demand, by contrast, can reduce unemployment quickly
    • Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach.
    To a modern practitioner of economic policy, none of this – except, possibly, the last point – sounds startling or even especially controversial. But these ideas weren’t just radical when Keynes proposed them; they were very nearly unthinkable. And the great achievement of The General Theory was precisely to make them thinkable.
    • Paul Krugman, Introduction to The General Theory of Employment, Interest, and Money (2006)
  • Although there are other heresies in The General Theory, along with puzzles, opacities, loose ends, confusions, errors, exaggerations, and anachronisms galore, they do not detract from the book's relevance to our present troubles. Economists may have forgotten The General Theory and moved on, but economics has not outgrown it, or the informal mode of argument that it exemplifies, which can illuminate nooks and crannies that are closed to mathematics. Keynes's masterpiece is many things, but "outdated" it is not.
  • What made the General Theory so hard to accept was not its intellectual content, which in a calm mood can easily be mastered, but its shocking implications. Worse than private vices being public benefits, it seemed that the new doctrine was the still more disconcerting proposition that private virtues (of thriftiness and careful husbandry) were public vices.
    • Joan Robinson, in Economic Philosophy (1962), Ch. 4 "The Keynesian Revolution"
  • The supply side of the model in Keynes’s General Theory (1936) has two key features. First, the nominal wage is completely unresponsive to current period developments (at least over some range) … Second, for reasons that Keynes did not specify explicitly, the wage that prevails in the absence of nominal rigidity is above the level that equates supply and demand. Thus, implicitly, the labor market has some non-Walrasian feature that causes the equilibriumreal wage to be above the market-clearing level. … Fluctuations in the demand for goods lead to movements of employment and the real wage along the downward-sloping labor demand curve. Higher demand, for example, raises the price level. Thus it leads to a lower real wage and higher employment. … This view of the supply side of the economy therefore implies a countercyclical real wage in response to aggregate demand shocks. This prediction has been subject to extensive testing beginning shortly after the publication of the General Theory. It has consistently failed to find support. As described in the next section, our current understanding suggests that real wages are moderately procyclical.
  • The view of supply in the General Theory assumes that the goods market is competitive and goods prices are completely flexible, and that the source of nominal stickiness is entirely in the labor market. This raises the question of what occurs in the reverse case where the labor market is competitive and wages are completely flexible, and where the source of incomplete nominal adjustment is entirely in the goods market.
  • 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. Economists beyond 50 turned out to be quite immune to the ailment. With time, most economists in between began to run the fever, often without knowing or admitting their condition.
    • Paul Samuelson, "Lord Keynes and the General Theory", Econometrica (1946)
  • Herein lies the secret of the General Theory. It is a badly written book, poorly organized; any layman who, beguiled by the author's previous reputation. bought the book was cheated of his five shillings. It is not well suited for classroom use. It is arrogant, bad-tempered. polemical, and not overly generous in its acknowledgments. It abounds in mares' nests or confusions. In it the Keynesian system stands out indistinctly, as if the author were hardly aware of its existence or cognizant of its properties; and certainly he is at his worst when expounding its relations to its predecessors. Flashes of insight and intuition intersperse tedious algebra. An awkward definition suddenly gives way to an unforgettable cadenza. When finally mastered, its analysis is found to be obvious and at the same time new. In short, it is a work of genius.
    • Paul Samuelson, "Lord Keynes and the General Theory", Econometrica (1946)
  • The General Theory seems to reduce it once more to simplicity, and to enable the economist once more to give simple advice that everybody could understand. But exactly as in the case of Ricardian economics, there was enough to attract, to inspire even, the sophisticated.
  • Without the acceptance of the marginalist methods of thought, The General Theory would not have had the enormous and relative quick impact that it had on the thinking of mainstream economists.
  • The General Theory of Employment, Interest and Money is a work of enduring fascination. It is simple and subtle, obscure and profound. It offered a systematic way of thinking not just about the behaviour of contemporary economies, but about the pitfalls in the quest for greater wealth at all times. It combined a vision of the future with a rigorous demonstration of the possibility of underemployment equilibrium. Although young economists of speculative bent were drawn to it as a storehouse of suggestive ideas, it was its practical usefulness which chiefly attracted them in a world poised between decaying democracy and rampaging dictatorship.
    At its core is a 'theory of output and employment as a whole', to distinguish it from the orthodox theory of what causes 'the rewards and distribution between different uses of a given quantity of resources' to be what they are. Keynes was the first economist to visualise the economy as an aggregate quantity of output resulting from an aggregate stream of expenditure. This new way of seeing the architecture of an economy is the General Theory's most enduring legacy.
    • Robert Skidelsky, John Maynard Keynes: 1883-1946: Economist, Philosopher, Statesman (2003), Ch. 30. Firing at the Moon

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