The General Theory of Employment, Interest, and Money (Great Minds Series)

The General Theory of Employment, Interest, and Money (Great Minds Series) | John Maynard Keynes | The Economics of Pessimism

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The General Theory...

	The General Theory of Employment, Interest, and Money (Great Minds Series) John Maynard Keynes Prometheus Books, 1997 - 403 pages average customer review:based on 48 reviews view larger image
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In 1936 Keynes published the most provocative book written by any economist of his generation. Arguments about the book continued until his death in 1946 and still continue today. This new edition, published 70 years after the original, features a new introduction by Paul Krugman which discusses the significance and continued relevance of The General Theory.

Keynes proves mathematically that the Speculative demand for money creates involuntary unemployment

Keynes presented a generalization of neoclassical theory.Keynes starts the GT in chapter 2 where he analyzes the neoclassical theory of the labor market.He notes that the most advanced technical treatmant was presented by Pigou in his 1933 book,The Theory of Unemployment.Keynes demonstrates in the appendix to chapter 19 that Pigou's model of his theory is a special case of Keynes's general model developed in chapters 20 and 21.The primary result of neoclassical theory is that an optimum result (full employment)is obtained in the aggregate labor market if the aggregated real wage(w/p) equals the marginal product of labor(mpl) derived from an aggregated production function(O= phi(N)).This is expressed as w/p=mpl,where w is the money wage,p is the price level,and mpl is the aggregated marginal product of labor.In chapters 20 and 21 Keynes presented his mathematical analysis.This leads to his generalization of the quantity theory's equation of exchange,MV=PO,to incorporate uncertainty and the speculative demand for money besides risk and the transactions demand for money.There are two such generalizations.Chapter 20 analyzes the labor market and the commodity market.Mathematically,there are two ways of expressing Keynes's first generalization in chapter 20-w/p=mpl/ep or the more convenient w/p=mpl/(mpc+mpi).Unless the elasticity ep=1(ep can range from 0 to 1) or the mpc + mpi=

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The Economics of Pessimism

One sometimes hears that money is the root of all evil. Keynes would agree, but not because of any animosity towards the profit motive (Keynes was definitely not a socialist and he even agreed with and endorsed Hayek's "The Road to Serfdom"), but because in an economy using money imbalances between the value in any currency of demand and the value of supply are possible.

Virtually all economists accept the price mechanism which speedily reconciles any imbalance between supply and demand. The macroeconomy is the sum of all markets and should therefore be more or less in equilibrium. The great French economist Jean-Baptiste Say formulated this in one of the rare laws in economics : every aggregate supply creates a corresponding aggregate demand. The law definitely holds in a barter economy, because even if products or services are not consumed they are lent out to others who will use them. Hoarding purchasing power by keeping money to put under the matress is impossible... without money.

Money makes it possible to have leakages of purchasing power because money received by selling goods or services is not spent. If money earned is not consumed it is by definition saved. Usually this would mean that these sums are made available to individuals or companies in need of capital so that savings are equal to investment. Any imbalance would be readjusted by a change in the interest rate. However, Keynes pointed out that saving is not necessarily synonimous with investment viz. that savings can be hoarded as money and that there are good reasons for doing so.

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