The General Theory of Employment, Interest, and Money

Indeed it [the economy] seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse

I suspect John Maynard Keynes’ “General Theory” was to the 1930s what Thomas Piketty’s “Capital in the Twenty-First Century” was to the 2010s – much discussed, mostly unread. I never made it further than the introduction to Piketty’s tome, but I have finished the 80-odd pages of the General Theory collected in The Essential Keynes.

The General Theory of Employment J.m. Keynes First Edition Rare

The book is why we use the word Keynesian today. It changed the course of economics and politics in the 20th century. The world would be unimaginable without it. When Keynes concluded the book with these now famous words, I wonder if he realised he was talking about himself:

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 influences, 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.

His technical discussions about liquidity preferences, the marginal propensity to consume, sticky wages, or the marginal efficiency of capital are explained in textbooks far better than I ever could. Instead I’m going to focus on some big ideas still relevant to today:

Breadlines aren’t inevitable

His central insight was that an economy could indefinitely operate below full employment – that involuntary unemployment and breadlines could stay around indefinitely. If this strikes you as obvious, you have Keynes to thank. He wrote at a time when most economists thought the economy always settled at full employment – if there were breadlines, it was because people liked bread.

The attitude seems absurd and callous today, but it was common sense then. In the middle of the Great Depression, President Herbert Hoover refused to act against rising unemployment. When asked why so many unemployed men were selling apples on street corners, he replied: “Many people have left their jobs for the more profitable one of selling apples.”

How Apples Became a Weapon Against the Great Depression - HISTORY

Keynes thought the problem was often a lack of investment. Keeping people employed requires a combination of investment and consumption. Factories can employ people because they sell products to people (consumption), and/or investors loan them money to make products to sell to people (investment). When there is insufficient investment, employment will be lower than it could be. Breadlines were not inevitable, nor did they represent an unusually high demand for bread, they were a technical problem, with a technical fix.

Keynes also emphasized what a precious thing it was to have everyone in work. Today, we think of “normal” as a healthy economy with full employment. We reserve “abnormal” for big crises or recessions, when things go wrong. Keynes inverted this, he thought that a healthy economy with full employment was a “rare and shortlived occurrence.” Societies had to work hard to maintain a healthy economy – there was nothing inevitable about it.


Keynes thought that investment was lower and more unstable than it needed be, because our expectations about the future were so fickle. Investment depends, in part, on how people feel. Keynes, whose first work was a philosophical treatise on probability (with blog favorite Bertrand Russell), thought human life was governed by deep uncertainty. We create stability with stories about what the future will be like. Sometimes these stories rest on analysis and calculations, other times stories rest on the simple fact that everyone believes them. Unfortunately, stories about the future are often incorrect. Being wrong makes people pessimistic, and if investors feel pessimistic, they expect lower returns, and when they expect lower returns, they invest less, and when they invest less, there is less employment. All of this may occur without any actual changes to the fundamentals. Think about Gamestop.

human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go around, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance

An important corollary to this is the idea that just because people can, does not mean they will. Low interest rates and lots of savings are powerful incentives for people to invest money, but they do not guarantee people will invest. Uncertainty about the future means people often choose to sit and wait:

For whilst the weakening of credit is sufficient to bring about a collapse, its strengthening, though a necessary condition of recovery, is not a sufficient condition

A brief aside: China and Investment

If investment is prone to shortfalls, then economies are vulnerable to the extent that they rely on investment to drive growth, as opposed to consumption. Since any level of employment is supported by some combination of consumption and investment, for example a 50:50 split, as employment (and output) grows, an increasing amount of investment will be required. At $100 of output, $50 of investment. At $1000, $500, at $10^10, $10^5 and so on. If the split between consumption and investment does not change, it is conceivable that a country runs out of worthwhile new investment opportunities before it uses up spare investment funds. To counter this, countries need to increase the percentage of income that people consume, say shifting the balance to 80:20. This is pattern is visible when you look at development:

China struggles with this problem today. For decades, growth has been driven by state-directed investment, but there are only so many railways, ports, and new apartment blocks an economy can productively absorb at once. The government needs to increase how much people consume out of their income. Unfortunately, high inequality means the majority of the population has little disposable income – the rich only spend a small proportion of their total income. A limited social safety net means what little they do have is often saved rather than consumed. Switching to a more consumption-heavy growth strategy is easier said than done. Years of investment have enriched parts of society and industry who have no interest in redistributing their wealth across society.

It’s a serious challenge for China, and if you’re interested in learning more, I recommend following Michael Pettis.

Contingency and change

Keynes shows a deep appreciation for the fact that observations are often contingent or conditioned on other, invisible, factors. If I failed to notice I was sitting in a silent carriage, I would be incorrect to assume only introverted people used trains. Individual and collective behavior is often the product of the rules, customs, culture, and organizations that surround us, not some intrinsic factor.

This allowed Keynes to, for example, look at investment behavior, and explain it in terms of changes in patterns of ownership, the regulation of certain markets, and the availability of different financial instruments – as opposed to some inherent behavioral characteristic of the investor. That is not to say he thought everything was contingent, but he showed an appreciation for it’s importance.

It also allowed him to move beyond describing what is, to imagining what could be:

But we must not conclude that the mean position thus determined by ‘natural’ tendencies, namely, by those tendencies which are likely to persist, failing measures expressly designed to correct hem, is, therefore, established by laws of necessity. The unimpeded rule of the above conditions is a fact of observation concerned the world as it is or has been, and not a necessary principle which cannot be changed.

The state, the private sector, and economy

“Keynesian” means different things, to different people, at different times. In the 1940s and 50s economists in the US suspected of being Keynesian were accused of being communists. In 1971, Richard Nixon said “we are all Keynesian now.” Today, it means supporting government spending in a recession. Keynes was more nuanced.

Keynes saw a role for government beyond just providing unemployment benefits and occasional stimulus packages. He was skeptical that private investment decisions would lead to socially advantageous outcomes. Left completely in private hands, investment would tend to be below the level required for full employment, leading to a persistent state of under-employment. He thought the state should manage the level of investment in the economy to ensure full employment. This need to socialise investment led to his famous passages calling for the “euthanasia of the rentier:”

The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment today is ‘to beat the gun’ … to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow….

There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.

At the same time Keynes was no revolutionary. The euthanasia of the rentier was going to be “nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.” He wanted government to maintain full employment, precisely to avoid the mass social upheaval and revolutionary unrest he had seen in Germany or Russia. As long as a sufficient level of investment and consumption was ensured in the aggregate, Keynes thought private actors and markets should determine how it was employed:

When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 is misdirected. The complaint against the present system is not that these 9,000,000 men out to be employed on different tasks, but that tasks should be available for the remaining 1,000,000

His hesitation over revolutionary socialism stemmed from his liberalism. Keynes valued creativity and individuality; his friends were poets, philosophers, and artists, not accountants. His economics was a way to build a world where that would be protected and encouraged. Soviet homogeneity threatened this vision as much as mass unemployment.

But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, 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… 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.

This is my favorite Keynes (one I’ve discussed before). Economics served a vision of the good life. It was not an exercise in discovering some “natural” state, some special truth about economic behaviour. It was a tool for society to use, and he was wise enough to see that people were not selling apples for pleasure or profit. It was the job of economics to create a prosperous society where creativity and individuality could flourish. It was, and remains, an inspiring vision.

If you’d like to read more about The General Theory, Keynes, and its influence on economics but don’t feel up to the full tome, I recommend these two short pieces (here and here) by Paul Krugman.

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Keynes on GameStop

I could not resist another Keynes quote in light of recent events

The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment today is ‘to beat the gun’, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow…


…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; so that each competitors has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

Keynes on what makes ideas attractive

Keynes on why classical economics exerted the influence it did, from Chapter III of the General Theory:

That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, i suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain must social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

Keynes combined a recognition that the success or failure of an idea could not be divorced from questions of power, with an optimism that good ideas, in the end, win out. I do not share the full measure of his optimism.

The first Keynesian?

It is the fate of famous thinkers to be reduced to caricature. Those outside the limelight at least keep their nuance.

Since reading Zachary Carter’s biography of Keynes earlier this year, I’ve been exploring more of the great man’s nuance. ‘Keynesian’ is now synonymous with massive crisis spending programs, but this characterisation both fails to adequately describe the practicalities of a Keynesian program, while omitting entirely the Keynesian political project.

A more complete interrogation is the goal of this 2018 book review in the LRB by Adam Tooze. This passage in particular was striking:


In praise of idleness

Over Christmas I re-read Bertrand Russell’s wonderful essay, In Praise of Idleness. Its message is still incisive and revolutionary, if in slightly different ways.

Most Likely Places to Find Pipes Mistakenly Left Behind by Bertrand Russell  | Weekly Humorist
Bertrand enjoying some leisure time

In Russel’s day, elites jealously guarded leisure for themselves while proclaiming the dignity and virtue of work for others. Today, the leisure class has committed suicide, and both rich and poor are slaves to “the virtue of hard work as an end in itself, rather than as a means to a state of affairs in which it is no longer needed.” Often, it is no longer enough to simply perform the routines of work. Work must now reflect some core part of your identity; be passion in action. For those elites lucky enough to work in creative fields, the incongruity might be limited. For most, the demand that manual, menial, and repetitive tasks be described as anything other than means to ends is a cruel joke.

In other ways the essay is very familiar. It is still an implicit article of faith for many that poverty or stultifying labour are necessary parts of the social order. Many of the highly-paid members of the managerial class, who divide their weekends between the couch and the pub, do not hesitate to prescribe sobriety and discipline for others.

The most affirming and revolutionary part of the essay comes in its claim that there is no necessary relation between the positive moral qualities society needs and work:

Finally, passages like this alone make the essay worth reading:

For a similar sentiment see also “Economic possibilities for our grandchildren” by Russell’s good friend John Maynard Keynes.

The role of government

From Keynes 1926 essay “The end of Laissez-Faire

We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed ‘one of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion.’ We have to discriminate between what Bentham, in his forgotten but useful nomenclature, used to term Agenda and Non-Agenda, and to do this without Bentham’s prior presumption that interference is, at the same time, ‘generally needless’ and ‘generally pernicious.’ Perhaps the chief task of economists at this hour is to distinguish afresh the Agenda of government from the Non-Agenda; and the companion task of politics is to devise forms of government within a democracy which shall be capable of accomplishing the Agenda.

John Maynard Keynes © Tim Gidal/Picture Post/Hulton Archive/Getty Images