The General Theory of Employment, Interest and Money

"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."

"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."

"I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical theory of the subject, upon which I was brought up and which dominates the economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past. I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience."

"Obviously, however, if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment—if there be such a thing (and who will deny it?). 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."

"The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. 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 much 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."

"The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand. For there would obviously be a natural tendency towards the optimum employment of resources in a society which was functioning after the manner of the classical postulates. It may well be that the classical theory represents the way in which we should like our economy to behave. But to assume that it actually does so is to assume our difficulties away."

"All production is for the purpose of ultimately satisfying a consumer."

"Thus the old-fashioned view that saving always involves investment, though incomplete and misleading, is formally sounder than the newfangled view that there can be saving without investment or investment without ‘genuine’ saving. The error lies in proceeding to the plausible inference that, when an individual saves, he will increase aggregate investment by an equal amount. It is true, that, when an individual saves he increases his own wealth. But the conclusion that he also increases aggregate wealth fails to allow for the possibility that an act of individual saving may react on someone else’s savings and hence on someone else’s wealth."

"Obstinacy can bring only a penalty and no reward."

"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."

"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."

"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."

"Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York."

"It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain."

"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;"

"Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

"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."

"It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges."

"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."

"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."

"The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future."

"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;"

""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."

"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."

"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."

"We are, as I have said, one equation short."

"For the importance of money essentially flows from its being a link between the present and the future."

"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."

"During the ... There is evidence that for a period of almost one hundred and fifty years the long-run typical rate of interest in the leading financial centres was about 5 pet cent., and the gilt-edged rate between 3 and 3 1/2 per cent.; and that these rates of interest were modest enough to encourage a rate of investment consistent with an average of employment which was not intolerably low."

"Once doubt begins it spreads rapidly."

"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."

"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."

"I am myself impressed by the great social advantages of increasing the stock of capital until it ceases to be scarce."

"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;"

"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."

"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."

"I believe that the future will learn more from the spirit of Gesell than from that of Marx."

"The idea behind stamped money is sound."

"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."

"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."

"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."

"But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital."

"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."

"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."

"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."

"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."

"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."

"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."

"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."

"It seems to me reasonable to interpret the entire work as a new system of political economy, built around, and built to support, Mr. Keynes's conception of inflation as the cure for depression and unemployment—with especial reference to a situation in which this condition has become more or less "stabilized," such as Mr. Keynes's own country in and since the later 1920's. With this general position, I happen to be in sympathy—for whatever that statement may be worth. But I had hopes of learning more about the problems involved, especially whether society should wait until such a situation is existent before taking action or should rather take steps to prevent its arising; and also what concrete measures are likely to be effective without aggravating the situation, or preparing for a recurrence, possibly worse, or introducing other evils more than offsetting the gain. In this regard, 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."