The General Theory of Employment

This article is a response to certain criticism of the General Theory, as well as a re-exposition of Keynes’ ideas regarding where he diverges from Classical theory. He explains how uncertainty results in interest and money functioning differently than the Classical model assumes, and these differences lead to very different conclusions about effective demand, aggregate output, and employment.

Among the criticisms of the General Theory, Keynes felt that Viner’s criticism of his definition and treatment of involuntary unemployment was most worthy of a detailed response. Keynes’ acknowledged that this portion of his work was open to criticism, and was ready to make some improvements of his own. In brief, Keynes’ explains that in times of crisis, no significant increase in the quantity hoarded occurs. Instead, increased liquidity preference drives up the interest rates at which individuals can be induced not to hoard.

However, Keynes was reluctant to engage in too much debate on the particulars until he was confident that the fundamental ideas underlying his work were understood. In that spirit, he posed most of his response as a re-exposition of some of the fundamentals of his theory.

Classical economists, from Ricardo and Marshall up through Pigou and Edgeworth, had more or less assumed that the amounts of the factors of production were given. All the relevant information to assess the relevant risks was assumed to be known well enough that all the probabilities could be computed with actuarial certainty. Keynes’ understanding of uncertainty is where he first diverges from Classical theory. He contends that “we have, as a rule, only the vaguest idea of any but the most direct consequences of our acts.”

The accumulation of weal...

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... both consumption and investment in accordance with the aforementioned ratio.

In a wider sense, Keynes defines the aggregate level of output and employment as a function of the propensity to hoard, monetary policy, the state of confidence, the propensity to consume, and the money wage. However, since those factors that influence the rate of investment are most subject to volatility, it is traditional to regard output and employment as a function of the rate of investment. Keynes’ theory therefore states that it is the wild fluctuations in the rate of investment, which are determined by precarious expectations of the future, which create such wild fluctuations in output and employment. He openly admits that while his theory may describe why employment is what it is at a given point in time, it does not immediately offer a general solution to the problem unemployment.