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Understanding Keynes' General Theory
This book is a comprehensive guide for those seeking to fully understand Keynes' General Theory of Employment, Interest and Money, and especially those approaching the work for the first time. It also highlights Keynes' important policy insights. This book is an essential introduction to Keynes' most influential text.
- GenresEconomics
298 pages, ebook
First published January 15, 2009
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January 17, 2026
Exactly what it says, a thorough primer to Keynes' general theory, captures all the key points of the book and debates afterwards, while illustrating with numerous numerical examples, but a bit obscure in some places (but to some extent all good books are!).
Essentially, Keynes analyses the flow of aggregate income and how that income determines the effective demand in the rest of the economy. The set amount of aggregate income and the propensity to consume determine the amount of consumption. The income left over is then saved by the community, but the amount invested depends on the long-term expectations of the cost of illiquidity (this refutes both Say’s law, which establishes an identity between savings and investment and the presumption of a calculable future, which aggregates loanable fund markets by presuming yield rates are predictable). This is relevant since the summation of consumption and investment equals the aggregate demand, which, when intersected with the aggregate supply, produces the aggregate effective demand. The amount invested is determined by the marginal efficiency of capital, which is the percent which makes the net present value of its cash flows (its prospective yields) equal to its supply price. The marginal efficiency of capital is equivalent to the interest rate, which is set at the intersection between the money’s supply and demand. Profit for Keynes emerges from the scarcity of capital assets. Disequilibrium occurs when inducements to investment weaken or strengthen beyond the aggregate effective demand.
The amount of aggregate effective demand determines the extent of employment and thus output. For Keynes the price of a good is determined by the marginal costs of the factor of production. This reduces down to the wage unit and the quantity produced. The wage unit and the wage good price levels (the aggregate price level of goods) then determine the “real wage rate per labour unit”. The real wage rate is the proportion of the aggregate output a wage-unit can earn. Importantly Keynes' recognizes that inflation can be caused by increases in demand determined raw materials, and he does not adopt the Phillip's curve in his discussions of inflation (his generalised statement on the quantity theory of money illustrates his complexity.
Inflation for Keynes depends on two things, the level of employment (to the extent it's full, which also involves the state of productive techniques) and the increase in nominal aggregate demand. If the economy is not at full employment nominal increases in demand can be absorbed in increased production. If not then it can not, and it must be absorbed in prices (when supply is inelastic the QToM are true).
Keynes' critique of the classical school is withering, not only can loanable fund markets not exist, neither can aggregated labour markets! Labour markets can not be aggregated because the presumption that all stocks are sold can not be made in the aggregate. Similarly savings (and loanable funds) are not decided upon by looking at the prevailing interest rate. Thus, unemployment is not an issue about the stubbornness of the worker, and the rate of interest an issue concerning the avarice of the community. But both are born from the irrationality of the financier.
Essentially, Keynes analyses the flow of aggregate income and how that income determines the effective demand in the rest of the economy. The set amount of aggregate income and the propensity to consume determine the amount of consumption. The income left over is then saved by the community, but the amount invested depends on the long-term expectations of the cost of illiquidity (this refutes both Say’s law, which establishes an identity between savings and investment and the presumption of a calculable future, which aggregates loanable fund markets by presuming yield rates are predictable). This is relevant since the summation of consumption and investment equals the aggregate demand, which, when intersected with the aggregate supply, produces the aggregate effective demand. The amount invested is determined by the marginal efficiency of capital, which is the percent which makes the net present value of its cash flows (its prospective yields) equal to its supply price. The marginal efficiency of capital is equivalent to the interest rate, which is set at the intersection between the money’s supply and demand. Profit for Keynes emerges from the scarcity of capital assets. Disequilibrium occurs when inducements to investment weaken or strengthen beyond the aggregate effective demand.
The amount of aggregate effective demand determines the extent of employment and thus output. For Keynes the price of a good is determined by the marginal costs of the factor of production. This reduces down to the wage unit and the quantity produced. The wage unit and the wage good price levels (the aggregate price level of goods) then determine the “real wage rate per labour unit”. The real wage rate is the proportion of the aggregate output a wage-unit can earn. Importantly Keynes' recognizes that inflation can be caused by increases in demand determined raw materials, and he does not adopt the Phillip's curve in his discussions of inflation (his generalised statement on the quantity theory of money illustrates his complexity.
Inflation for Keynes depends on two things, the level of employment (to the extent it's full, which also involves the state of productive techniques) and the increase in nominal aggregate demand. If the economy is not at full employment nominal increases in demand can be absorbed in increased production. If not then it can not, and it must be absorbed in prices (when supply is inelastic the QToM are true).
Keynes' critique of the classical school is withering, not only can loanable fund markets not exist, neither can aggregated labour markets! Labour markets can not be aggregated because the presumption that all stocks are sold can not be made in the aggregate. Similarly savings (and loanable funds) are not decided upon by looking at the prevailing interest rate. Thus, unemployment is not an issue about the stubbornness of the worker, and the rate of interest an issue concerning the avarice of the community. But both are born from the irrationality of the financier.
Displaying 1 of 1 review