The General Theory of Employment, Interest and Money by John Maynard Keynes and Essays in Persuasion by John Maynard Keynes [Paperback]

The value of this new edition of The General Theory of Employment Interest and Money is in its inclusion of Essays in Persuasion. One can gain greater insight into Keynes by reading more than his most famous book. You can see how his views developed. However, it is equally important to understand the historical context of Keynes' thought.

The strengths of The General Theory are in its treatment of time, information, uncertainty, and coordination problems. Keynes investigates many scenarios where miscommunication between groups of individuals leads to coordination failures that lead to a specific type of problem- deficient aggregate demand. We should think of trade cycles as coordination failures, and Keynes raises many such possibilities.

The historical significance of this book is a matter of contention. According to the prevailing mythology, Keynes singlehandedly transformed professional opinion concerning the causes of the Great Depression. Prior to Keynes all economists believed that markets self-correct. In reality, several economists developed demand side theories of unemployment before Keynes: Dennis Robertson, JM Clark, M Kalecki , Lautenbach, JA Hobson, JR Commons... Keynes was involved in the development of these ideas, but he is not singularly responsible for either the development or popularization of these ideas. The real founder of modern macroeconomics is the Swedish economist Knut Wicksell, not JM Keynes.

There are empirical problems with this book. Keynes argued that decreases in private components of aggregate demand cause cycles. Yet, shifts in the money supply correlate well with depressions. Also, at the close of World War 2, Keynesians predicted another great depression in 1946 due to massive decreases in government spending for armaments. They were clearly wrong, and this is very damaging to Keynes' case. If his 'effective demand' hypothesis is correct, there should have been a depression in 1946. Modern Keynesians, like Paul Krugman, claim that we don't know what happened in 1946, but we really do know. Capitalism worked in that particular instance.

Keynes paid almost no attention to data in this book. Instead, he focused, as the title implies, on theory. His central hypothesis is his 'Principle of Effective Demand. He lays out the main variables involved here on page 29. This principle supposedly refutes Say's law of Market. Keynes claims that total spending can fail to generate full employment. This happens when total savings exceeds total investment. A key supporting argument is that investors will hold cash when interest rates fall. This cash holding supposedly causes demand to fall. The truth is that investors do not hold cash, but instead hold their money in some form of asset in financial markets, even when they are speculating over future bond prices. In the absence of legal restrictions money stays in the financial system and circulates. Depositors did withdraw money from banks- during the banking panics that began in November of 1930. Were these panics an effect of a slowdown that had already existed for more than a year, or the cause of the slowdown itself? Keynes might have the direction of causation backwards.

Keynes refers to the 'marginal efficiency of capital' and downplays the critical issue of time preference. Oddly, Keynes does admit that money serves as a link between present and future (p293), and even considers dividing economics between the theory of stationary equilibrium and shifting equilibrium (same page). But Keynes never dealt with time preference all that clearly. In his world, capital markets are driven by 'animal spirits', not expected profits. 'Marginal propensities' drive saving, not inter-temporal consumer choice. The validity of these propositions is questionable.

Keynes' irrationalist view of markets stands in contrast to his view of government. Will public officials stabilize the economy via some socialization of investment? He seemed to believe that government officials seek simply to promote the general welfare, rather than to seek political gain by catering to special interests. Does the historical record substantiate this view of government? It should be noted that Keynes does not endorse deficit spending in this book. Deficit spending was proposed by Abba Lerner- and endorsed by Keynes (after initial hesitation). In this book Keynes recommended something even worse than deficit spending- `somewhat comprehensive socialization of investment' (p378). The economics profession drifted away from Keynes during the late 20th century. In fact, modern Keynesian economics bears almost no resemblance to this book. The recent financial crisis has renewed interest in The General Theory, but it arguments have not gained any greater applicability. The housing boom was driven primarily by Federal Reserve Bank policy, not by 'animal spirits'. The General Theory has its place in history, and it should stay there along side Keynes' Essays in Persuasion.

John Maynard Keynes is one of the great economic minds of our time. This is a great edition of his work with Essays in Persuasion as an added bonus!!!

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