As the Great Depression raged, immiserating millions who’d lost their jobs as business after business folded, John Maynard Keynes posed some key questions: Why do people who are both willing and able to work remain unemployed? Why are financial markets so volatile, so often bubbling and then crashing? The General Theory of Employment, Interest, and Money, Keynes’s magnum opus of 1936, is clear about its objective: to demonstrate how the precepts of classical economic theory derived from the likes of Adam Smith and John Stuart Mill—that markets are essentially self-regulating systems governed by natural laws of production and exchange—miss the mark, and with disastrous consequence. Classical theory, Keynes argues, mistakes for a rule what is in fact a special case—namely, a situation of full employment. With actual unemployment as high as 25% at the height of the Depression in the United States, the so-called invisible hand had little explanatory power. Thus Keynes’s general theory, meant to address that which classical theory failed to take into account—”the economic society in which we actually live”—and to correct its misleading teachings and their catastrophic application. What are the essential lineaments of this general theory? What does it capture that classical theory does not? And what, necessarily, are its implications—for workers, employers, and policymakers?
In this course, we will examine Keynes’s General Theory in close detail, asking first about the special case it describes, then moving on the principle of effective demand and the central role of consumption and the question of investment. What is the propensity to consume, and what the propensity to save? How did Keynes understand expectations, the marginal efficiency of capital, money, and interest rates? By the end of the course, we will be able to understand why classical employment theory holds under only the exceptional condition of full employment and to assess Keynes’s proposals for monetary and fiscal policy, their relevance and application to both historical and contemporary contexts. Rounding out our reading list will be additional commentary from Keynes and select supplementary materials on monetary theory.
