Summary

"The General Theory of Employment, Interest and Money" by John Maynard Keynes challenges classical economic thought by asserting that the level of employment is not self-regulating and that involuntary unemployment can indeed exist. Keynes argues that effective demand, composed of consumption and investment, determines the volume of employment. This directly contradicts the classical notion that supply creates its own demand, thus necessitating a re-examination of fundamental economic assumptions.

Keynes introduces the concept of the 'propensity to consume,' suggesting that as income increases, consumption also increases, but to a lesser extent. This psychological law implies that there must be sufficient investment to absorb the excess of total output over what the community consumes. The equilibrium level of employment, therefore, depends on the amount of current investment, which in turn depends on the 'inducement to invest.' This inducement is influenced by the relationship between the schedule of the marginal efficiency of capital and the complex of interest rates.

The book delves into the theory of interest, arguing that it is the rate of interest's function to preserve equilibrium between the demand and supply of money, or liquidity. Keynes critiques the traditional 'Quantity Theory of Money,' proposing instead that the price level is determined by supply and demand. Money influences economic activity by affecting the supply of liquid resources and, consequently, the rate of interest, which then impacts investment and the levels of income, output, and employment.

Keynes also addresses the role of expectations in determining output and employment, distinguishing between short-term and long-term expectations. Business decisions are primarily driven by short-term expectations, which themselves are influenced by long-term expectations. He also advocates for government intervention through fiscal policy, including government spending and short-term deficits, to mitigate economic contractions.

The long-term implications of Keynes's theory suggest a transformation of capitalism, where the state plays a more active role in managing investment and consumption. Keynes envisions a future where the 'euthanasia of the rentier' occurs through policies that promote full employment and reduce the scarcity value of capital. This, in turn, would lead to a more equitable distribution of wealth and incomes, creating a more stable and prosperous economic system.