Edited by Robert W. Dimand and Harald Hagemann
Chapter 30: The General Theory of Employment, Interest and Money
Keynes began as a monetary theorist, but by the 1930s he had come to believe that monetary conditions reflect the state of aggregate demand, not the amount of exogenously supplied money. His General Theory, published in 1936, was a theory of employment, not money. In this chapter, I examine the causes and implications of this shift in Keynes’s thinking. The General Theory challenged the neoclassical theory of an optimally self-correcting economy. It demonstrated the possibility of “under-employment equilibrium”; this short-run model offered a justification for policies to maintain or restore full employment. However, Keynes’s theoretical ambition went deeper. It was to show that the existence of radical uncertainty made it unlikely that economies would naturally achieve full employment, except in moments of excitement. The theoretical counter-attack against Keynes’s theory, however, left too narrow a policy space to guard against the slump of 2008–09 or bring about strong recovery.
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