Question

In Ch. 12 of Keynes’s The General Theory of Employment, Interest and Money

1. What is Keynes arguing in this chapter? Be as specific as possible. Does this chapter at all resemble or build off of Marshall’s approach to science?
2. Is this chapter relevant today? Why or why not?
3. What does Keynes mean when he refers to “the job likely to be ill done?”

Answer 1

Keynes (1883–1946), who argued in The General Theory of Employment, Interest, and Money (1935–36) that there exists an inverse relationship between unemployment and inflation and that governments should manipulate fiscal policy to ensure a balance between the two.

The aggregate equations that underpin Keynes’s “general theory” still populate economics textbooks and shape macroeconomic policy. Even those who insist that market economies gravitate toward full employment are forced to argue their case within the framework that Keynes created. Central bankers adjust interest rates to secure a balance between total demand and supply, because, thanks to Keynes, it is known that equilibrium might not occur automatically.

Keynes’s second major legacy is the notion that governments can and should prevent depressions. The widespread acceptance of this view can be seen in the difference between the strong policy response to the collapse of 2008-2009 and the passive reaction to the Great Depression of 1929-1932. As the Nobel laureate Robert Lucas, an opponent of Keynes, admitted in 2008: “I guess everyone is a Keynesian in a foxhole.”

Keynes’s relevance may lie less in his specific remedies for unemployment than in his criticism of his profession for modeling on the basis of unreal assumptions. Students of economics eager to escape from the skeletal world of optimizing agents into one of fully-rounded humans, set in their histories, cultures, and institutions will find Keynes’s economics inherently sympathetic. That is why I expect Keynes to be a living presence 20 years from now, on the centenary of the General Theory, and well beyond.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. Keynes explains that speculation is a result of “liquidity.” While most people saw market liquidity as a huge benefit, Keynes saw it as a double edged sword.