The General Theory of Employment, Interest, and Money

What determines employment levels in society isn’t only how much people want to work or their willingness to accept lower wages—it’s tied to larger patterns of spending, saving, and investment.

1. The Flaws in Classical Economic Assumptions

Keynes criticized classical economic ideas, arguing they misunderstood the reality of unemployment. Economists of the time assumed that workers' wages reflected their value to businesses and that employment levels automatically balanced out. This perspective suggested that if unemployment existed, it was because workers refused to accept lower wages.

Keynes disagreed, pointing out that unemployment is not always voluntary. He observed periods when people were willing to work for the prevailing wages but still couldn't find jobs. His ideas overturned the belief that economic downturns were solely due to worker resistance and insisted that larger forces—such as inadequate demand—played a role.

This rethinking laid the foundation for Keynes’s argument that full employment cannot be achieved through market forces alone. Instead, he proposed that strategic government intervention could correct imbalances and address involuntary unemployment.

Examples

• Workers during the Great Depression faced unemployment despite agreeing to lower wages.
• In 2008, job availability shrank even for individuals willing to work for reduced pay.
• Keynes’s critique of laissez-faire economics prompted governments to rethink labor policies.

2. Consumption and Investment Drive Employment Levels

Keynes argued that employment depends on two main factors: how much people consume and how much investors are willing to fund ventures. Together, these create what he termed "effective demand."

He explained that consumption rises with income, but not at the same rate—creating a gap between earning and spending. Businesses then base their labor decisions on this effective demand, which combines consumer spending and investment in new industries or projects.

Keynes warned that without sufficient investment, employment equilibrium is limited. Even wealthy societies could experience unemployment if savings outpace spending and investment opportunities stagnate.

Examples

• During economic booms, increasing incomes lead to higher but proportionate spending.
• Economic recessions could limit investment opportunities, lowering effective demand.
• Wealthy countries may struggle more with unemployment if their savings exceed investment.

3. Understanding the Multiplier Effect

Keynes introduced the concept of the “multiplier,” which shows how an injection of spending can ripple through the economy. When investment increases, income and employment also rise through repeated cycles of spending.

The multiplier effect relies on society’s Marginal Propensity to Consume (MPC)—that is, the percentage of additional income people are willing to spend. Higher MPC leads to larger ripple effects as income generates more economic activity. But if people save too much, the multiplier effect weakens, hindering economic recovery.

This principle underpins why Keynes viewed government spending during downturns as essential. Public works, for instance, could spark employment and additional consumption, triggering economic growth.

Examples

• Public infrastructure projects during the 1930s boosted construction jobs and related industries.
• Increases in consumer spending after stimulus checks during the 2008 crisis demonstrated how income injections spark growth.
• A society with a high MPC sees faster benefits from any increase in spending.

4. Employment Relates to Spending Psychology

Keynes highlighted the complex relationship between people’s spending habits and employment patterns. He showed that not all additional income is spent equally across industries, causing variances in how employment multiplies.

When people save or invest their income cautiously, demand in certain sectors surges, leaving others stagnant. He stressed that an economy thrives when paycheck spending fuels diverse industries. This dynamic means governments must understand consumption behaviors to effectively stimulate employment.

Moreover, subjective factors—such as fear of inflation—can create distortions in how incomes translate into job opportunities. Balancing psychological nuances with realistic policies becomes crucial for long-term stability.

Examples

• In periods of high inflation, people may save more out of fear, slowing job growth.
• Post-war economies often thrived as people spent their freed-up wartime incomes.
• Unbalanced spending patterns after 2008 left manufacturing lagging while tech sectors grew.

5. Investment Decisions Often Defy Logic

Keynes observed that investors frequently rely on conventions and moods rather than rational calculations. This behavior can amplify economic instability, as people react emotionally to market shifts.

He noted that expectations about future profits often skew investment choices. For instance, if confidence falters, even sound projects may go unfunded. Markets themselves intensify uncertainty, with prices influenced by mass psychology rather than clear data.

This irrationality, Keynes argued, underscores the need for policies that stabilize investments. Governments can temper panic or speculation by offering predictable fiscal measures or promoting industries likely to ensure growth.

Examples

• The 1929 stock market crash stemmed from speculative bubbles rather than solid financial reasoning.
• Property markets often see values climb irrationally, only to burst during corrections.
• Keynes’s time saw investors pull out of long-term ventures due to fleeting pessimism.

6. Conventions Shape Economic Expectations

Keynes emphasized the role of shared assumptions—or conventions—in shaping how businesses and consumers act. For instance, many assume that future conditions mirror the present, leading to economic inertia.

While these conventions bring stability, they may also discourage innovation or risk-taking. Entrepreneurs might avoid significant investment because of uncertain returns, even if opportunities exist. Keynes argued that breaking conventional thinking is essential to unlock bold economic changes.

Governments, he believed, must either revert to conventional approaches during stable times or challenge them during crises, using drastic interventions like fiscal stimulus to alter expectations.

Examples

• Economic recovery plans after WWII broke conventions, fostering rapid industrial growth.
• During the Great Depression, fear of change delayed responses to unemployment.
• Modern-day shifts to green energy highlight progress when conventions adapt to challenges.

7. Large Investments Need Confidence

Keynes also highlighted that substantial projects require confidence, which can be fragile in uncertain times. He noted that investors usually prefer short-term gains to avoid the risks tied to long-term endeavors.

This makes it challenging for major sectors, like infrastructure or energy, to attract funds during downturns. Keynes argued that government intervention, such as guarantees or direct funding, could fill this gap, stabilizing investor confidence and unlocking long-term ventures.

Examples

• Post-World War II infrastructure growth relied on public investment due to market hesitance.
• Renewable energy initiatives today often depend on government subsidies to mitigate risks.
• Financial bailouts for banks in 2008 restored confidence, averting economic collapse.

8. Unchecked Market Fluctuations Hurt Employment

Keynes critiqued free markets for their tendency toward harmful volatility. He emphasized how mass reactions to small changes in profit forecasts could spiral into widespread downturns, affecting jobs and incomes.

This volatility highlights why addressing speculative behavior is necessary. Stability can be achieved when governments regulate markets and focus on fostering long-term investment over fleeting short-term gains.

Examples

• The 2000s housing bubble showed how unchecked speculation devastated economies.
• Stock market corrections often affect employment sectors lacking direct market ties.
• Keynes’s call for tempered speculation aligns with modern regulation efforts.

9. Even Useless Spending Can Save Jobs

Keynes famously remarked that burying money in pits for people to dig up could help the economy when unemployment is very high. This analogy underscores his belief in the stimulating power of spending, even when it seems pointless.

When governments invest in large-scale projects—or even superficial ones—they inject money into the economy, creating a domino effect. This spending empowers consumers, revives businesses, and ultimately restores faith in markets.

However, Keynes made clear that such methods should only be used as a last resort. Meaningful investments—like building roads or schools—are preferable as they add lasting value.

Examples

• Depression-era public works invigorated household consumption and broader industries.
• Recent COVID-19 relief packages preserved jobs by injecting funds across sectors.
• Keynes’s theory of “wasteful spending” influenced modern stimulus programs to prevent collapses.

Takeaways

1. Support government spending during recessions to inject money into economies, creating jobs and stimulating growth.
2. Balance savings with spending in personal and policy decisions to maintain consistent demand and investment.
3. Be aware of emotional biases in markets, and make deliberate, informed financial decisions during volatile periods.