1936
John Maynard Keynes’s The General Theory of Employment, Interest and Money was probably the most influential work on economics published in the 20th century. It mounted the first serious challenge to the classical theories of economics that had been developed over the preceding century and a half. The traditional view was that governments should not try to intervene in the working of the financial markets, but the crisis of the First World War and the misery of poverty, unemployment and worldwide economic slump that followed led Keynes to consider ways in which taxation and adjustments to the supply of money in circulation might mitigate the effects of economic recession.
The General Theory of Employment, Interest and Money, was primarily a theoretical study rather than a practical policy document. Keynes (1883–1946), known as a brilliant economic theorist at Cambridge University and a one-time adviser to the British Treasury, said that he hoped his book would be intelligible to non-specialists; but he was clear that it was aimed primarily at other economists.
Within that world of economics, however, his intention was from the start to bring about a revolution. A year before the publication of his book he wrote to the play-wright George Bernard Shaw: ‘I believe myself to be writing a book on economic theory which will largely revolutionize – not, I suppose, at once, but in the course of the next ten years – the way the world thinks about economic problems.’
The Victorian age and the decades thereafter had been dominated by free-market economics, built on the ideas of thinkers such as Adam Smith (1723–90), David Ricardo (1772–1823) and John Stuart Mill (1806–73), who opposed government intervention in the working of the economy. The title of Keynes’s book, when it appeared, was a clear echo of The General Theory of Relativity that Albert Einstein (1879–1955) had announced in 1915. In the same way that Einstein had updated Newton’s classical theories of physics, so Keynes was aiming to update classical ideas about the management of the economy and the reduction of unemployment. Economic theories that had worked in the 19th century, he believed, were no longer satisfactory in the 20th.
Where free-market economists believed that the level of employment in society was essentially fixed by the price of labour, so that lower wages would automatically promote full employment, Keynes said that it was the level of economic demand within society that was the determining factor. In 24 densely argued chapters, The General Theory set out his case that, without positive action by government, under-employment and under-investment might be the result of unfettered economic competition. He was not putting forward a socialist case for full-scale central direction of the economy, but arguing for a measure of government intervention to work alongside market forces and protect the vulnerable. Increased government spending might be necessary, even if this resulted in governments running a budget deficit.
The General Theory was partly a product of the economic misery of the slump that had followed the First World War. Keynes had been developing much of the thinking behind The General Theory – how government action, together with market forces, could alleviate distress and promote the general welfare of society at large – for some 20 years before the book was published in 1936. One of its central planks, as Keynes explains in this extract from the final chapter of the book, is the need to move towards full employment, and end what he believed was the ‘arbitrary and inequitable’ distribution of wealth and incomes.
I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalized into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandizement. It is better that a man should tyrannize over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative. But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as at present. Much lower stakes will serve the purpose equally well, as soon as the players are accustomed to them.
THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY, CHAPTER 24, 1936
As representative of the British Treasury at the Paris Peace Conference of 1919, Keynes had argued passionately against the damaging reparation demands that were imposed on Germany. When his arguments were rejected, he resigned his Treasury position, and within two months wrote a book, Economic Consequences of the Peace, in which he warned prophetically that destroying the German economy would have serious implications for the rest of Europe.
Four years later, Keynes contemptuously dismissed the free-marketeers’ assumption that the market would correct itself and solve problems of unemployment ‘in the long run’. In his book A Tract on Monetary Reform (1923), he famously pointed out ‘The long run is a misleading guide to current affairs. In the long run, we are all dead.’ In many ways, The General Theory, written thirteen years later, is an expansion of this idea.
The General Theory was well received both by academic economists and by governments, and for a quarter of a century after the end of the Second World War it was widely accepted that economies could be successfully managed if a Keynesian policy of government spending was adopted, coupled with cheap money, a redistributive taxation policy and the maintenance of an agreed policy on incomes.
Keynes’s adherents point to this period as a time of unprecedented real economic growth in the capitalist world, but by the mid-1970s, with incomes policies under strain, governments increasingly concerned about economic growth, and economists developing new ideas about inflation and employment, the Keynesian model fell out of favour. However, the fact that few modern economists would argue for completely unfettered competition is a mark of Keynes’s influence. Markets, left to their own devices, do not always work. Some economists believe that the ideas in The General Theory have still not been properly applied, and the general consensus today is that although a properly functioning market will bring about equilibrium over a long period, Keynesian intervention can bring significant benefits in the short and medium term – and in times of real economic stress. The General Theory brought a lasting change to the terms of debate about how governments should manage a modern market-oriented entrepreneurial economy.