General theory of employment, interest and money
The General Theory of Employment, Interest and Money (often called General Theory and General Theory (from the English. Original title The General Theory of Employment, Interest and Money hereinafter)) was designed by the British economist John Maynard Keynes wrote. It was published in February 1936 and is considered to be his major economic work.
The abstract and purely macroeconomic work is directed against classical or neoclassical axioms ( “postulates” ), in particular against the so-called natural interest rate and thus against Say's theorem . According to Keynes, the free market tends towards an equilibrium of underemployment and by no means full employment , as the neoclassical claims. After the Great Depression in 1929, the work was considered the foundation of new economic policy concepts and heralded the Keynesian Revolution in economics .
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content
The work is divided into six books and comprises a total of 24 chapters:
- First book: introduction
- 1. The general theory
- 2. The postulates of classical economics
- 3. The principle of effective demand
- Second book: definitions and ideas
- 4. The choice of units
- 5. Expectations as the determinant of production and employment
- 6. The definition of income, savings and investment
- 7. Consider further the importance of saving and investment
- Third book: The propensity to consume
- 8. The objective factors
- 9. The subjective factors
- 10. The marginal propensity to consume and the multiplier
- Book Four: The Incentives to Invest
- 11. The marginal efficiency of capital
- 12. The state of long-term expectation
- 13. The general theory of the interest rate
- 14. The classical theory of the interest rate
- 15. The psychological and economic incentives to liquidity
- 16. Various considerations on the nature of capital
- 17. The essential properties of interest and money
- 18. Reformulation of the general theory of employment
- Fifth Book: Nominal Wages and Prices
- 19. Changes in nominal wages
- 20. The employment function
- 21. The theory of prices
- Sixth Book: Brief Remarks Inspired by General Theory
- 22. Comments on the business cycle
- 23. Remarks on mercantilism, the usury laws, stamped money, and underconsumption theories
- 24. Conclusions on the Social Philosophy to which General Theory could lead
reception
The reputation of classical and neoclassical music had been ruined since the Great Depression, and politics and the public were waiting for a scientific justification for the state's intervention in the economy to overcome the crisis, which had been practiced in the USA since 1933, for example with the New Deal . Keynes's work was enthusiastically received by students and younger economists, and opponents such as Friedrich August von Hayek lost much of their influence on the economic debate at universities.
Since an open resistance on the part of the ruling doctrine against the Keynesian revolution promised little success, some approaches of the criticism of Keynes were taken up that, for example, money is not neutral and the interest rates do not fall low enough because of the liquidity trap to be built into the neoclassical ideas and to present it to the public as a Keynesian model . Shortly after the publication of the General Theory , the idea for the IS-LM model was born at a conference of the Econometric Society in Oxford. Alvin Hansen , who was appointed to Harvard in 1937 , also contributed to this and it was taught as the Hicks-Hansen synthesis in the USA and popularized by Paul A. Samuelson in his 1948 bestselling textbook Economics: An Introductory Analysis . John R. Hicks himself later stated his dissatisfaction with the IS-LM model, which was rejected by Keynes students such as Joan Robinson , and referred to it as "a classroom gadget". Although the IS-LM model is taught at universities as a Keynesian model , it does not actually contain Keynes’s knowledge and insights, but it is also officially called a neoclassical synthesis and reduces Keynes’s theories to a general equilibrium model .
The economist Lorie Tarshis, a former Keynes student and enthusiastic supporter of the Keynesian business cycle theory, had already published his work The Elements of Economics in the USA in 1947, i.e. a year before the bestselling textbook by Samuelson, which initially sold very well . It contained an easy-to-understand account of Keynes' business cycle theory, in which investment determines the change in income in the economy. A major campaign by libertarian and conservative spokesmen against universities and schools that used Tarshis' work as textbooks ended the sales success.
The revolutionary thoughts contained in the General Theory have been weakened, falsified, and devalued by a broad spectrum from avowed supporters like Hicks to open opponents like Jacob Viner . After this process of interpretation came to the conclusion that Keynes' correct thoughts were not new and the new ones were incorrect, Orthodoxy again dominated the universities and the political advisory bodies. Keynes was barely able to take part in the discussions about his work because he suffered a heart attack in 1937 and, after his recovery, was claimed from his government work from 1939 onwards.
Core idea
Basically
As a person who suffered greatly from his high level of intelligence in economic debates, Keynes wrote very funny, ironic and cynical about the importance of gold mines for civilization or about war as the only politically legitimate reason for large bond issues. His proposals to fill old bottles with banknotes, to cover them with municipal waste and to have them dug up again by private enterprise, his praise for building pyramids and cathedrals, his proposal to dig and fill in holes again because of completely senseless job creation measures Many readers have misunderstood the idea and were indignant about the supposed nonsense, who would have the advantage of being decided immediately without discussion.
The demand for goods determines production, income and employment
In the orthodox economy, companies determine the volume of production. To maximize profit they employ all workers whose wage demands do not exceed their marginal productivity . Because of the assumed neutrality of money, every saving in consumption leads to correspondingly higher investments and the production potential is always fully utilized.
At Keynes, the demand for goods determines production and employment. Households decide on their consumer goods purchases and companies decide on their investments. Full employment is a special case and requires incentives and circumstances for sufficiently high investments, especially low interest rates. The market processes reinforce insufficient investment by saving households on consumption. Say's law that production creates a corresponding income does not give sufficient reason for the demand necessary for full employment. Because in a boom, production and income are high, and in a crisis, income falls with production.
The quantity theory of money does not apply
Prices are not controlled by a circulating amount of money, rising or falling prices are the result of a booming economy or a sales crisis. Keynes had already emphasized in his essays that a deflation of prices does not occur through the control of the money supply, but that the central bank with high interest rates will trigger a sales crisis to lower wages and prices. The international gold standard forced the Bank of England to adopt a very restrictive monetary policy, which had caused high unemployment in England since 1925. As long as there is unemployment, an increase in the money supply will increase employment as much as an increase in the money supply increases demand. Only with full employment will prices change in relation to the money supply.
The classic capital market is based on a fallacy
According to the ideas of the classical and neoclassical periods, saving households, i.e. reducing spending on consumption, supposedly leads to savings. These savings would be offered by households on a capital market. The classic interest rate mechanism means that the savings offered are in demand by companies for their investments. There must always be an equilibrium of the markets, because if the supply of savings exceeds the planned investments, interest rates would fall. Falling interest rates create increasing demand for savings by firms until savings and investment are in balance. Because saving, i.e. not consuming, in the classic and neoclassical model immediately leads to savings that companies use to finance additional investments, a sales crisis is not possible in this model and unemployment is always voluntary.
According to Keynes, saving does not create any offer of savings at all. The classic capital market is based on a fallacy of generalization : From the point of view of a single person who spends the amount X less on consumption, their money savings have increased, but the income in the economy has fallen and it is precisely this amount X that is now missing from other households further edition.
From a macroeconomic perspective, there are no savings from restricting consumption that would then be offered on a capital market. Saving households only leads to a decrease in the demand for goods. This decline in demand for goods can even cause companies to cut back on investment, so that an initial decline in consumption can initiate further spending restraint and the subsequent economic stagnation.
The savings are identical to the investment
With the classics, neoclassics and neo-Keynesians (IS-LM model), savings and investment are balanced by the interest or a combination of interest and income by market forces. The equilibrium is achieved by the fact that every single act of saving lowers interest rates and thus stimulates investment; conversely, every investment increases savings by promoting savings either with higher interest rates or through higher incomes.
At Keynes the saving is always the same as the investment, but the budgeted saving of households leads, in the case of insufficient investment, about which is decided by the companies, to the additional abandonment of consumption, which increases the deviation of the equilibrium of the investments from the desired saving because companies will react to the decline in consumption with ever more investment cuts.
There is no mechanism by which households' desire to save on the market could ensure sufficient investment through falling interest rates. Household saving must continue to discourage corporate investment, while the neo-classical school maintained that any increased savings made by an individual created increased investment. However, because of the identity of saving and investment, there are no additional savings from individual saving acts that households offer on the capital market and thus lower interest rates far enough so that the investment is made to the desired extent, but consumption decreases and thus income and the incentive to Investment.
The saving paradox is exacerbating the crisis
Households cannot directly determine the amount of their savings because their total saving is always identical to the investment in the economy. The companies decide on the scope of the investment. If households want to save more, they will try to reduce their consumer demand. This means that the demand for goods, production, income and employment continue to decline.
The savings paradox exacerbates any deviation between the desired savings and the actual savings. An expansion of consumption because households want to save less leads to higher investments by companies and thus increasing savings, in other words the opposite of the reduction in savings desired by households. Conversely, lowering consumption, if households want to save more, leads to even less investment and thus falling savings. Only the intervention of monetary and financial policy can stop the undesirable developments that would otherwise intensify into deflationary depression or hyperinflation. The classical economists still teach (t) the orthodox credit theory , according to which every saving lowers interest and stimulates investment, every investment increases interest and stimulates saving, until the equilibrium interest rate savings and investment are the same. Instead, according to Keynes, every saving has a negative and every investment has a positive effect on income and employment.
Wage cuts do not lead to more employment
Orthodox theory sees the extent of employment as determined by real wages. If workers are willing to work for a lower real wage, employment can rise at any time. Keynes believed that workers cannot negotiate real wages and therefore cannot work at lower real wages because only nominal wages are negotiated. Falling nominal wages could even lead to a rise in real wages in the event of deflation if prices fall, because little is invested, since investors have to reckon with further falling wages and prices.
Flexible wages and prices intensify economic fluctuations
The workers oppose a lowering of their nominal wages, because each individual and each group wants to ward off relative disadvantage. Rigid wages and prices are good for the economy because falling wages and prices exacerbate the crisis. Falling wages reduce purchasing power and falling prices increase the burden of debt and the real interest rate. The expectation of falling wages in the future affects the investment like a correspondingly higher real interest rate. As the global economic crisis has shown, wage cuts and deflation are leading ever deeper into the depression.
At no point did Keynes claim that full employment and market equilibrium would be missed because of rigid wages or prices. Despite his statements to the contrary, models such as the New Keynesian Economics by Mankiw / Romer are taught with these assumptions and with reference to Keynes.
Deficit spending
The savings desired by households and the investment required for this can also be achieved through deficit spending by the state. If there is no more net investment in a severe crisis, the economic crisis would cause production and income to collapse until households were so impoverished that they could no longer limit their consumption and their total savings would drop to zero:
- “The stock of capital and the level of employment will consequently have to shrink until the community becomes so impoverished that total saving has become zero, so that the positive saving of some individuals or groups is offset by the negative saving of others. In a society that conforms to our assumptions, the equilibrium must, under laissez-faire conditions, be in a position where employment is low enough and living conditions are poor enough to bring savings to zero ”.
The state can enable private individuals to make corresponding savings and thus higher incomes through its excess expenditure.
At the same time, however, in times of economic upswing, the state should increase taxes in accordance with the countercyclical fiscal policy in order to repay the expenditure-related debts that had accumulated during the recession. This doctrine of tax increases in upswing times is often not followed by financial politicians, which ultimately leads to a long-term rise in national debt. Explanations for this can be found in the public choice theory , which shows economic explanations for political behavior. In connection with the median voter theorem it explains that politicians consequently avoid (at least obviously recognizable direct) tax increases in order not to endanger their re-election.
The multiplier
The multiplier was first mentioned as an employment multiplier by Richard Kahn , a Keynes employee, in 1931: The employment of additional workers indirectly creates additional employment through their income and consumption. Keynes adopted this idea for his business cycle theory as an investment multiplier.
The concept of the multiplier at Keynes is based on the assumption that the amount of the savings cannot be determined by the households, because the savings are always identical to the investment. Now, however, the savings are linked to the level of income via the savings rate, so a part of the income corresponding to the savings rate is saved. From this it follows that if there is a decline in investments determined by companies due to increased interest rates, there must be a collapse in the income of the economy that is increased by the multiplier. Households have to become so impoverished that they can no longer save more than the companies' current investment. This is what triggers the economic crisis. Conversely, an increase in investment or increasing national debt or increasing foreign debt through foreign trade surpluses means greater savings for households and enables these households to increase their income in line with their savings rate. In general, small fluctuations in investment will lead to wide fluctuations in employment. Keynes did not claim that the multiplier effect would lead to a new market equilibrium and, especially in the event of a slump in income due to a decline in investment triggered by monetary policy, it is also unlikely and would ultimately contradict the demand for a national deficit to overcome crises.
The savings rate for additional income determines the multiplier for investments or deficit spending by the state. With a savings rate of z. B. 20% we get a multiplier of 5, the income in the economy can grow by five times the additional debt taken on by the state, the additional investment or additional export surpluses. Conversely, the economy will shrink by five times the austerity measures decided by the government, the investment cuts by companies or the losses in foreign trade.
Liquidity preference and liquidity trap
Under the gold standard, holding money was almost without risk, because a fixed gold rate guaranteed the preservation of purchasing power. In a crisis, investors therefore had to take neither the price risk nor the default risk of buying bonds, and the money owners had a correspondingly high liquidity preference.
Long-term bonds carry price risk. Therefore, in a crisis, long-term interest rates cannot fall low enough to end the crisis with an expansive monetary policy alone, but financial and economic policy must also stimulate the economy.
expenditure
Original edition:
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The General Theory of Employment, Interest and Money. Mac Millan, London 1936. ( Online on the University of Adelaide homepage ).
- German: General theory of employment, interest and money. Translation by Fritz Waeger, Duncker & Humblot, Munich / Leipzig 1936; unchanged until 2006.
- 2006 Fritz Waeger's translation corrected and revised. by Jürgen Kromphardt and Stephanie Schneider and published as an 'improved 10th edition'.
- 11th edition Berlin 2009, ISBN 978-3-428-12096-3 (reviewed; with an introduction to the structure and content of the book).
- German: General theory of employment, interest and money. Newly translated from English by Nicola Liebert, Duncker & Humblot, Berlin 2017, ISBN 978-3-428-15048-9 .
- German: General theory of employment, interest and money. Translation by Fritz Waeger, Duncker & Humblot, Munich / Leipzig 1936; unchanged until 2006.
Literature (selection)
- Richard Kahn: The Making of Keynes' General Theory. Cambridge University Press. Cambridge 2011, ISBN 978-0-521-18975-0
Web links
- Homepage of the keynes society
- Paul Krugman (2005): Introduction to The General Theory of Employment, Interest, and Money , German translation: here (pdf, 19 pages)
Individual evidence
- ^ John Hicks: "IS-LM": An Explanation Source. In: Journal of Post Keynesian Economics. Vol. 3, No. 2, Winter 1980/81, pp. 139-154
- ^ John Hicks: "IS-LM": An Explanation Source. In: Journal of Post Keynesian Economics. Vol. 3, No. 2, Winter 1980/81, p. 152
- ↑ David Colander & Harry Landreth: Political Influence on the Textbook Keynesian Revolution. In: Omar F. Hamouda & Betsey B. Price: Keynesianism And The Keynesian Revolution In America: A Memorial Volume in Honor of Lorie Tarshis. Edward Elgar, 1998 ( PDF; 46 kB )
- ↑ Hyman P. Minsky : John Maynard Keynes. McGraw Hill, 2008, pp. 3f
- ↑ General theory, 1936 p. 110f
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↑ Allgemeine Theory, 1936/2006 p. 24:
“The amount of current investments will in turn depend on what we shall call the incentives to invest, and we will find that the incentives to invest depend on the ratio between the marginal efficiency of capital and the totality of the interest rates for bonds of different maturities and risks depends. " -
↑ Allgemeine Theory, 1936/2006 p. 23:
“Say's law, according to which the aggregated demand value of production as a whole is equal to the aggregated supply value of all production quantities, is thus the equivalent of the assertion that there is no obstacle to full employment. But if that is not the true law of the relationship between the functions of aggregate demand and supply, then there is a chapter of economic theory of essential importance which has yet to be written and without which all discussions of the total amount of employment are empty words . " - ↑ General theory, 1936 p. 247ff
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^ John Maynard Keynes: The Economic Consequences of Mr. Churchill. In: Essays in Persuasion. WW Norton & Company, 1991, p. 259
Deflation does not reduce wages "automatically". It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a depression. - ↑ General theory, 1936 pp. 251f
- ↑ General theory, 1936 pp. 55f
- ↑ General theory, 1936 p. 147ff
- ↑ General theory, 1936 p. 149
- ↑ General theory, 1936 pp. 150ff
- ↑ General theory, 1936 p. 155
- ↑ General Theory, 1936, p. 227
- ↑ General Theory, 1936, p. 226
- ↑ General Theory, 1936, p. 224
- ↑ General Theory, 1936, p. 184
- ↑ General Theory, 1936/2006, p. 183
- ^ RF Kahn (Jun 1931). "The Relation of Home Investment to Unemployment" . The Economic Journal (Wyley-Blackwell) 41 (162): 173-198.
- ↑ General Theory, 1936, pp. 103f
- ↑ General Theory, 1936, p. 101
- ↑ General Theory, 1936, pp. 97ff
- ↑ General theory, 1936 p. 163 ff.
- ↑ General theory, 1936 p. 170
- ^ Reinhard Blomert : economic book. Back to Keynes. Die Zeit , March 1, 2007.
- ↑ Olaf Storbeck: History of an Economic Classic - The Keynes Understander. Handelsblatt , May 17, 2009. Page 10 (published online May 11, 2009)