Keynes’ implications that what was known as the “good market” might be at unemployment equilibrium, such that it was not ensuring equilibrium in the labor market, caused quite a stir among economists.  In a labor market like this, employers would not hire workers to the point at which it would have been profitable for them to do so had necessary demand for their output been present.  The concept of unemployment equilibrium was developed and elaborated on by Keynes and other economists in the years that would follow the publication of “The General Theory of Employment, Interest, and Money”.

Demand as an essential determinant of the output, a Keynesian idea, catalyzed further development in related macroeconomic fields.  It was, at least in part, responsible for national income accounting.  In national income accounting, the components of GNP consumption, investing, net exports, and the spending of the government are measured. Another point of contention between Keynes and classical economic theorists is that of money supply theory.  Money supply is of the utmost importance in macroeconomics.  As this analysis and summary of “The General Theory of Employment, Interest, and Money” by John Maynard Keynes attempts to make clear, the primary argument against Keynes is posited by the monetarists.

 Monetarists are economic theorists whose beliefs indicate that money supply growth is the most important factor, and in fact the primary determinant, of economic growth.  Prior to Keynes’ work, the popular economic theory was that interest rates led to a balance between savings and investment.  Subsequently, there would be equilibrium in the goods market.  In “The General Theory of Employment, Interest, and Money” Keynes heavily disputed these ideas.  He contested that the interest rate was primarily a monetary issue, the principal function of which was to maintain the balance of supply and demand for money, not savings or investment.  Keynes’ idea provided a long sought explanation for the reason that the amount of savings did not always correlate with the investment amount or interest rate.

There was further disagreement between Keynesians and monetarists as it regards changes in the money supply and their effects on employment and output.  Keynes thought that an increase in the money supply has the tendency to reduce interest rates.  Following that, investment and total demand will increase.  Hence, they theorize that one way to reduce unemployment is through the expansion of the money supply.  Keynes theorized that in conditions in which the work force if underemployed, this sort of increased spending would yield greater output and cause employment to rise.  Monetarists vehemently disagree, as their understanding of economics leads them to believe that such an increase in the money supply would lead only to inflation over a long stretch of time.  John Maynard Keynes, in the process of writing The General Theory of Employment, Interest, and Money, wrote to Irish playwright George Bernard Shaw.  In his correspondence, he revealed, with seemingly prophetic accuracy, the effect his treatise would have on global economic policy. “I believe myself to be writing a book on economic theory which will largely revolutionise–not, I suppose, at once but in the course of the next ten years–the way the world thinks about economic problems.”

Keynesian economics gained favor with economists and public officials following World War II.  In practice, this manner of interventionist economics appeared to work well in the post-war boom.  In the 1970s, however, economies would run into the problem of stagflation, as certain classical economists had predicted.  Stagflation, the combination of stagnation and inflation, is characterized by high rates of inflation and extremely low economic growth.  Keynesian economic policies at the time had no solution for this stagflation, and these troubles led to a spike in the popularity of monetarism in popular economic thinking.

In some ways, the “General Theory of Employment, Interest and Money” was not entirely revolutionary. One example is that Keynes’s conclusions suggested new methods of raising employment, very different from those of most economists, which could be applied to government policy. During The Great Depression, when The General Theory was written, the explanations of many of Keynes’s contemporaries–that prolonged unemployment should not be possible and that employment could be increased by wage reductions–did not help relieve depression at all. Keynes was compelled to write The General Theory because the classical explanations of a depression, which had already begun in England in the 1920s, differed increasingly from the policies Keynes thought necessary to relieve depression. In the final chapter of The General Theory, Keynes emphasizes the actions government must take to remedy unemployment. According to Keynes, the government had to intervene in order to make sure that demand is adequate, since the tendency in a depression is towards decreased demand, which is reflected in decreased investment. Keynes says, “The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment.”

By the time that stagflation had hit, Keynes was long dead.  His health had begun to erode in 1937, immediately following the publication of The General Theory of Employment, Interest, and Money.  John Maynard Keynes died of heart problems in 1946.  He was outlived by both of his parents.  Prior to dying, Keynes was a key figure in the establishment of the International Monetary Fund (IMF).

Despite his physical death, John Maynard Keynes’ ideas have lived on.  Their adoption into the post-World War II economic mindset, known as the Keynesian revolution, and their subsequent exposure to stagflation in the 1970s was unable to cause Keynesian economics to altogether falter.  Though widespread use of the principles of aggregate management espoused by Keynes was no longer in favor, the principles have been modified and are still in use by economists today. Most economies, following the seeming failure of Keynesian economics in the 1970s, were extremely hesitant to utilize the principles of Keynes’ work.  The arguments against Keynes were typically centered around the believed damaging effects that Keynesian economics could have on balancing budgets and the encouragement of inflation.  With the 1970s inflation crisis still very much on peoples’ minds, the monetarist mindset was a distinct change for economic policy.  The idea has been forwarded that Keynesian economics were a victim of their own success.  The post-World War II era was primarily devoid of prolonged unemployment, and the 1970s’ failure to continue the pattern turned people against Keynes’ ideas, some theorize, prematurely.

Despite this ideological shift, Keynes’ ideas have been adapted in the form of new Keynesian economics.  The goal of this form of economic thinking is the merger of neoclassical economics with some of Keynes’ conclusions regarding economic policy.  It is an ideology of synthesis between microeconomic foundations and macroeconomic concepts and management.  Though his ideas have been doubted, distrusted, nearly discarded, and heavily altered; John Keynes’ ideas are still a topic of discussion and practice in 21st century economic policy

Other essays and articles in the Main Archives related to this topic include : Marx and Locke: Comparison of Views on Government, Property and Labor  •  The Economics of Socialism: An Historical Perspective   •  Summary and Analysis ofThe Essential Adam Smith by Robert L. Heilbroner   •  Analysis and Summary of Principles of Political Economy by John Stuart Mill