Keynes’s General Theory at 80
In 1936, John Maynard Keynes's magnum opus, The General Theory of Employment, Interest and Money, was published. How much of Keynes's theory, which revolutionized the way policymakers approached economic problems, still holds up?
LONDON – In 1935, John Maynard Keynes wrote to 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 its economic problems.” And, indeed, Keynes’s magnum opus, The General Theory of Employment, Interest and Money, published in February 1936, transformed economics and economic policymaking. Eighty years later, does Keynes’s theory still hold up?
Two elements of Keynes’s legacy seem secure. First, Keynes invented macroeconomics – the theory of output as a whole. He called his theory “general” to distinguish it from the pre-Keynesian theory, which assumed a unique level of output – full employment.
In showing how economics could remain stuck in an “underemployment” equilibrium, Keynes challenged the central idea of the orthodox economics of his day: that markets for all commodities, including labor, are simultaneously cleared by prices. And his challenge implied a new dimension to policymaking: Governments may need to run deficits to maintain full employment.