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Critical Review Of Keynes' General Theory

4506 words - 19 pages

A Critical Review of Keynes’ General Theory of Employment, Interest & Money


Deepika Rana Priyanka Gupta

Biographical Account
John Maynard Keynes is doubtlessly one of the most important figures in the entire history of economics. He revolutionized economics with his classic book, The General Theory of Employment, Interest and Money (1936), regarded as probably the most influential social science treatise of the 20th Century. The son of the Cambridge economist and logician John Neville Keynes, John Maynard Keynes, born in 1883, was bred in British elite institutions - Eton and then King's College Cambridge. During his freshman year at Cambridge, Keynes was invited to join an ...view middle of the document...

In 1930, John Maynard Keynes brought out his heavy, two-volume Treatise on Money, which effectively set out his Wicksellian theory of the credit cycle. In it, the rudiments of a liquidity preference theory of interest are laid out and Keynes believed it would be his magnum opus. His bubble was soon pricked. Friedrich von Hayek reviewed the Treatise so harshly that Keynes decided to set Sraffa to review (and condemn no less harshly) Heyek's own competing work. The Keynes-Hayek conflict was but one battle in the Cambridge-L.S.E. War.

By the time the General Theory appeared, politicians and economists all over the world were searching for a way to reverse one of the longest depressions in economic history; orthodox, or classical, economic policy, which held that prosperity would return if prices and wages were lowered, was not promoting recovery anywhere. With the General Theory, as it became known, Keynes sought to develop a theory that could explain the determination of aggregate output and as a consequence, employment. He posited that the determining factor to be aggregate demand. Among the revolutionary concepts initiated by Keynes was the concept of a demanddetermined equilibrium wherein unemployment is possible, the ineffectiveness of price flexibility to cure unemployment, a unique theory of money based on "liquidity preference", the introduction of radical uncertainty and expectations, the marginal efficiency of investment schedule, breaking Say's Law (and thus reversing the savings-investment causation), the possibility of using government fiscal and monetary policy to help eliminate recessions and control economic booms. Indeed, with this book, he almost single-handedly constructed the fundamental relationships and ideas behind what became known as "macroeconomics". He was a principal negotiator at the Breton Woods Conference in 1944, where he played a significant role in the inauguration of the International Monetary Fund and the World Bank. His last major public service was his negotiation in 1945 of a multi-billion-dollar U.S. loan to England. He died of a heart attack on April 21, 1946, shortly after returning from an economic conference in Savannah, Georgia.

General Theory of Employment
General Theory is essentially about what determines the level of employment. In his book, h e problematises how the economy c ould g et stuck at the b ottom of the trade cycle. He strongly rejec ted the classical proposition of the sel f adjusting mechanism of the free ma rkets drivers viz . wages, prices & interest rate. He puts forward a theory of equilibrium at less than full empl oyment

level. The Principle of Effective Demand
The logical starting point of K eynes‟ theory of employment is the princ ip le of effective demand. Total Employm ent dep ends on total demand & unempl oyment results from a deficiency of total demand. Effective demand manifests it self in the spending of income. As e mp loyment increa ses, inc ome increases. A...

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