The General Theory of Employment, Interest, and Money by J.M. Keynes

Introduction - Chapter 1

• The general theory: "I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium." - 3

The Postulates of the Classical Economics - Chapter 2

• Fundamental postulates of the classical theory of employment
• "The wage is equal to the marginal product of labour" - 5
• "The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment." - 5
• "possible means of increasing employment" - 7
• "An improvement in organization or in foresight which diminishes 'frictional' unemployment"
• "decrease in the marginal disutility of labour, as expressed by the real wage for which additional labour is available, so as to diminish 'voluntary' unemployment"
• "increase in the marginal physical productivity of labour in the wage-goods industries"
• "increase in the price of non-wage goods compared with the price of wage goods, associated with a shift in the expenditure of non-wage earners from wage-goods to non-wage goods"
• "When money-wages are rising...it will be found that real wages are falling; and when money-wages are falling, real wages are rising." - 10
• "the struggle about money-wages primarily affects the distribution of the aggregate real wage between different labour-groups, and not its average amount per unit of employment" - 14
• "In a given state of organisation, equipment and technique, the real wage earned by a unit of labour has a unique (inverse) correlation with the volume of employment." - 17
• "Contemporary thought is still deeply steeped in the notion that if people do not spend their money in one way they will spend it in another." - 20

The Principle of Effective Demand - Chapter 3

• Two kinds of entrepreneurial expense
• factor cost: "the amounts which he pays out to the factors of productions for their current services" - 23
• user cost: "the amounts which he pays out to other entrepreneurs for what he has to purchase from them together with the sacrifice which he incurs by employing the equipment instead of leaving it idle" - 23
• income (of entrepreneur) = value of output - (factor cost + user cost)
• total income = income + factor cost
• effective demand: "point of the aggregate demand function [D], where it is intersected by the aggregate supply function" - 25
• Propositions summarizing the General Theory
• "income (both money-income and real income) depends on the volume of employment N." - 28
• propensity to consume (D1): "the relationship between the community's income and what it can be expected to spend on consumption" - 28
• D = D1 + D2; D2 = new investment - 29
• "the volume of employment in equilibrium depends on (i) the aggregate supply function...(ii) the propensity to consume...and (iii) the volume of investment" - 29
• "N cannot exceed the value which reduces the real wage to equality with the marginal disutility of labour" - 29
• "When employment increases, D1 will increase, but not by so much as D" - 29
• "It may well be that the classical theory represents the way in which we should like our Economy to behave. But to assume that it actually does so is to assume our difficulties away." - 34

The Choice of Units - Chapter 4

• "In dealing with the theory of employment I propose, therefore, to make use of only two fundamental units of quantity, namely, quantities of money-value and quantities of employment." - 40

Expectation as Determining Output and Employment - Chapter 5

• short-term expectation: "the price which a manufacturer can expect to get for his 'finished' output" - 46
• long-term expectation: "what the entrepreneur can hope to earn in the shape of future returns if he purchases (or, perhaps, manufactures) 'finished' output as an addition to his capital equipment." - 47
• long-period employment: "the steady level of employment...corresponding to that state of expectation." - 48
• "the economic machine is occupied at any given time with a number of overlapping activities, the existence of which is due to various states of expectation." - 50

The Propensity to Consume, The Objective Factors - Chapter 8

• "The ultimate object of our analysis is to discover what determines the volume of employment." - 90
• "in general, we shall in what follows take the subjective as given; and we shall assume that the propensity to consume depends only on changes in the objective factors" - 91
• "Account has also to be taken of all kinds of risks, such as the prospect of not living to enjoy the future goods or of confiscatory taxation. As an approximation...we can identify this with the rate of interest." - 93
• "If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes, its effect in increasing the propensity to consume is, of course, all the greater." - 95
• "the propensity to consume may be considered a fairly stable function, provided that we have eliminated changes in the wage-unit in terms of money." - 95
• "apart from short period changes in the level of income, it is also obvious that a higher absolute level of income will tend, as a rule to widen the gap between income and consumption." - 97
• "employment can only increase pari passu with an increase in investment....For since consumers will spend less than the increase in aggregate supply price when employment is increased, the increased employment will prove unprofitable unless there is increase in investment to fill the gap." - 98
• "We cannot, as a community, provide for future consumption by financial expedients but only by current physical output." - 104
• "Consumption is satisfied partly by objects produced currently and partly by objects produced previously, i.e. by disinvestment." - 105
• "The obstacle to a clear understanding is...much the same as in many academic discussions of capital, namely, an inadequate appreciation of the fact that capital is not a self-sufficient entity existing apart from consumption." - 106

The Propensity to Consume, The Subjective Factors - Chapter 9

• "Apart from the savings accumulated by individuals, there is also the large amount of income, varying perhaps from one-third to two-thirds of the total accumulation in a modern industrial community such as Great Britain or the United States, which is withheld by Central and Local Governments, by Institutions and by Business Corporations" - 108
• "The rise in the rate of interest might induce use to save more, if our incomes were unchanged. But if the higher rate of interest retards investment, our incomes will not, and cannot, be unchanged." - 111

The Marginal Propensity to Consume and the Multiplier - Chapter 10

• "The marginal propensity to consume is not constant for all levels of employment, and it is probable that there will be, as a rule, a tendency for it to diminish as employment increases" - 120
• "It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly 'wasteful' forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict 'business' principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below he current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions." - 129

The Marginal Efficiency of Capital - Chapter 11

• supply price: "the price which would just induce a manufacturer newly to produce an additional unit of such [capital-]assets, i.e. what is sometimes called its replacement cost." - 135
• marginal efficiency of capital: " the relation between the prospective yield of one more unit of that type of capital and the cost of producing that unit" - 135
• "The expectation of a fall in the value of money stimulates investment, and hence employment generally, because it raises the schedule of the marginal efficiency of capital, i.e. the investment demand-schedule" - 141-2
• "The fact that the assumption of the static state often underlie present-day economic theory, imports into it a large element of unreality." - 146

The State of Long-Term Expectation - Chapter 12

• "In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention...lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change." - 152
• "Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of 'liquid' securities. It forgets that there is no such thing as a liquidity of investment for the community as a whole." - 155
• "We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." - 156

The General Theory of the Rate of Interest - Chapter 13

• "the quantity of money is the other factor, which, in conjunction with liquidity-preference, determines the actual rate of interest in given circumstances." - 168
• "The market price will be fixed at the point at which the sales of the 'bears' and the purchases of the 'bulls' are balanced." - 170
• "The concept of Hoarding may be regarded as a first approximation to the concept of Liquidity-preference." - 174

The Classical Theory of the Rate of Interest - Chapter 14

• "Unlike the neo-classical school, who believe that save and investment can be actually unequal, the classical school proper has accepted the view that they are equal." - 177
• "The mistake originates from regarding interest as the reward for waiting as such, instead of as the reward for not-hoarding" - 182

The Psychological and Business Incentives to Liquidity - Chapter 15

• "the income-velocity of money merely measures what proportion of their incomes the public chooses to hold in cash, so that an increased income-velocity of money may be a symptom of a decreased liquidity-preference." - 194
• income motive: "One reason for holding cash is to bridge the interval between the receipt of income and its disbursement." - 195
• business motive: "Similarly, cash is held to bridge the interval between the time of incurring business costs and that of the receipt of the sale-proceeds" - 195
• precautionary motive: "To provide for contingencies requiring sudden expenditure and for unforeseen opportunities of advantageous purchases" - 196
• "the banking system and the monetary authority are dealers in money and debts and not in assets or consumables." - 205

Sundry Observations on the Nature of Capital - Chapter 16

• "since the expectation of consumption is the only raison d'etre of employment, there should be nothing paradoxical in the conclusion that a diminished propensity to consume has cet. par. a depressing effect on employment." - 211
• "Every act of saving involves a 'forced' inevitable transfer of wealth to him who saves, though he in his turn may suffer from the savings of others." - 212
• "It is much preferable to speak of capital as having a yield over the course of its life in excess of its original cost, than as being productive." - 213

The Essential Properties of Interest and Money - Chapter 17

• "Unemployment develops, that is to say, because people want the moon; -- men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot readily be choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control." - 235
• "The neutral rate of interest can be more strictly defined as the rate of interest which prevails in equilibrium when output and employment are such that the elasticity of employment as a whole is zero." - 245

The General Theory of Employment Re-Stated - Chapter 18

• "changes in the rate of consumption are, in general, in the same direction (though smaller in amount) as changes in the rate of income." - 248
• "the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence....an intermediate situation which is neither desperate nor satisfactory is our normal lot." - 249-50

Changes in Money-Wages - Chapter 19

• "whilst no one would wish to deny the proposition that a reduction in money-wages accompanied by the same aggregate effective demand as before will be associated with an increase in employment, the precise question at issue is whether the reduction in money-wages will or will not be accompanied by the same aggregate effective demand as before." - 259
• "a movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices." - 264

The Employment Function - Chapter 20

• "the inevitable price-instability due to change cannot affect the actions of entrepreneurs, but merely directs a de facto windfall of wealth into the laps of the lucky ones" - 288

The Theory of Prices - Chapter 21

• "So long as there is unemployment, employment will change in the same proportion as the quantity of money; and when there is full employment, prices will change in the same proportion as the quantity of money" - 296
• "Too large a proportion of recent 'mathematical' economics are mere concoctions, as imprecise as the initial assumptions they rest on,which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols." - 298
• "When a further increase in the quantity of effective demand produces no further increase in output and entirely spends itself on an increase in the cost-unit fully proportionate to the increase in effective demand, we have reached a condition which might be appropriately designated as one of true inflation." - 303

Notes on the Trade Cycle - Chapter 22

• "The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom." - 322

Notes on Mercantilism, The Usury Laws, Stamped Money and Theories of Under-Consumption - Chapter 23

• "The fact that the advantage which our own country gains from a favorable balance is liable to involve an equal disadvantage to some other country (a point to which the mercantilists were fully alive) means not only that great moderation is necessary, so that a country secures for itself no larger a share of the stock of the precious metals than is fair and reasonable, but also that an immoderate policy may lead to a senseless international competition for a favorable balance which injures all alike." - 338-9