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

Lords of Finance: The Bankers Who Broke The World by Liaquat Ahamed

• "Each in his own way illuminates the national psyche of his time. Montagu Norman, with his quixotic reliance on his fault intuition, embodied a Britain stuck in the past and not yet reconciled to its newly diminished standing in the world. Emile Moreau, in his insularity and rancor, reflected all too accurately a France that had turned inward to lick the terrible wounds of war. Benjamin Strong, the man of action, represented a new generation in America, actively engaged in bringing its financial muscle to bear in world affairs. Only Hjalmar Schacht, in his angry arrogance seemed out of tune with the weak and defeated Germany for which he spoke, although perhaps he was simply expressing a hidden truth about the nation's deeper mood." - 8
• "Boiled down to its essentials, a central bank is a bank that has been granted a monopoly over the issuance of currency." - 11
• 1914: 59 countries "had bound their currencies to gold" - 13
• "Shaken by the crisis [of 1907], the U.S. Congress decided to act. In 1908, it created the National Monetary Commission...to undertake a comprehensive study of the banking system...Memories of how close the system had come to imploding progressively dimmed and the momentum for reform stalled." - 54
• December 23, 1913: Woodrow Wilson signs the Federal Reserve Act; "the Glass Plan called for a number of autonomous regional institutions: Federal Reserve Banks...While these individual entities were to be controlled and run by local bankers, a capstone -- the Federal Reserve Board, a public agency whose members were to be appointed by the president -- was placed in an oversight role over the whole structure." - 56-7
• "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency." - 99, J.M. Keynes
• "Only on reparations did Germany seem able to fight back. It discovered what every large debtor at some point discovers: that when one owes a large amount of money, threatening to default can give one the upper hand." - 109
• "Germany experienced the single greatest destruction of monetary value in human history. By August 1923, a dollar was worth 620,000 marks and by early November 1923, 630 billion." - 121
• "the really pernicious effect of war debts was that they made it hard, if not impossible, for Britain to forgo collecting its own debts from France and Germany, made France all the more obstinate in its efforts to collect reparations from Germany, and led Europe into a self-defeating vicious cycle of financial claims and counterclaims." - 144
• "Whether to deflate or devalue became the central economic decision for every country after the [First World] war. The burden of deflation fell on workers, businesses, and borrowers, that of devaluation on savers...The United States and Britain took the route of deflation, Germany and France that of devaluation." - 157
• "The bigger concern among bankers after the war was not so much that the world was short of gold, but that too much of the gold was concentrated in the United States." - 163
• "The world of the international gold standard had become like a poker table at which one player has accumulated all the chips, and the game simply cannot get back into play." - 164, emphasis mine
• "the Federal Reserve was so flush with gold that it had gone from being the central bank of the United States to being the central bank of the entire industrial world." - 172
• "the new German prosperity depended on what Keynes described as 'a great circular flow of paper' across the Atlantic: 'The United States lends money to Germany, Germany transfers its equivalents to the Allies, the Allies pay it back to the United States government. Nothing real passes -- no one is a penny the worse. The engravers' dies, the printers' forms are busier. But no one eats less, no one works more.'" - 215-6
• "During [Montagu] Norman's visit to New York in January 1925, [Benjamin] Strong had warned him, 'In a new country such as ours with an enthusiastic, energetic and optimistic population,...there would be times when speculative tendencies would make it necessary for the Federal Reserve Banks to exercise restraint by increased discount rates, and possibly higher money rates in the market. Should such times arise, domestic considerations would likely outweigh foreign sympathies.'" - 240
• "In the fall of 1925, Hoover, not shy about interfering in his cabinet colleagues' business -- Parker Gilbert called him the 'Secretary of Commerce and the Under-Secretary of all other departments' -- decided to launch a campaign against the pervasive atmosphere of speculation that he claimed was infecting the country, from Florida real estate to the stock market." - 275
• "In Strong's view, something about the American character -- the exuberance, the driving optimism, the naive embrace of fads -- lent itself to periods of speculative excess." - 277
• "At particular times a great deal of stupid people have a great deal of stupid money....At intervals....the money of these people -- the blind capital, as we call it, of the country -- is particularly large and craving; it seeks for someone to devour it, and there is a 'plethora'; it finds someone, and there is 'speculation'; it is devoured, and there is 'panic.'" - 307, Walter Bagehot
• in early 1929 "The Fed was now paralyzed by this standoff between its two principal arms. The Board kept insisting that the right way to deflate the bubble was through 'direct action': credit controls, particularly of brokers' loans. New York was equally insistent that such a policy could not work, that it was impossible to control the application of credit once it lefts the doors of the Federal Reserve." - 322-3
• "To jump-start the economy, a central bank had to have enough gold, the underlying raw material for credit creation under the gold standard. The international monetary system was now operating, however, in a very perverse way. Because of investor fear, capital in search of security was flowing into those countries with already large gold reserves -- such as the United States and France -- and out of countries with only modest reserves -- such as Britain and Germany." - 375
• "'Gold is out of sight -- gone back into the soil. But when the gods are no longer seen in yellow panoply walking the earth, we begin to rationalize them; and it is not long before there is nothing left.' The bullion reserves that backed the credit systems of the world, buried as they were in underground vaults...were invisible to the public eye. They had acquired an almost metaphysical existence. Keynes thought that perhaps gold, its usefulness now outlived, might become less important. He compared the situation to the transition in government from absolute to constitutional monarchy." - 383-4
• "Money has no motherland; financiers are without patriotism and without decency; their sole object is gain." - 393, Napoleon Bonaparte
• "As the economy lost ground, unemployment climbed, and the budget deficit widened [in Germany], [Heinrich] Bruning [, the new Chancellor,] focused on balancing the budget. Unemployment benefits were restricted; salaries of all high federal and state officials, including the president's, were slashed by 20 percent. Wages of lower-level officials were cut 6 percent; income taxes were raised, taxes on beer and tobacco increased, and new levies imposed on warehouses and mineral water. All of these measures made the Depression worse." - 400
• After resigning in 1930, Schacht "spoke about reparations, seeking to make his audience understand German bitterness over the issue: 'You must not think that if you treat people for ten years as the German people have been treated they will continue to smile....Reparations are the real cause of the world-wide economic depression.'" - 402
• "Never has the incapacity of the economic leaders of the capitalist world so glaringly demonstrated as today....A capitalism which cannot feed the workers of the world has no right to exist. The guilt of the capitalist system lies in its alliance with the violent policies of imperialism and militarism" - 417-8, Schacht, The End of Reparations
• "Britain's problem was not its budget deficit, but rather that it had clung to the role of banker to the world without any longer having the money or the resources to do so and at a time when most of the world was a damn poor risk." - 429
• Roosevelt's "simplistic view was that since the Depression had been associated with falling prices, recovery could only come about when prices began going the other way. His advisers patiently tried to explain to him that he had the causality backward....They were themselves only half right. For in an economy where everything is connected, there is often no clear distinction between cause and effect." - 459
• "In 1935, Congress passed a banking act designed to reform the Federal Reserve. Authority for all major decisions was now centralized in a restructured Board of Governors. The regional reserve banks were stripped of much of their powers and responsibility for open market operations was now vested in a new committee of twelve, comprising the seven governors and a rotating group of five regional bank heads, renamed presidents." - 475

The Protestant Ethic and the "Spirit" of Capitalism by Max Weber

The Problem

- Denomination and Social Stratification

1. "business leaders and owners of capital, as well as the skilled higher strata of the labor force, and especially the higher technical or commercially trained staff of modern enterprises tend to be predominantly Protestant." - 1
2. "But what is often forgotten is that the Reformation meant...the replacement of an extremely relaxed, practically imperceptible, and scarcely more than formal authority by an infinitely burdensome and earnest regimentation of the conduct of life" - 2
3. "The Catholic...is more calm; his acquisitive drive is lower, he places more value on a life which is as secure as possible, even if this should be on a smaller income, than on a perilous, exciting life, which could bring honors and riches. As the popular saying jokingly has it, 'either eat well or sleep soundly.' In the above case, the Protestant likes to eat well, while the Catholic wants to sleep soundly." - 5, Offenbacher

- The "Spirit" of Capitalism

1. "Kurnberger, in his book, The Man Tired of America, sums up its philosophy of life thus: ' They turn cattle into tallow, and people into money.' The essence of this 'philosophy of avarice' is the idea of the duty of the individual to work toward the increase of his wealth, which is assumed to be an end in itself." - 11
2. "the 'summum bonum' of this 'ethic' is the making of money and yet more money, coupled with a strict avoidance of all uninhibited enjoyment...it is...so much purely thought of as an end in itself that it appears as something wholly transcendent and irrational, beyond the 'happiness' or the 'benefit' of the individual." - 12
3. "Moneymaking --  provided it is done legally -- is, within the modern economic order, the result and the expression of diligence in one's calling and this diligence is...the real alpha and omega of [Benjamin] Franklin's morality" - 12-3
4. Traditionalism: "a person does not 'by nature' want to make more and more money, but simply to live -- to live in the manner in which he 'is accustomed to live, and to earn as much as is necessary for this.'" - 16
5. "We shall...provisionally use the expression 'spirit of capitalism' for that attitude which, in the pursuit of a calling strives systematically for profit for its own sake in the manner exemplified by Benjamin Franklin." - 19
6. Rationalism: "a historical concept which embraces a world of opposites...that concrete form of 'rational' thinking and living from which arose the idea of the 'calling' and that devotion to the work of the calling -- so irrational from the point of view of eudaemonistic self-interest -- which was and still is one of the most characteristic components of our capitalist culture." - 27-8

- Luther's Conception of the Calling

1. "labor in a secular calling appears as the outward expression of Christian charity. This view is based in particular on the argument that division of labor forces each individual to work for others, an extremely otherworldly argument which is almost grotesquely at variance with Adam Smith's well-known dictum." - 29
2. "If economic traditionalism was at first a result of Pauline indifference, it later came to flow from an ever-more intense belief in providence that identifies unconditional obedience to God with unconditional submission to the situation in which one has been placed." - 32

The Idea of the Calling in Ascetic Protestantism

- The Religious Foundations of Innerworldly Asceticism

1. "To assume that human merit or fault had any influence on one's fate would be to regard God's absolutely free decision which had stood for all eternity, as capable of being changed by human influence -- an impossible idea...Since his decrees were immutably fixed, those on whom he bestowed his grace could never lose it, just as those to whom he denied it could never attain it." - 73
2. "The wonderfully purposeful structuring and organization of this cosmos, which, according to the biblical revelation and equally according to natural insight, is evidently designed to be of 'use' to the human race, shows that labor in the service of this social usefulness furthers the divine glory and is willed by God." - 76
3. regarding Calvin's doctrine of predestination, "One question inevitably very soon arose for every single believer, and forced all other interests into the background: 'Am I one of the elect? And how can I be certain of my election?'" - 76
4. "tireless labor in a calling was urged as the best possible means of attaining this self-assurance" of election in the eschatology of predestination - 77-8
5. "Totally unsuited though good works are to serve as a means of attaining salvation...they are indispensable as signs of election...This means, however, the Calvinist 'creates' his salvation himself (as it is sometimes expressed) -- more correctly: creates the certainty of salvation." - 79
6. Pietism: "For our subject...merely the penetration of methodically cultivated and controlled, that is , ascetic, living into areas of non-Calvinist religious observance." - 90
7. "just as in external 'material' life, the inclination to seek enjoyment in the present conflicts with the rational structuring of the 'economy', which is, after all, based on the need to make provision for the future, so it is, in a sense, in the sphere of religious life." - 94
8. Methodism: "A combination of emotional and yet ascetic religious practice and increasing indifference or even rejection of the dogmatic foundation of Calvinist asceticism is a distinguishing mark of the Anglo-American equivalent to continental Pietism" - 95

- Asceticism and the Capitalist Spirit