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Keynes's General Theoryof Employment. Essay

7181 words - 29 pages

In 1935, while he was writing The General Theory of Employment, Interest and Money, John Maynard Keynes wrote to George Bernard Shaw, "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."[1] Keynes was not wrong--The General Theory did cause a great change in economic thought. It disproved many traditional beliefs about savings, investment, and especially unemployment. The question can still be asked, however, to what extent Keynes's General Theory was, in fact, revolutionary and to what extent was it based on the economic theories before it. Some of the ideas presented in The General Theorycan be found in the writings of Malthus and Hobson, and in the writings of more contemporary economists such as Knut Wicksell, D.H. Robertson, and Richard F. Kahn. Also, the actions that Keynes in The General Theory argued were necessary to be executed by government had already been started in certain countries several years before The General Theory came out. But even though many of Keynes's individual ideas in The General Theory were not completely original, Keynes was the first person to get them widely accepted and to use them to influence government policy. In addition, Keynes provided a much more "general" theory than had existed in the past by exposing assumptions of classical economists, and he caused a great shift in emphasis to aggregates, the short run, and the problems of employment. In these ways The General Theory was revolutionary.The General Theory was published in 1936. The basic idea of The General Theory is that "the equilibrium level of employment...will depend on the amount of current investment....But there is no reason in general for expecting it to be equal to full employment."[2] Investment is not the only factor that affects the equilibrium level of employment, but it can be regarded as the most important factor because of its strong influence on incomes and because it is the factor which is most likely to change suddenly.[3] Employment is determined by two elements, which investment, in turn, affects--the total income of the community, and the sum of the community's consumption and its investment. Keynes calls the relationship between the number employed and the total income the Aggregate Supply Function or Z=f(N) (where Z is the aggregate supply price and N is the number employed)[4] and he calls the relationship between the number employed and the sum of consumption and investment the Aggregate Demand Function or D=f(N) (where D is the aggregate demand price and N is the number employed). There is only one value for which the total income equals the sum of the consumption and the investment, and it is at this point that the equilibrium level of employment is reached (this is similar to the way supply and demand determine the equilibrium price of a good). At any other level of...

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