The General Theory of Employment, Interest, and Money

The General Theory of Employment, Interest and Money, first published in 1936, is an economic treatise by British economist John Maynard Keynes. Renowned for his role in shaping modern macroeconomic thought, Keynes wrote this book in the midst of the Great Depression to challenge the assumptions of classical economics and offer a new framework for understanding unemployment, interest rates, and aggregate demand. As a Cambridge scholar and a former British Treasury official, Keynes had firsthand experience with policy-making during times of economic turmoil—experience that informs his call for government intervention in the economy. Often considered one of the seminal works of the 20th century, The General Theory belongs to the broader era of interwar non-fiction that deeply influenced postwar economic policies worldwide. 

This study guide is structured around three major themes—The Power of Aggregate Demand, Government Intervention and the Public Sector’s Role, and Psychological Underpinnings of Economic Behavior.

This guide references The Macat Library series Kindle edition (no publication date listed).

Summary

Although not a narrative in the traditional sense, the book unfolds through a series of structured arguments that build upon one another to challenge and ultimately refute many of the key tenets of classical economics. Keynes begins by critiquing the existing orthodoxy, which held that free markets naturally gravitate toward full employment as long as wages and prices are allowed to adjust. From his first chapters, he emphasizes that such assumptions fail to explain persistent unemployment and long periods of economic stagnation—most visibly exemplified by the Great Depression.

Keynes sets out his thesis in Books 1 and 2, introducing the concept that not all unemployment can be explained or remedied by wage adjustments. Classical economics views any surplus labor as a sign that wages are too high. In contrast, Keynes insists real-world economies can settle into an equilibrium characterized by significant underemployment if total (or aggregate) demand is too low. He further suggests that wage cuts often reduce workers’ purchasing power, thereby weakening overall demand and creating a vicious cycle, rather than restoring equilibrium.

Central to his argument—elaborated in Book 3—is the idea of aggregate demand, composed of both consumption and investment. Keynes argues that the level of consumption is largely predictable based on people’s income (though less than one-to-one, to account for private savings), but investment hinges on a host of factors such as confidence, expectations of future returns, and interest rates. Here he introduces his now-famous notion of “animal spirits”: the emotional and psychological factors that lead businesses and investors to be either bold or cautious in their spending. When “animal spirits” dim, investment falls, and so does aggregate demand—potentially dragging the economy into a recession or sustained slump.

A key element of Keynes’s framework, developed in Book 4, is the relationship between interest rates and what he calls “liquidity preference.” In classical models, interest rates are simply the price of loanable funds, determined by supply (savings) and demand (investment). Keynes counters that interest rates are also driven by people’s preference for holding cash. In uncertain times, businesses and individuals hoard money, pushing interest rates higher unless the central bank or government intervenes. This “liquidity trap” scenario, in which conventional monetary policy becomes ineffective (because rates cannot be lowered enough to spur additional investment), is one of the most important additions Keynes makes to economic theory.

Also in Book 4, Keynes develops the concept of the marginal efficiency of capital—roughly, the expected profitability of an investment relative to its cost—and shows how it can collapse under pessimistic expectations. If investors anticipate weak future returns, they will not commit resources, no matter how low interest rates go. This insight dovetails with his earlier emphasis on “animal spirits,” suggesting that purely rational calculations alone do not drive investment decisions.

Keynes offers solutions in Books 5 and 6, advocating for proactive government policies to boost or maintain aggregate demand during downturns. This can be done through deficit spending on public works, tax incentives, or direct transfers to consumers to stimulate purchasing power. Keynes argues that, rather than waiting for the market to correct itself, governments should act as economic stewards, intervening when private investment is too low to ensure the economy operates closer to full employment. This is where Keynes most forcefully rejects the classical belief in self-correcting markets, describing how well-timed fiscal policy can energize otherwise idle resources and labor.

The General Theory does not propose government intervention in every aspect of economic life. Rather, Keynes envisions a “mixed economy,” where the private sector remains central but is supplemented by strategic public spending and investment when needed to counteract slumps. He extends this to a broader critique of the so-called rentier class—those who rely on interest returns for income. Over time, he predicts that society will evolve to reduce the rewards to mere money-holding, thus directing more capital toward productive uses.

In his final chapters, Keynes weaves together his arguments—low aggregate demand, the central importance of investment, the psychological elements driving or inhibiting that investment, and the critical role of policy—into a cohesive theory of macroeconomic stabilization. 

In sum, The General Theory of Employment, Interest and Money systematically dismantles classical assumptions about market self-correction and full employment. It replaces them with a model in which demand shortfalls can persist indefinitely and underscores the ability—indeed, the responsibility—of governments to intervene. Keynes charts how underemployment equilibria arise, why monetary policy alone may fail in severe downturns, and how targeted fiscal measures can spur activity.