Right before the last week of October, 1929, when stock market collapsed, the signs of prosperity were visible in every hand in America. There was no wonder that the country was drunk with the elixir of prosperity. America in the late 1920s had found jobs for 45 million of its citizens to whom it paid some $77 billions in wages, rents, profits, and interest-flood of income comparable to nothing the world had ever seen. When President Herbert Hoover said with earnest simplicity, “ We shall soon with the help of God be within sight of the day when poverty will be banished from the nation.” He rested his case on the incontrovertible fact that the average American family lived better, is better, dressed better, and enjoyed more of the amenities of life than had any average family hitherto in the history of the world. The nation was possessed of  a new vision, on  a great deal more uplifting than the buccaneering ideals of the robber barons. People thought that everyday ought be to be rich. Many financial advisors published articles stating “If a man saves  $15.00 a week, and invests in good common stocks, at the end of twenty years, he will have at least $80,000.oo and an income from investments of around $400 a month. He will be rich.” By arithmetic calculation with 6% a year dividend options,  $780 that was saved by $15 a week in 1921, the money would be worth $1,092 by 1922. If he added another $780 yearly, he would find himself worth $4,800 in 1925, $6,900 a year later, $8,800 in 1927, and an incredible $16,000 in 1928. Incredible ? By May of 1929, he would have figured his worldly wealth at over $21,000: In less than 9 years his saving of $7,200 would have tripled. Barber or shoeblack, banker or businessman, everyone gambled and everyone won, and the only question in most people’s mind was why they had never thought of it before.


Then all of sudden American stock market collapsed in the last week of October 1929. It was like Niagara Fall suddenly bursting through the windows to the stockbrokers. The grim jokes of the period speak for themselves. It was said that with every share of Goldman Sachs you got a complimentary revolver, and that when you booked a hotel room the clerk inquired, “For sleeping or jumping”. When the debris was swept away the wreckage was fearful to behold.

In two insane months the market lost all the ground it had gained in two manic years; $40 billions of value simply disappeared.  By the end of three years investor’s inflated paper fortune of $21,000 had diminished by 80  percent; his original $7,020 of saving was worth barely $4,000.

The vision of Every Man Wealthy Man had been shown up as a hallucination.


A permanently high plateau of prosperity that ever dreamed was vanished into thin air.




In Muncie, Indiana every fourth factory worker lost his job by the end of 1930. In Chicago, the majority of working girls were earning less than twenty-five cents an hour and at quarter of them made less than ten cents. In New York’s Bowery along, two thousand jobless crowded into breadlines every day.

In the nation as a whole, residential construction fell by 95 percent. Nine million

Savings accounts ere lost. Eighty five thousand (85,000) businesses failed. The national volume of salaries dwindled 40 percent; dividends 56 %; wages 60 %.

In 1930, the nation manfully whistled “Happy Days Are Here Again”. In 1931 the country sang “ I’ve Got Five Dollars”. National income dwindled to miserable $42 billions.

The higher rate of unemployment, asset value plummeted by the collapse of stock market. A drastic reduction in personal income and national income, shut down of  factories and bank failure led a miserable economic life in America. No jobs, no income, lack of purchasing power, an increasing level of poverty cried for a fast economic recovery. What happened to the self-regulating market economy? Over production and insufficient aggregate demand called for creating an effective aggregate demand by increasing an investment. President Franklin Roosevelt began to examine reasons why an economic prosperity turned into slump. The traditional virtue of personal saving  was not  social virtue. Thrift was good way accumulating personal wealth, but social wealth needed increased level of consumption to sustain needed investment. If savings do not become invested by expanding business firms, our incomes must decline. Keynesian revolutionary approach of increasing investment by governmental fiscal policy began to draw attention from American policy makers to boost necessary economic stimulus. As the economic crash in 1929 gave a devastating blow  to every American daily life, money saved for hoarding that was considered as Liquidity Preference by Keynes was not a solution for an economic recovery.


A British economist John Maynard Keynes discovered that the new-classical theory failed to provide an equality of national saving with national investment, which was absolutely necessary for preventing  economic contraction.

In his “Treatise on Money” in 1930, he showed sparkling exposition of the seesaw of savings and investment, pointing that deviation of the savings from investments could be crucial factors in the business cycle. For savings and investment-Thrift and Enterprises- were not utterly unconnected economic activities. They were  tied together in the market where businessmen “bought” savings- or at least borrowed them: the money market. Savings like any other commodity had its price, the rate of interest.

Therefore, at the bottom of slump when there was a flood of savings, its price should decline. And as the price of savings is cheapened, the incentive to invest appeared very likely to increase. But investment did not increase during the Depression because of hoarding mentioned in the above.

Market system was not self-regulator. At the result of this, economy went into Depression.



Keynesian revolution to cure this shortage of investment was shining on the gloomy side of economic slump as a practical medicine to overcome the depression by government intervention on the  market economy, which had been  an evil to the operation of  laissez faire system.  The role of money, which has been viewed as neutral in the neo-classical framework, emerged as an important driving force in changing the level of price, investment and employment and output in the Keynesian revolution.


The General Theory of Employment, Interest and Money, which was published in 1936, as the Keynes’s most famous work, manifested itself to provide a revolution in the traditional economic theory by jumping from the equilibrium system of Adam Smith and surplus and Reproduction theory of Karl Marx to the positions of DISEQUILIBRIUM.


Attaching an pioneering ideas to the traditional economic theory with the cyclical character of the capitalist process, decision-making under uncertainty, financial relations of an advanced capitalist economy, time factor, process and the transitory nature of particular situations, Keynesian model provided a very practical tool in running the modern capitalistic economy. His departure from the thinking of Adam Smith and Karl Marx was clear from his letter that was sent to George Bernard Shaw in 1935 right before his General Theory was published. “ I just reread Marx and Engels at your suggestion and found them little to his liking”. Keynes also stated in his last passage of the General Theory “ Ideas of economist and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.” Preceding the above he note “At the present moment people are unusually expectant of a more fundamental diagnosis; more particularly ready to receive it, eager to try it out, if it should be even plausible”/ (GT. P 383) And Keynes concluded his General Theory as “ It is ideas not vested interests, which are dangerous for good or evil”.


John Keynes was born in 1883, in the very year that Karl Marx passed away. But the two economists who thus touched each other in time, although each was to exert the profoundest influence on the philosophy of the capitalist system, could hardly have met from one another, more differed from one another. Marx was bitter, at bay, heavy and disappointed; as we know, he was the draftsman of Capitalism Doomed.

Keynes, Cambridge don, loved life marrying to a young Russian ballerina Lydia Lopokova and sailed through it buoyant, at ease, and consummately successful and becomes the architect of Capitalism Viable. His boyhood was Victorian, Old School, and premonitory brilliance. At age four and a half he was already puzzling out for himself the economic meaning of interest.






He had a “slave who obediently trailed him with his school books, a service rendered in exchange for assistance with the knottier problems of homework.

At fourteen he applied for and won a scholarship to Eton. At age 17, because of his high intelligence, Alfred Marshall begged him to become a full time economists at Cambridge; Professor Pigou-Marshall’s heir-to-be- had him to breakfast once a week. He was elected Secretary of the Union, a post automatically carrying an eventual presidency of the world. His intention to manage a railroad or organize  a Trust was rejected and he was elected the editorship of the Economic Journal and held it for 33 years. Then appointed Deputy for Chancellor of Exchequer. If Keynes, along with Marx, Darwin, Freud, and Einstein, belongs on the pantheon of seminal thinkers, who triggered modern intellectual revolutions. It is because of the contribution to economics, both as a science and as a relevant guide to public policy, that is contained in his General Theory. He wrote extensively on economic matters, addressing both professionals and the public, with special emphasis on problems in monetary economics; even his substantial contributions to international economics dealt largely with the financial and monetary aspects. He was mainly concerned with making more precise the manner in which the then standard theory of money- the quantity theory- worked. The fundamental propositions of the quantity theory of money are that for positions of EQUILIBRIUM, MONEY IS NEUTRAL,  in the sense that  relative prices, income, and output do not depend upon the quantity of money; the general level of prices is determined by the quantity of money, and that a  decentralized economy is fundamentally STABLE.

Keynes held prior to his GENERAL THEORY that these quantity theory propositions are VALID, ONLY IN SHORT RUN, but in THE LONG RUN where economy behaves in between positions of equilibrium- in transitory states, the theory is imprecise. That is why Keynes said in his book that “WE ARE ALL DEAD IN THE LONG RUN.”


The GENERAL THEORY marked a sharp break with this earlier position on the quantity theory. With logical and empirical foundations of traditional economics, he redefined the problems of economic theory as the determination of aggregate demand, and thus employment, which still hold true today. In the short run, within the framework that deals with a capitalist economy subject to BOOMS AND CRISES, Keynes introduced new tools of analysis, such as consumption function, investment function and LIQUIDITY PREFERENCE function and a concept of UNCERTAINTY that is unfamiliar to mainstream economics.

The analysis of Keynes produced the shocking, REVOLUTIONARY results that MONEY WAS NOT NEUTRAL. Accordingly, in contrast to the QUANTITY THEORY, his results proved that real variables depend in an essential way on MONETARY AND FINANCIAL VARIABLES; that price level does not depend solely upon or even mainly on the quantity of MONEY; and that the TRANSITIONAL PROCESS are such that a DECENTRALIZED, UNPLANNED capitalist economy-IN WHICH ECONOMIC POLICY did NOT INTERVENE in an appropriate manner- was  NOT A SELF-CORRECTING SYSTEM that tended toward stable equilibrium at FULL EMPLOYMENT. His new full employment, if achieved, was itself A TRANSITORY STATE.



The General Theory with 384 pages, which is nothing comparing with the Wealth of Nations of Adam Smith, and 2,500 pages “Das Kapital” of Karl Marx, was an immediate success. Paul M Sweezy noted in his obituary of Keynes that The General Theory produced a “sense of liberation and intellectual stimulus… among younger teachers and students in all the leading British and American Universities.” Keynes “opened up new vistas and new pathways to a whole generation of economists.”

In the General Theory Keynes shifts his focus from how money affects investment’s share of a fixed output to what in general determines aggregate demand and output. The primary focus was shifted from the determinants of the level to the joint determination of output. In a Treatise on Money, at all times the quantities of output and employment are determined by real factors, independent of monetary influences.

It is assumed that the market mechanisms of a decentralized capitalist economy will lead to what may be labeled full employment, and that deviations from full employment are transitory and can be imputed to nonessential flaws, such as a poorly conceived Federal Reserve policy or the existence of an unstable banking system.

The view of the General Theory is that no such tendency to achieve and then sustain full employment exists; that is, the basic path of a capitalist economy is CYCLICAL.

Keynes’s view and analysis well reflect today’s status of economy. US economy that has been established on the basis of western capitalism is struggling with reducing high rate of unemployment(8%), with raising  higher rate of economic growth with all the high technology and financial ability.

As global economy is still in the mire of economic recession without a recovering sight ahead. Without manifest solution for the global recession, policy makers in every nation hover back and forth with market economic theory and Keynesian tools of monetary and fiscal apparatus, causing the share of government sector out of GDP to increase 50 % or more of GDP, which are resulting in higher federal deficit, higher debt ratio to GDP leading to lowering productivity. Are we on the brink of witnessing collapse of 250 year old western capitalism and  of being taken over by China’s state capitalism ? Keynes at least greatly contributed to development of policy tools via taxation and monetary variables to correct the disequilibrium that was generated from deviations in consumption, production, investment function which boil down to balance between aggregate demand and aggregate supply in the economy. On one side we need to create an effective demand and needed investment to keep full employment, but also on the other we need producing and reproducing an appropriate supply to meet the changing aggregate demand in order to maintain the capitalistic market system, which still gives us the most attractive  incentive  to work  diligently and reward for hard work  under the condition of unconstrained competition and morality in trade.

Dr. Hubert Hojae Lee, economist, Commissioner of Human Rights,

CEO of Benjamin Hubert International Consulting Group             Aug 15, 2017