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