The Economics Book

156

I

n 1936, John Maynard Keynes

published his groundbreaking

work The General Theory of

Employment, Interest, and Prices,

often referred to simply as The

General Theory. The book was

important because it forced people

to consider the workings of the

economy from a completely

different perspective. It made

Keynes one of the world’s most

famous economists.

Ever since the Scottish

economist Adam Smith (p.61) had

published The Wealth of Nations

in 1776, outlining what came to be

known as classical economics, the

economy had been viewed as a

perfectly balanced collection of

individual markets and decision

makers. The consensus among

economists was that the economy

would spontaneously and naturally

achieve a state of equilibrium with

all those who wanted to work

finding employment.

Keynes was to turn much of

the basic cause-and-effect of the

classical model on its head. He

also argued that the macroeconomy

(the total economy) behaved quite

differently from the microeconomy

(a section of the economy).

Originally tutored in the classical

school, Keynes claimed that he

struggled to escape from its

habitual modes of thought. His

success in doing so, however, led to

a radical economic approach that

suggested an entirely different set

of causes for unemployment and

equally different solutions.

DEPRESSIONS AND UNEMPLOYMENT

Classical economics states

that unemployment is always a

choice—there are jobs if people are

prepared to work for lower wages.

But wages change slowly, so

during recessions, as prices fall, the

value of wages rise—and firms

demand less labor.

As demand in the economy

slumps, workers are trapped in

unemployment, and firms are

trapped in underproduction.

IN CONTEXT

FOCUS

The macroeconomy

KEY THINKER

John Maynard Keynes

(1883–1946)

BEFORE

1776 Scottish economist

Adam Smith argues that the

“invisible hand” of the market

will lead to prosperity.

1909 British social

campaigner Beatrice Webb

writes her Minority Report,

saying that the causes of

poverty are structural and

cannot be blamed on the poor.

AFTER

1937 British economist John

Hicks presents his analysis of

the Keynesian system.

1986 US economists George

Akerlof and Janet Yellen

explain involuntary

unemployment through their

efficiency wage models.

Unemployment is not

a choice.

This Edgar Degas painting of 1875

shows absinthe drinkers idling in a café.

Until Keynes’s ideas were published in

1936, alcohol abuse and other vices

were seen as causes of worklessness.