The General Theory of Employment, Interest and Money
by John Maynard Keynes
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Preface
Boom Recommendation: Treatise on Money - John Maynard Keynes
Book I - Introduction
Chapter 1 - The General Theory
There is something wrong with the Classical Theory. The General Theory is about fixing that.
Chapter 2 - The Postulates of the Classical Economics
Wage = Marginal Product of Labour
Wage Utility = Marginal Disutility of Employment
People only work if they think it's worth their time. And people only pay work as much as it is worth.
The worth of labour and the want for labour therefore balance out. One is demand, the other is supply.
Book Recommendation: Economics of Welfare - Pigou
The prediction of the balancing of employment doesn't hold true. When prices rise, wages don't necessarily go along with it and neither do people stop working until they do.
Book Recommendation: The Theory of Employment - Pigou
Classical theory => wages arise from bargain between entrepreneur and worker
General Theory => this doesn't hold.
- Inflation (rising prices) are not accompanied by rising wages. But they should. Why?
- When people demand more money, the entrepreneurs also increase the prices of the goods, keeping the marginal utility the same, pushing the balance of wages/prices ratio against the workers favor.
Something else is determining wages.
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Summed income of economies activities = output of those activities
Chapter 3 - The Principle of Effective Demand
Parts + Machinery + Materials + Labour + Profit = Total Income
Otherwise employer wouldn't have business.
Thus the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function.
=> markets and competition within markets define the amount of employment available.
Entrepreneurs try to find that point of intersection, where they deploy just enough capital in the form of labour to saturate the market and maximize profits. Entrepreneurs are usually very bad at this over long time frames, hence firms go broke.
Income depends on amount of labour.
The relationship between income and consumption is the "propensity to consume". Hence consumption depends on income depends on amount of labour, unless there are changes in the psychology of the population (people want to buy more) => this last point is an escape hatch. It's not a good assumption.
It may well be that the classical theory represents the way in which we should like our Economy to behave. But to assume that it actually does so is to assume our difficulties away.
Book II - Definitions and Ideas
Chapter 4 - The Choice of Units
Comparin old versus new output is hard if the equipment changes due to innovation. This needs new metrics to be invented.
Book Recommendation: Economics of Welfare - Pigou
Book Recommendation: Economica - Hayek
Precision is dependent on the inputs. If inputs are not clearly defined and variable, precision is lost.
New measures: money value + labour amount, hours of labour can be scaled by monetary value in case efficiency increases.
What about machines added to the mix?
Wages = Unit Wage * Employment
Functions of wage are time independent.
Chapter 5 - Expectation As Determining Output and Employment
Firms plan their output based on current capital + employment and their expected cost of production and price of selling. Change in these expectations lags behind in showing in numbers of employment. Over time employment matches expectations.
Changes can lead the expectations of changes to oscillate and therefore to repeating cycles of boom and bust. These expectations can overlap in time. Producing highly complicated patterns.
The economic machine is occupied at any given time with a number of overlapping activities, the existence of which is due to various past states of expectation.
Chapter 6 - The Definitions of Income, Saving and Investment
(Worth of Finished Product B - Cost of Production B) - (Worth of Finished Product A - Purchase Costs of A) = Sacrifice of Value when producing A = "User Cost"
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