This work is based on [1]²—K thereafter—published book titled the “General Theory of Employment, Interest and Money”, GT thereafter, in Feb. 1936. K mainly dealt with the determination of economy’s total employment, interest rate & money³. Moreover, K thought it necessary to explain, and at the same time defend, at once, the prefix “General” (GT, p. 3). For K, this prefix was purposed to addemphasis (Chapter 1)⁴, because he believed that the prevailing “Classical theory”—CT thereafter—was aspecial case⁵.

In addition, for K, CT did not describe the economic reality in which he lived. As a result, K showed in particular that if the system is disturbed, it will not return to full employment, as believed.

The GT addressed mainly to economists, because it dealt with difficult at that time theoretical questions. Its application to practice, consequently, was placed in a 2^nd place. GT was also a study of the forces that determine economy’s Output.

1) The 1929-1939 Slump

K, in 1929, was 46 years old, when a worldwide great depression (a Slump) took place, which lasted till 1939—with a peak in 1933—creating up to 15 million unemployed... In our opinion, K wrote, indeed, the “Economic Theory of the Depressions” or the “Economic Theory of Mass Unemployment” ([2]).

The Slump began on Black Thursday, 24/10/1929, when NYSE had a previous rise of 90% in about 1 year. The prices of the shares—which were overpriced—started to fall, and to cause a panic. The GNP_USA fell by 30% and the unemployment rose by 25%.

2) Economic Policy & Real Life

K, being a pupil of Alfred Marshall (1842-1924), dealt with the actual economic problems, where Marshall, moreover, limited even the use of his mathematics—as a misleading proxy of reality, we believe. Moreover, K believed that CT lacked clearness and generality. In addition, K criticized his fellow economists for having almost fully destroyed the practical influence of the economic theory (GT, p. vi).

3) The Real Life and Mathematics

Many economists, till nowadays, created a plethora of mathematical models, apparently difficult to be understood by policy-makers. I remember, in a lecture I attended, delivered by Joan Robinson (1903-1983) in London, in the 1970s, a famous Japanese mathematical economist to “cloud” the blackboard with a plethora of equations in presenting his paper. He compelled Joan to ask: “Sir, she said, what about the real world?” And he answered: “Madam, this is the real world”. K apropos also expressed his opinion about mathematical economics (GT, pp. 297-298).

To restate the essential arguments of Keynes derived from his GT.

Paper’sStructure

This work is presented in ten parts: Part I, dealt with the Classical Theory of Employment; Part II, dealt with the “Effective Demand”, which K called the substance of GT⁶; Part III, dealt with the determination of the Rate of Interest; Part IV, dealt with the Liquidity Trap; Part V, dealt with the Theory of Money; Part VI, dealt with the Theory of Prices; Part VII, dealt briefly with K’s Monetary Economy; Part VIII, dealt with K’s Shifting Equilibrium; Part IX, dealt with paper’s contributions and Part X, dealt with our recommendation for demand and supply to determine prices. Finally, we concluded.

This is based on 2 postulates, treated as axioms (as K wrote): first, the money Wage—Wm thereafter—paid to labor—is equal to the value of labor’s marginal product⁷—MP_L thereafter. This means that each worker earns his/her Wm being equal to the value of his/her (net) contribution⁸ to production. This in turn determines the demand of the enterprises for labor. K accepted the above (GT, p. 17).

The above also means that—with a given organization of the economy, its equipment & technological progress (techniques)⁹—the real wage—Wr thereafter, the output and employment are all connected. Thus, an increase in employment canonly occur if followed by a decline in Wr, where profit also increases.Consequently, the MP_L(which determines Wr) has, necessarily, to be reduced, for employment to be increased (GT, p. 18).

Second: the “utility of labor” is equal to its “marginal disutility”¹⁰. This means that enterprises pay the Wm to labor, be sufficient, (in workers’ estimation), to induce the volume of labor—actually employed—to be also supplied¹¹. This 2^nd postulate determines the quantity of labor supplied. K objected the above in two counts, as will be mentioned below.

Total employment, now, in any economy, is determined at the point where the marginal “utility” of labor, MU_L, balances the “disutility” of the marginal employment MD_L (p. 6, GT).

Source: Author.

Graph 1. Total employment determined by the interaction of the demand for, & the supply of, labor, according to both CT and Keynes.

As shown in Graph 1, the demand for, and the supply of, labor, at the negotiated Wm, determines country’s total employment. This, however, is below fullemployment. Because a part of labor, equal to NFE, is not employed, due to the insufficient demand D₁. This K named a case of “involuntary unemployment”, and we re-named it as a case of “forced employment”… for the first time. The kinked supply curve S1KS3 is our contribution to K’s theory of employment.

K’sObjectionsto CT’s 2^ndPostulate

A fall in Wr, with the Wm constant, will not result in a lower supply of labor, as believed. This means that a rise in the “cost of living” will make the unemployed, NFE—though willing to work at Wm—to withdraw from the supply of labor (GT, p. 13). The 2^nd, more fundamental objection of K, was, however, that Wr is not determined during the “wage bargains” (GT, p. 13), as believed.

K defined 3 main situations when a person is unemployed (Table 1).

Table 1. Situations where a person is unemployed.

Source: Author; data mainly from GT, Chap. 2.

As a result of the above discussion, there are 5 ways so that economy to increase employment (Table 2).

Table 2. The five ways to increase employment.

Source: Author; data from GT, p. 7; (*) K showed how.

K concluded that the willingness of labor to accept a lower Wm, will not necessarily lead to a higher employment, as believed. Moreover, MP_L will not necessarily fall (GT, pp. 17-18). A reduction in Wm will, ceteris paribus, stimulate demand, provided it lowered the prices of the products and increased output and employment—something possible, but up to a point¹² (GT, p. 257).

TheCostof Living

Some economists argued that the rise of the “cost of living” may create a reason for a claim from the side of labor, for the Wm to rise, thus supporting CT’s opinion that the Wr is in fact negotiated.

True is that recently, (mainly after the Russia-Ukraine War), the above opinion obtained certain firm grounds, due mainly to the serious rise of the cost of energy, development which made Wm to fail to face the cost of living.

A higher cost of living—due to a rise in prices—will be used,we believe,as anadditional argument for strikes and for higher Wm claims from the part of labor, but Wm will only finally be negotiated. Worth noting is that Economists failed originally to include Energy in production as its 4^th coefficient, along with Labor, Capital and Land.

Enterprises pay, in providing employment: 1) the “factor cost”, meaning the payments made to “factors of production” used, or inputs—in modern terminology; 2) the payments made to other entrepreneurs (for inputs purchased from them); 3) the sacrifice, which incurs to the enterprises from operating their equipment (the user cost) vis-à-vis leaving it idle.

K defined also profit, or what he called “entrepreneur’s income”—destined to be maximized—as the value of output, which exceeds the above costs 1 & 3. Moreover, total income, or proceeds, is the sum of the factor cost and the profit.

Enterprises provide employment by taking into account the total “supply price”, Z, (=the output produced by labor), and the “expected proceeds”from labor, whichare equal to D¹³. If D > Z, enterprises offer a higher employment, and this up to Z = D (GT, p. 25). Employment is thus determined at the intersection between the “aggregate demand function” and the “aggregate supply function”—providing also a maximum profit.

It is interesting, we believe, to quote here what Joan Robinson, in her book “Economic Heresies” (p. 80), wrote for K’s Chapter 17 (of GT), apropos titled “the essential properties of interest and money”. She wrote that she found chapter’s arguments “difficult to follow”, and K admitted that this was so also for him.

Let us assume that any rate of interest below 0R₂is desirable (Graph 3), because there are certain MEIs < 0R₂. But this, however, cannot be done,even if the supply of Money is increased to S₂… Economists, and not K, named this a “liquidity trap”—LT thereafter.

As shown, the LT has made the increased supply of money, ineffective—and thus the authorities, and so the monetary policy, unable to reduce the lending rate of interest below 0R₂. Economy in this case has then, as its option, the fiscal policy only.

Economists, in the 1990s, disputed that a LT existed, despite of what K (GT, p. 207) wrote in 1936: “it is possible for the rate of interest to fall down to a certain level, so that the liquidity preference of the economy to become absolute, and as a result, everybody to hold cash”.

Later, economists, in 2013, however, talked about a “real rate of interest”, which increases as prices fall—providing also a gain to cash holders. This real rate of interest can be trapped also, and thus to have a RLT (a real LT) at zero OR. The slumps in Japan in 1990’s and in 2000’s and the global financial crisis in 2008-9 in USA are considered as cases of LTs ([4]).

Here, we may add that the banking system is interested, we believe, in, an as great as possible gap between the rate of interest paid to call deposits and the lending interest rate—LIR thereafter. The LIR can never be very low or zero, we believe. We can say also that there is a degree of inflexibility of the LIR downwards by incorporating a % for risk and a % of uncertainty as well as other costs mentioned by K.

Moreover, the bank of England on 27/04/2000 published a working paper, no 111, about the liquidity traps and how to avoid and escape from them.

Money satisfies people’s 4 needs (Table 4).

Table 4. The needs satisfied by money.

Source: Author.

For K, money is the only asset having a rate. K argued that 3 motives make-up the demand for money: the money which one holds/demands to carry out his/her daily transactions; the money, which one keeps/holds to face unforeseen circumstances (e.g., a sudden health problem; further studies; travelling), and the money one requires to store his/her wealth in it.

People of course can store their wealth also in bonds, and in elsewhere¹⁶. Bonds offer a double gain: one from their value appreciation and one from their interest rate. They surely can offer also a double loss.

Let the demand for money, M_D= L₁(Y) + L₂(r) (6), where L₁ stands for the two motives mentioned above, determined by the level of Y, while L₂ is negatively related to r. The two first motives above are clearly caused by an uncertain future. Certain economists called K’s “liquidity preference theory” as a “theory of uncertainty”. The CT assumed that only the M_d has a person, so that to make a maximum number of transactions, being equal to k PY, where k stands for a constant proportion of Y, and P stands for the average price level.

Monetarists—Mon.—thereafter, moreover, believed in nothing more than a complex version of the above CT. Mon. argued that the Md is for financing rather stable transactions, and not being a unique function of the rate of interest and Y. In the economy many physical and financial assets exist, where their return influences Md. People are rather assumed to try to equalize the marginal rate of return across all physical and financial assets.

Money is a substitute for all other assets, and the Md is a function of their rates of return. This statement is in agreement with K’s theory, where the rate of interest influences the Md.

Let, now, the demand for “real money” balances to be Md/P, a function of Y, Prices P and r. This is the “modern quantity theory of the Md”. Mon. argued that the Md can be statistically only determined, and thus monetary policy has to be preferred. Where, Ms (the supply of money) has to grow at a constant rate (= growth of output). But this policy, when applied, produced great instabilities.

For K, the fundamental propositions of a Monetary Theory start first with the Md. Individuals are free to change—whenever they like—the amount of Money they hold, provided that the total amount of Md is exactly equal to the Ms, created by the banking system. Md = f(Y, Prices), where for K here the Prices mean the prices primarily of the securities (financial assets like stocks, equities, debentures and bills), the purchase of which is the natural alternative to holding cash (GT, pp. 84-85).

The economists who were concerned with the “theory of prices”—TP thereafter, were also those concerned with the “theory of value”, arguing, once upon a time, and par excellence, that Prices are determined by Supply(plus the changes in Marginal Cost & the elasticity of supply in the short run) and Demand (GT, Chapter 21).

The above economists, however, when passed on to the “theory of Money & Prices”, adopted a number of other factors (shown in Table 5), who this time destined to govern Prices, forgetting at the same time the elasticities of Demand and Supply. They rather assumed a zero elasticity of Supply and a demand proportional to the Q_M. As a result, the TP had to be brought, by K, closer to the theory of value.

Table 5. The factors brought in by the classical theory of money & prices.

Source: Author; data from GT, p. 292.

For K, in order for the economists to bring the TP closer to the “theory of value”, they have to consider Economics as dealing only with the 3 theories mentioned below (Graph 4).

K argued that if we assume that the total employed resources are constant, and that the conditions in industries/firms are unchanged, as CT did, we have missed

the significant characteristics of Money. To determine Output and total employment, we need a Monetary Economy. “The importance of Money flows from being a link between the present and the future” (this is the most repeated sentence in the whole GT, as mentioned) (GT, p. 293).

K suggests considering what distribution of resources will be consistent with the (shifting) equilibrium (which we have presented in Part VIII)? In the real world, the previous expectations, though liable to disappointment, affect what we do today (GT, p. 294). This is the standard philosophy of K.

The level of all prices depends on what is paid (called remuneration) to factors of production (which make up Marginal Cost), and on the scale of Output (and on the volume of employment). Industries’ costs of production depend on their output. Important here is to ask “how the changes in Demand affect the costs of the industries and their volume of production” (GT, p. 295)?

The costs of production in any industry depend on the output of the rest of the industries. Prices depend on wages (and on the volume of employment)—if the costs move along the direction of Wm. Thus, the effect of changes in Q_M on price level can be considered as being compound from its effects on Wm and on employment (GT, p. 295).

K made five new assumptions (GT, p. 296) (Table 6) about the Qm theory.

Table 6. The new K’s assumptions about the quantity theory of money.

Source: Author; data from GT, p. 296.

A rise in Effective demand will cause a rise in employment and in Prices. Thus, prices can rise gradually as employment rises (GT, p. 296).

K introduced a monetary economy. A monetary economy for K is the one in which the future views¹⁷ of the enterprises are capable to influence today’s level of employment, through Money. This is the most persistent idea of K.K believed that money is the link between the future & the present... This, however, as K argued, depends also on the interaction of supply and demand¹⁸—which is also a further link with the fundamental “theory of value”¹⁹.

K introduced verbally a new concept of equilibrium, ignored, however, by the economists, to the best of our knowledge. He called it “shifting” (GT, pp. 293-294)… meaning “changing”, concerning the enterprises. This was so, because their views were also changing continuously over time. For K, this equilibrium makes-up… also “a theory” (Graph 5).

As shown in Graph 5, the higher the prospective yield—PY, the higher the intended investment by the enterprises. These PYs, however, are only pieces of the entire puzzle of economy’s “New Investment”. The PYs indicate the prerequisite elements existing in the economy, so that enterprises to be willing to implement these investments to which PYs belong to, as soon as the rest of the prerequisites (supply price; lending rate of interest, MEI, etc.) are also satisfied.

Source: Author; inspired by Keynes, GT, p. 293.

Graph 5. Keynes’ shifting equilibrium²⁰.

The above idea, which we have presented, for the first time, graphically, is based on the fact that “the reason for which an enterprise invests, or buys a newly-made capital asset, is asset’s net, discounted, and expected return (gross revenue less expenses = net present value); we assumed, however,a degree of100%confidence” in PYs (our definition). The PY is also the “demand price” of a capital asset (GT, p. 135).

In addition, the “supply price” of a capital asset is its replacement cost by a newly-made capital asset. These PYs are not static...

The above theory, K argued that it is also… a “theory of value” as well one of “distribution” (GT, p. 294). Given the importance attached to the theory of PY by K, we wonder why economists ignored it… given that in all our readings about K’s GT, we have never met a reference to this super-concept. Of course this can be further researched.

Graph 6 now shows that the price of a good has rather to be determined by the demand curve of the consumer (governed by his/her disposable income) for the specific good, and the supply of the good concerned (governed by its costs of production).

Graph 6. The proper determination of the price of a good/service.

As shown, the price of any good, or service, has to be determined at the interaction of its Supply and Demand. This contributing proposal brings us back to the early history of the original formulation of the “theory of demand”. This demand-supply model, we believe, is nearer to the economic reality than the existing mathematical models, and we suggest to be adopted by economists. This,of course,isanother subject for further research.

GT is a turning point in the history of economic thought, and it provides a reformulation of the contemporary monetary theory. K created a simple, general, economic equilibrium model, capable of manipulation and empirical formulation and, moreover, relevant to the problems of economic policy.

Keynes introduced a new type of equilibrium, called “shifting equilibrium”—as shown—establishing a bridge between present and future, which has been achieved only by introducing money into the economy. Unfortunately, economists have ignored this concept and theory for which K was proud.

GT explained why a “competitive capitalist economy” cannot automatically maintain full employment. Moreover, it stimulated a revolution about the role of the governments. Finally, GT turned the attention of economists from the determination of the “general level of prices” to the more important of “how output”, (“and employment”), are determined.

GT also rejected the opinion of CT that unemployment was due to high realwages & higherinterest rates. Keynes underlined the importance of the effective demand for growth and development, which, however, can be short of that needed for full employment, unless the New Investment equals Saving. For the gap between the new investment and Saving to be closed, the Government is called to close it, by proper spending (fiscal policy), if and when LT cancels the effectiveness of state’s monetary policy.

K expected (GT, p. 248) that an inducement would push the rate of the new investment to the point which forces the supply of every type of capital asset to a figure, which, taken in conjunction with its PY, brings MEC to approximate equality with the lending Rate of Interest.

The physical conditions of the Supply in the capital goods industries, the state of confidence concerning the PYs, the psychological attitude to liquidity and the Quantity of Money, determine, between them, the New Investment. The dynamic character of Investment underlined by K, no one we believe can underestimate in a world where consumption will be less than the entire Y.

¹For the “given” factors Keynes simply did not take their effects into account in the GT, though they influence Employment and Income (GT, p. 248). As a result, by describing them as “given” is misleading.

²GT finished by Dec. 13^th, 1935.

³K thought, wrongly, (but in 1930), as admitted by him, that “the influence of money” was something separate from the general theory of supply & demand (GT, p. vi).

⁴K distinguished his theory from that of the CT (prevailing from 1835 to 1935). Marx (1818-1883) considered as “Classical economists”, D Ricardo (1772-1823) and J Mill (1773-1836), and their predecessors at their culmination. K included also: J.S. Mill (1806-1873; son of James), Alfred Marshall, Is. Edgeworth (1845-1926) and Prof. A.C. Pigou (1877-1959). The extensive references of K in the GT were made to Marshall and especially to Pigou. K explained why criticized Pigou (GT, p. 279), for his “theory of unemployment”.

⁵K argued that even if we assume fully flexible wages & prices downwards—as CT—the economy will not always return to full employment (this being his central proposition). Employment can coexist with a number of unemployed (being involuntarily so for lack of demand).

⁶GT, p. 5.

⁷Imperfect markets excluded. Labor’s MP is the amount added to total production by an additional worker.

⁸This can be found by the value by which the production will be diminished if he/she stopped to be employed.

⁹These are the standard assumptions of K—making his theory—useful mainly for the short run.

¹⁰For K, labor’s disutility comes from all kinds of reasons, which lead a man/woman to withhold his/her labor rather than to accept a wage, which provides utility < a certain minimum (GT, p. 6). For labor to do this, we believe, has to rest on unemployment benefits, past savings, support from family, etc. Humans cannot survive for long without employment, we believe, not to mention the associated psychological effects for one to be unemployed for a long time.

¹¹K introduces into his argument also the possible “combinations between employable units”, which K considered them as analogous to the imperfections we meet in competition.

¹²K specified this point to be the “marginal efficiency of labor”, as output increases.

¹³Total demand function.

¹⁴In communist states both saving and Investment are carried out by the state.

¹⁵The role of banks, and of those who attract savings to finance the new investments, is important. The level of the rate of interest, r, is the key variable for the attraction of savings from homes (hoarding) to the banks, in absence of a haircut risk (from capital controls as this happened in Greece in 2015). The level of the lending rate of interest, however, acts also as a cutter, if it is >MEIs. A lower r and a higher MEI are recommended, though a low r will discourage saving to reach the banks. K discussed for long how societies, in different stages of their development, offer opportunities to new investments. This is why AI, and the “rare earths”, as well innovations, are required in providing opportunities, especially when MEC > r, otherwise savings will remain idle, and Y will be reduced. The role of Governments is obvious here: to increase MEIs as far as possible and reduce r as far as possible, making also a “liquidity trap” inactive. Saving is also made by the firms called “depreciation”. K went as far as to consider depreciation in USA as responsible for the Great Slump (GT, p. 100-104). Enterprises have to realize that depreciation has to be spentbeforea deficient demand is created... This issue is certainly related also to the “durability of the investments” meaning that the longer a capital good produces/lives, the rarer is replaced, and so its accumulated depreciation spent. This is a real dilemma.

¹⁶Gold; jewels; foreign currency; crypto money; raw materials; houses; shares; objects of art, etc.

¹⁷For K, the “positive expectations” of the enterprises—at the present—lead to the new investment.

¹⁸For K, demand & supply determine price, and given costs, they determine profit. The expected profits determine the new investment and the employment and the output: a simple and consistent reasoning.

¹⁹The “theory of value” used to deal with the intrinsic worth of a good, defining also its price. The “values” were: the “value in use”, which corresponds to the capacity of a good to satisfy a need, and the “value in exchange”, which is the worth of a good in exchange (= relative price). A good must be useful to be produced and/or exchanged, given its costs (wages, rents & profits). The late 19^th century economists, argued, however, that the price of a good is determined by marginal utility (an “exchange value” concept). The modern writers grouped 2 incentives, i.e. the “utility maximization” for the consumer and the “profit maximization” for the producer, into a single principle: that of “maximizing welfare”. The concept “marginal” established firmly itself in economic theory, however, where one meets 29 such concepts…

²⁰This is a first attempt to present graphically a concept described by Keynes verbally.

²¹We assume, according to our “theory of education”, that there are 3 schools of thought: 1) In favor of educating as many as possible, if interested, (UK used to be such an example); this category creates a happier, and a more creative population. In USA you may encounter a person to fill your car with gasoline having a doctoral degree… 2) One, expecting universities, and other schools—state and private, etc.—to provide only those required by the industry out of an exact plan. 3) One, where Universities “produce”—by the power of their independence—whatever their PhD holders like, (Greece is an example), regardless of whether they will be needed or not by enterprises. This last model creates a number of unemployed together with vacancies, which we may call it “the educational paradox”. The failure of a country’s educational system, we believe, can be shown, along with other factors, by the number of unemployed, and in money terms by the unemployment benefits paid. In EU, in 2022, 178b euro paid to unemployed... From the 3 mentioned above schools of thought, one may derive 3 different educational policies, which have 3 different costs and importances. For wealthy societies we will recommend to follow the first school of thought. For the poor countries, we will recommend to follow the 2^nd model. For the third case-study, we will recommend the state to correct it. This is an issue for further research. Our slogan may be: “it is better to have a fully educated population partly unemployed than having a fully employed uneducated one”. See also next footnote.

²²So that to confirm modern society’s urgent need so that an educated person to be also a civilized one. This means that a human being has not simply to be a Homo-economist, but also a Homo—sapiens... He/she, not only to know everything about the present life, but also to be aware about the after-death one… Education perhaps will put an end in the phenomenon where husbands kill their wives…