The General Theory: Critical and Constructive

This brief chapter will be concerned only with the General Theory and, in the General Theory, only with the central problem of the determination of output and employment. The General Theory opened a new era in economic analysis, which will never be the same again. We have witnessed an attempted counter-revolution, but it has been, in my opinion, abortive. What Keynes did was to challenge the basic, usually implicit, assumption that the economy was a case of a constrained maximum, constrained that is by unproduced resources, particularly labour. A consequence was that there was market clearing in all markets, even the labour market. Thus economists were teaching a theory which implied full employment in the 1930s when there was exceptionally high unemployment! Thus Keynes had to say at length that the emperor has no clothes, that we are teaching a false doctrine, irrelevant and inapplicable, not only then but also 80 or 90 per cent of the time. For this central target of attack he used the splendidly aggressive phrase under-employment equilibrium, something that could not exist according to the ruling orthodoxy. It was a good, useful phrase and it was very effective in concentrating the minds of the profession on the real problem.