Introduction

Ever since I read Keynes’s The General Theory of Employment, Interest and Money (1936) as a graduate student in the United States in 1962, I have never lost faith in Keynes’s economics for an understanding of the functioning of capitalist economies, from what causes booms to what causes severe slumps. It is true that for the most part, The General Theory is comparative static analysis and deals with a closed economy, but nonetheless the foundations of macroeconomic theory were laid for the first time with far more subtleties than textbook versions of Keynes’s economics portray There is a difference between Keynesian economics and the economics of Keynes (Leijonhufvud, 1968). The most revolutionary aspects of the book were: making saving a function of the level of income (rather than the rate of interest as in classical theory); the income multiplier which brings savings and investment back into equilibrium following a disturbance but not necessarily at the full employment level of income; making the supply of labour a function of the money wage and not the real wage; introducing the demand for money as an asset (liquidity preference) and hence the non-neutrality of money, and emphasising the role of expectations in the determination of investment.