The General Theory of Employment, Interest and Money: An Overview with Commentary

Due to the intellectual influence previously enjoyed by Keynes’ General Theory, this chapter is dedicated to a commentary on Keynes’s great work, whose influence was largely recovered during the current global financial and economic crisis. The author points out the great importance and relevance of the book in solving the problems that occur in the periods of high involuntary unemployment. In this analysis, special attention is paid to Keynes’s theory of cost structure based on the distinction between the primary cost (the user cost as its part), and the supplementary cost. In addition, attention is paid to the importance of changes in the user cost for the analysis of inflationary pressures, in the long run. Keynes’s theory of capital and investment process, based on the relationship between the marginal efficiency of capital and the interest rate, and his position that the investment process is sufficiently attractive for entrepreneurs as long as the capital is scarce, is presented as one of the most contradictory parts of the General Theory in this book, taking into account that Keynes explicitly recommended expansionary monetary policy in order to keep the interest rate at a very low level when the actual output is close or equal to the potential output. Since Keynes did not write a single chapter about changes in the cost structure in the long run, caused by the changes in technology, the author ends this chapter by integrating Keynes’s theory of capital with Horvat’s model of economic growth based on the contributions of the sectors producing capital goods and final consumer goods to the average growth rate, and changes in the cost structure in the two sectors in the long run. Thereby the author presents that Keynes’s theory of capital scarcity combined with an expansionary monetary policy does not necessarily cause inflationary pressures as long as the marginal productivity in the second sector (production of final consumer goods) increases up to the level necessary to maintain price stability.