Keynes’s General Theory

In this chapter, we examine Keynes’s important contributions to economic theory. Our exploration begins with an analysis of the theory of effective demand and the income multiplier, shedding light on the intricate relationship between investment and saving. Having established the precedence of investment over savings, we discuss the determinants of investment, with a specific emphasis on the pivotal role played by the marginal efficiency of capital—a variable introduced by Keynes to represent the rate of profit. We argue that Keynes sites with other major economists in acknowledging the long-run decline in the marginal efficiency of capital. The analysis proceeds to elucidate the nature and determinants of interest rates, continuing with an exploration of the economic implications associated with wage reductions. Concluding this chapter, we summarize Keynes’s general economic philosophy.