Keynes General Theory

Keynes claims that “there are insane and irrational springs of wickedness in most men”. (Toye, 140) This study will examine the relation of this claim to the three fundamental psychological factors of Keynes's General Theory. These three fundamental psychological factors are;

1. The psychological propensity to consume

2. The psychological attitude to liquidity

3. The psychological expectation of future yield from capital assets.

The wage-unit as determined by the bargains reached between employers and employed, and the quantity of money as determined by the action of the central bank; so that, if we take as given the factors specified above, these variables determine the national income (or dividend) and the quantity of employment. This summary statement contains, as I think, Keynes's main and very important contribution to economic analysis. I therefore want to emphasize it now. If I wasn't afraid that you'd feel insulted, I should read it over again!

Secondly, consider differences, as between situations consume and capital assets, in the liquidity preference schedule; that is, in the proportion of their income that people choose to hold in the form of physical money at various rates of interest. In Keynes's scheme a lower liquidity preference schedule entails a larger income velocity of money; (Coddington, 45-57) therefore more money income; therefore higher prices, and therefore, the money rate of wages being given, more employment. This extra employment, carrying with it extra income, as valued in labor, entails in turn a larger amount of investment supplied and engaged. The implications for employment and investment are thus the same as those of a higher demand schedule for investment. At the same time the extra employment and the lower rate of interest associated with it both make on the side of supply for larger consumption. Thus employment is larger to a greater extent than investment is. This means that the multiplier relevant here this multiplier is not mathematically of the same form either as the one relevant to variations in the demand for investment or as that relevant to variations in the supply of it must be greater than unity.

There remain to be considered differences in the money-rate of wages. Everybody knows that, if in a single industry the money-rate of wages goes up or down, employment, provided that initially it is not "sufficiently over-full", will normally go down or up. But, as Keynes rightly points out, we cannot step from this to the inference that, if money wage-rates in the whole body of industries go up or down, the same consequences will follow. For it is possible, indeed highly probable, that a shift in money wage-rates in one industry will affect the money demand for labor in others. Hence the problem must be attacked on a wider front. If the aggregate money demand function were unaltered by an all-round fall in the money-rate of wages, employment in the absence initially of full or over-full employment would necessarily rise. Will the aggregate money demand function for labor in fact be unaltered or not altered enough ...