The General Theory of Employment, Interest and Money

If demand is the engine, Keynes needs to explain what governs it, and here he introduces the idea that gave the whole system its shape: the propensity to consume. As a household's income rises, its spending rises too, but by less than the full amount. People eat a little better, but they also tuck some away. The richer a person, or a country, becomes, the larger the slice of each extra dollar that goes unspent. Keynes treated this as a basic psychological fact, dependable enough to build a theory on.

This creates a problem the classics never saw. In a poor, hand-to-mouth economy, almost everything earned gets spent, and the demand loop closes tightly. But in a wealthy economy, a growing share of income is set aside rather than consumed. That saved portion becomes a gap, a chunk of purchasing power withdrawn from the market. For the economy to stay at full employment, something has to fill that gap. Somebody has to spend where the savers won't.

Having shown that investment holds the economy up or lets it fall, Keynes needed to measure how hard that lever pulls. His answer, developed with his colleague Richard Kahn, is the multiplier, and it is the idea most people carry away from the book even if they never read it. The claim is that a given amount of new spending raises total income by more than itself. A dollar invested does not add a dollar to the economy. It adds several.

The logic runs through the propensity to consume. Imagine the government or a firm spends money hiring a builder. That builder now has income, and he spends most of it, say on groceries. The grocer now has that income, and spends most of it in turn. The shopkeeper down the chain does the same. Each round is smaller than the last, because at every stage a fraction is saved rather than passed on, but the rounds add up. The total rise in income is a multiple of the first spending, and the size of that multiple depends entirely on how much of each dollar gets re-spent rather than hoarded.

Step back from the mechanics and the whole book resolves into a single reassignment of responsibility. In the world Keynes inherited, an economy's fate rested on private character. Prosperity flowed from thrift, discipline, and the sober judgment of savers and investors; a slump was, at bottom, a failure of those private virtues, and the cure was to practice them harder. Balance the household budget, tighten the belt, wait for confidence to return. The General Theory dismantles that moral picture piece by piece and puts something impersonal in its place.

Once output is set by effective demand, and once private demand can settle stubbornly below full employment, the question is no longer who has behaved badly. It is who will spend when everyone else has good private reasons not to. Households are saving because they are frightened. Businesses are holding back because profits look uncertain. Each is behaving sensibly, and their combined sensible behavior is what keeps the factories dark. There is no private actor whose self-interest points toward filling the gap. The logic of the individual and the logic of the whole have come apart.

Keynes wrote in his preface that the difficulty lay not in the new ideas but in escaping the old ones, which reach into every corner of a mind trained the classical way. The General Theory is that escape attempt, argued in the language of the very economics it overturns. Its core is smaller than its reputation: output is set by how much the economy actually spends, spending leaks out through saving that investment cannot always be trusted to replace, and the gap, once it opens, can hold an economy below full employment indefinitely. From that follows the multiplier, and from the multiplier, the case for a government that spends when no one else will.