Keynes Claimed his Theory to be General: 5 Grounds

The following points highlight the five grounds on which Keynes Claimed this Theory to be General. The grounds are: 1. Nearer to Facts of Experience 2. Integrated Monetary and Value Theory 3. Dealt with all the Conditions 4. Dealt with Inflation and Unemployment 5. Macro Quasi-General Equilibrium Economics.

Ground # 1. Nearer to Facts of Experience:

J.M. Keynes remarks, “I call this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical theory of the subject…. I shall argue that postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium.Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.”

While Keynes considered his theory to be general, he called classical theory a ‘special case’. In the preface of the book, Keynes says, “if orthodox economics is at fault, the error is to be found not in the super-structure but in a lack of clearness and of generality in the premises.”

Ground # 2. Integrated Monetary and Value Theory:

Generality of the General Theory lies in the integration of monetary and value theory, a work that was left incomplete and extremely confused earlier.

“Our method of analyzing the economic behaviour of the present under the influence of changing ideas about the future is one which depends on the interaction of supply and demand, and in this way, is linked up with our fundamental theory of value. We are thus led to a more general theory, which includes the classical theory with which we are familiar as a special case.”

In other words, generality of the ‘General Theory’ lies in the integration of monetary theory with the theory of value. From a theory of money and prices, Keynes developed a monetary theory of output. The integration of the theory of money with the theory of value and output was attained through the rate of interest.

Ground # 3. Dealt with all the Conditions:

According to Keynes, it was a mistake to imagine that full employment is a part of the natural order of things, and that departures from it are abnormal and temporary, rather full employment is only one of a number of possible situations-it is in fact a special case. The assumptions of classical economics according to Keynes were applicable to this special case (of full employment) only and not to the general case.

In other words, Keynes theory deals with all levels of employment, whether it happens to be full employment, widespread unemployment or some intermediate level: the purpose of the General Theory is to explain what determines the volume of employment at any given time; in contrast classical theory was concerned with the special case of full employment.

Ground # 4. Dealt with Inflation and Unemployment:

Another ‘general’ aspect of the ‘General Theory’ is that it explains ‘inflation’ as readily as it does unemployment because both are linked with effective demand. Inflation is caused by an excess and deflation is caused by a deficiency of effective demand. If Keynes’ own general theory is correct then the special theory is at fault not only in being the theory of a limiting case but also in being largely irrelevant to the actual world in which unemployment is obviously one of the gravest problems.

Most of the significant differences between the classical theory and Keynes’ theory stem from the difference between the assumption that full employment is normal and the assumption that less than full employment is normal.

Ground # 5. Macro Quasi-General Equilibrium Economics:

There is another equally important meaning associated with the term general as it appears in the title on Keynes’ book. His theory relates to changes in employment and output in the economic system as a whole in contrast with traditional theory which relates primarily but not entirely to the economics of the individual business firm and the individual industry.

The General Theory “has evolved in what is primarily a study of the forces which determine changes in the scale of output and employment as a whole.” All the basic concepts of Keynes’ General Theory are in terms of aggregates of employment, national income, national output, aggregate supply, aggregate demand, total social consumption, total social investment and total social savings.

However, there are others who argue that Keynes’ theory is not general; it fails as a theory of growth. There is no theory of development in the General Theory. They maintain that Keynes’ theory is at the most depression economics; it is static, it is short-period economics: it does not apply anywhere and everywhere ; it is not applicable in under-developed countries; how could it be ‘general’ then ? Such criticisms of the ‘generality’ of the ‘General Theory’ are not justified.

It is not proper to say that there is no theory of development in the ‘ General Theory’. Critics will do well to remember that Keynesians like Harrod, Domar, Mrs. Joan Robinson and Kurihara have emphasised the implicit dynamic elements in Keynes’ and out of his system have constructed a theory of growth. Moreover, Keynes developed a theory of employment which may be regarded as the foundation of growth economics.