Keynes’ masterpiece at 90

THIS month marks the 90th anniversary of the publication of the General Theory of Employment, Interest and Money (1936) by John Maynard Keynes, a treatise that still has a tremendous bearing on intellectual discourse and economic policymaking, and profound impact on the theory and practice of economics. It’s instructive to revisit its legacy and the way it shaped economic discourse. His contributions cover a wide swathe; in 1930, he wrote the two-volume Treatise on Money, after penning Monetary Reform (1923). As a public intellectual, he came to prominence in the aftermath of World War I through his Economic Consequences of Peace (1919), prophesising that the proposals at Versailles would lead to another major war (World War II).

Before delving into the main ideas of General Theory, one must stress that what’s known as Keynesian economics is entirely the interpretation of his written work by other economists. The famous IS-LM framework, for example, was the interpretation of his ideas by J. Hicks.

A number of economists (for example, Axel Leijonhufvud), accordingly, distinguish between ‘Keynesian economics’ and the ‘economics of Keynes’. A well-known case in point is his 1933 letter to US president Franklin Roosevelt in the context of his New Deal that considerably expanded the public sector’s economic footprint. Almost every economist today would label such expansion as ‘Keynesian’. However, in his letter, Keynes warned against certain expansionary policies, cautioning “whether some of the advice you get is not crack-brained or queer”.

Moving to the contents of the book, it’s important to first emphasise that a short summary does not do justice to the depth and extent of its ideas. As far as the main achievement of the book is concerned (for yours truly, at least), it decisively broke the hold of four schools of thought: Classical, Marxian, Neoclassical and Austrian (especially the neoclassical discourse).

From the mid-1930s to the mid-1970s, Keynesian economics remained the dominant thought in academia and policymaking.

The central message was that economies are not necessarily self-correcting. Characterised by ups and downs in economic activity, a recession can be ameliorated by fiscal interventions. To counter declines in economic activity, the focus should be on income generation via demand management. Keynes explained all this using the concepts of aggregate demand and aggregate supply in a general equilibrium framework, in contrast to the partial equilibrium analysis of his mentor Alfred Marshall, another leading figure in 20th-century economics.

To complement his thoughts, he brought toge­ther the disparate concepts of others, like ‘effective demand’ (Hahn and Lederer) and ‘multiplier’ (Kahn) to explain and justify the ‘under-consum­ptionist’ basis of his argument, a view dating back to the likes of Quesnay, Malthus and Sismondi. By the mid-1920s, Keynes had discerned the futility of belief in a self-correcting market given the persistent struggles of European economies. His The End of Laissez-Faire (1926) reflected these beliefs, with Keynes advocating countercyclical spending. His thoughts finally got a foothold across the Atlantic too when the American economy lurched its way into the Great Depression (1929), the most devastating economic episode in recorded economic history.

The ‘self-correcting’ hypothesis was based on J.B. Say’s Law of Markets, positing that supply creates its own demand. It was based on the views of the Classicals who treated money merely as a medium of exchange and ‘numeraire’, implying that changes in the quantity of money had no ef­­fect on economic activity. Simply put, Say’s law ru­­­led out the possibility of any demand deficiency.

Keynes flipped this argument on its head, demonstrating that the central problem lay in insufficient demand which translates into broader maladies, specifically high unemployment. For reasons that he elaborated, the most logical path in combating these maladies lay in targeting the demand side and income growth rather than the aggregate supply (which he assumed was comparatively static). Take, for example, his opposition to the entrenched view that savings should be the main focus as higher savings translate into higher investment. Keynes opined that this was illogical. He emphasised that more savings would only lead to more unemployment as demand falls further (‘the paradox of thrift’). In summary, the state should be the ‘backer of last resort’ to cushion economic shocks, just as a central bank is supposed to be the ‘lender of last resort’.

From the mid-1930s to the mid-1970s, Keynes­ian economics remained the dominant thought in academia and policymaking. The momentous inflation in the aftermath of the 1973 Arab-Israel war, coupled with high unemployment (stagflation and failure of the standard Keynesian framework in explaining it), led to this thought monopoly finally giving way. It made a spectacular comeback in the aftermath of the Great Recession of 2007. A decade later, public finances and backing again came to the rescue as Covid-19 struck and the global economy went into a tailspin.

To gauge the remarkable influence of his ideas, one need only recognise that every country has some form of state presence in its economic af­­fairs. Even the US, the so-called bastion of ‘free-market’ capitalism, has a huge state presence in the form of redistributive programmes like Med­icaid, TANF, SNAP, etc. Of course, just as Keynes pointed out, not every intervention produces a successful outcome. The ills of a large, outsized public sector in Pakistan’s economy are well documented. Additionally, Keynes was very clear in discerning the dangers of bureaucracy-led economic management, advising a middle path between free market and a large public sector.

I’ll conclude with a reference to Milton Friedman, another intellectual giant in the field. It was Friedman’s Monetarism along with the New Classical thought of the likes of Robert Lucas that displaced Keynesian economics as the dominant mode of economic thought. A significant portion even within economics sees Friedman as having little appreciation for Keynes’ contributions. To the contrary, he had tremendous regard for Keynes, stating that even if General Theory had not been written, Keynes would still rank amongst the greats of economics, and that the book was the “true mark of his greatness”. This, perhaps, is the most befitting eulogy to a man whose ideas still hold remarkable sway.

The writer is an economist. His current research focuses on long-term analysis of various issues plaguing Pakistan’s economy, economic reforms and the history of economic thought.

shahid.mohmand@gmail.com

X: @ShahidMohmand79

Published in Dawn, February 23rd, 2026

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