Analyzing Book III of The General Theory

Abstract

In Book III of The General Theory, Keynes decomposes the aggregate demand function, which is introduced in Book I into the consumption and investment function. Book III considers properties of the consumption function, and provides the investment multiplier analysis that asserts that capital investment causes additional effective demand. Although Keynes recommends expansionary fiscal policy based on the multiplier analysis, the government of Britain did not response. While many researchers of Keynesian economics are inclined to blame the government’s unwise and/or obstinate attitude, one should note that economic conditions that Britain faced. Because of World War I, the country was heavily in debt to the US, although not to the same extent as continental Europe. In order to stabilize the value of monetary assets, an expansionary fiscal policy, which was associated with a considerable amount of public debt, might not have been considered reasonable by the government. Further, I show that Kahn’s employment multiplier reaches the same value as Keynes’s investment multiplier under some plausible condition.