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The General Theory: a neglected work?!
Mark Hayes
Robinson College, Cambridge
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Five Propositions of The General Theory
• Equilibrium
• Competition
• Money
• Expectation
• Liquidity
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1. Equilibrium
Employment is in continuous ‘daily’ equilibrium
corresponding to the point of effective demand.
Equilibrium does not mean that all available labour
and capital-goods are employed and that factor
markets clear.
Equilibrium does not mean that expectations are
fulfilled.
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2. Competition
Competition in supply and demand is the motive
force which holds the system in equilibrium.
Agents take prices in each market to be independent
of their own actions.
The degree of competition is not the same as the
degree of monopoly.
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3. Money
Equilibrium reflects spending decisions by
employers, investors and consumers, and not the
optimal allocation of factors of production.
Money is integral to production and income is
intrinsically monetary.
The wage-unit is not an equilibrium value.
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4. Expectation
Decisions to produce, consume and invest are based on expectation.
Effective demand corresponds to the state of expectation at any time.
The long and short term are not the same as the long and short equilibrium periods.
The future is unknown and long-term expectations are fundamentally uncertain.
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5. Liquidity
Liquidity means more than convertibility and includes
invariance of value to changes in the state of
expectation.
Assets possess this property in different degrees, so
that money is more liquid than bonds, and both are
more liquid than equities.
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Five Propositions
• Continuous equilibrium
• Perfect competition
• Flexible prices
• ‘Rational’ short-term expectations, but long-term
expectation quite a different matter
• Liquidity means more than convertibility
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Relationship to Classical doctrines
• Flexible labour markets
• Flexible exchange rates
• Financial liberalisation
o Free movement of financial capital
o Prudential regulation
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