By Amol Agrawal, the author teaches at the National Institute of Securities Markets
February is a highly anticipated month as the Indian government tables the Union Budget in Parliament. This year marks the 90th anniversary of a book whose ideas broadly lays the economic foundations of every Union Budget, titled The General Theory of Employment, Interest and Money, and written by the British economist John Maynard Keynes. It was published in February 1936.
General Theory was written during highly uncertain times—the inter-war period and the Great Depression. Keynes was already famous, both as an author and as an economic thinker. In 1920, he wrote the highly acclaimed The Economic Consequences of the Peace, criticising western powers for putting the blame of the First World War squarely on Germany. It was followed by A Tract on Monetary Reform in 1923, where he advised the Bank of England on monetary policy. In 1925, he chastised Winston Churchill for going back to the Gold Standard. In 1930, Keynes wrote A Treatise on Money, where he discussed how savings and investments could lead to recessions.
Keynes’s earlier books were targeted at a general audience and the policy world. General Theory was written specifically for “fellow economists” with the hope that it was also “intelligible to others”. In the opening chapter, Keynes points that the book was thus titled to contrast it with the classical theory, which emerged from the works of Adam Smith and David Ricardo, the predominant thinkers in economics until the 1930s.
The Great Depression witnessed record unemployment. And Keynes wanted to show how general theory, not classical theory, could explain the rise in unemployment. He builds his arguments by noting that the classical school stuck by two major findings on employment. First, labourers’ wages were equal to the value added by them. Second, wages should be sufficient to incentivise them to work. Based on these two, we have the demand and supply curves of labour markets.
According to the classical theory, high unemployment is caused by wages being higher than the equilibrium, owing to unions and minimum wages. Such unemployment is voluntary. As wages are cut, the markets are restored to an equilibrium. Government intervention distorts markets.
According to General Theory, unemployment is caused by insufficient demand and inadequate jobs. Such unemployment is involuntary and lowering of wages further worsens demand. Keynes’s prescription was the opposite of the classicalists’—government spending was necessary to stimulate demand. General Theory started the so-called Keynesian revolution which argued about the important role of the government in managing business cycles. It created the distinction between micro and macro aspects of economics and gave birth to macroeconomics.
General Theory created an immediate impression on policy and fellow economists. Before publishing it, Keynes had sketched his ideas in a pamphlet titled The Means to Prosperity. He did not just share it with then President Franklin Delano Roosevelt (FDR), but also met him. The buzzword was that FDR’s New Deal policies were influenced by Keynes, even though economic historians disagree with the degree of influence.
Keynes’s book was not as “intelligible to others” as he hoped. However, it found many young disciples who added and presented their versions of Keynesian thought. The younger economists needed a new school of thought to build their careers. They adopted and spread Keynesian ideas eagerly. American economist Paul Samuelson based his book Economics: An Introductory Analysis on Keynesian thought. It went on to become the major economics textbook taught all around the world.
It was not all rosy though. The world of economics became highly divided post-General Theory and the spread of Keynesian economics. Keynes thought that his ideas saved markets from collapsing whereas the critiques said they led to the rise of big governments where all the ills could be cured by government spending. The classical theorists and free market-supporting economists such as Friedrich Hayek and Milton Friedman constantly rebuked and debunked Keynesian economics. An attempt was made to reconcile the two worlds via neoclassical synthesis, which used Keynesian ideas for the short run and classical ideas for the long run. However, it was rejected by Keynes’ followers who formed the post-Keynesian school of thought.
Keeping the divides aside, it is an understatement to say General Theory changed the course of economic policy all around the world. Come any Budget (or crisis), the discussion veers towards favouring and opposing Keynesian stimulus, multipliers, and animal spirits.
In 1935, Keynes wrote to his playwright friend and Nobel laureate George Bernard Shaw that his upcoming book on economic theory would “largely revolutionise… the way the world thinks about economic problems” within a decade. This was quite a prediction and, like many of his predictions, was proven right. In a sheer coincidence, 2026 also marks the 250th anniversary of Adam Smith’s The Wealth of Nations that laid the foundations of the classical school. How these two foundational books and their ideas have divided the economic world is quite a story by itself.