Analysis on Keynes General Theory and the Transformation of Modern Capitalism

Abstract

Beginning in the late 1950s during the industrial revolution, new classical macroeconomists began to disagree with the methodology employed by Keynes and his successors. Keynesians emphasized the dependence of consumption on disposable income and, also, of investment on current profits and current cash flow, through the concept of “The General Theory” principles. In addition, Keynesians hypothesized a Phillips curve that tied nominal wage inflation to unemployment rate. Meanwhile, in support to these theories, Keynesians typically traced the logical foundations of their model using introspection and supported their assumptions with statistical evidence. The result of this shift in methodology produced several important divergences from Keynesian Macroeconomics: that is, independence of Consumption and current Income (life-cycle permanent income hypothesis), irrelevance of Current Profits to Investment (Modigliani–Miller theorem), long run independence of inflation and unemployment (natural rate of unemployment), the inability of monetary policy to stabilize output (rational expectations) and lastly, irrelevance of Taxes and Budget Deficits to Consumption (Ricardian equivalence). Meanwhile, some eminent scholars ascribed modern capitalism to the financial institutions, Unemployment and inflation, business cycle, and fluctuations in Phillips curve assumed by Keynes. Although acknowledging some evidence in support of these modern interpretations of capitalism, this current paper argues that Keynes also developed the fundamental elements of a general theory of unemployment, business cycle and potential instability under capitalism, without having clearly unscrambled these elements from more institutionally specific ideas. Such a general theory applies to all types of capitalist economy, but still is institutionally specific, referring to capitalism. The paper extracts this more general message, which was partly obscured by Keynes's emphasis on modern financial institutions, investments and unemployment.

Keywords: Capitalism, Keynesianism, Phillips curve, Investment, Modern-Capitalism, “The General Theory” Unemployment, Financial Institutions and Neo-Keynesian and Classical Theory.