Get the answer of: Is ‘General Theory’ a Depression Economics.

Some economists following J.R. Hicks, described Keynesian economics as depression economics.

They argue that most of the Keynesian functions particularly the Liquidity function and the Investment-Demand function, are active only during depression, then how can it be general? But this is a wrong charge.

It is true that Keynes lived and wrote during depression period. He was primarily concerned with factors which would take the depressed economy of England out of the depths of depression.


It was on account of the peculiar circumstances in which he lived that he wrote a lot about depression and attributed unemployment to the insufficiency of effective demand. We also know that during the Second World War he dealt with problems of inflation as effectively as he dealt with the problems of depression. Therefore, it is more appropriate to describe his economics as general economics rather than depression economics. Simply because Keynes analysed the problems of depression and the factors which will bring about full employment during such a period need not make us think that it is depression economics.

It is, therefore, neither necessary nor desirable to describe Keynesian economics as depression economics or to think of Keynes as a depression economist. Hicks was hasty in describing his economics as the economics of depression. It would be more suitable to describe him as an anti-cyclical, or as anti-deflation and anti-inflation economist.

Those who associate his economics with depression conveniently forget his major contributions in his last book- How to pay for War-in which he spelt out the important measures needed to combat inflation. It is true that Keynes did much for fighting the Great Depression, it is also true that he did much for fighting inflation also.

In fact, Keynes himself is to be blamed for this kind of impression that the ‘General Theory’ is a depression economics. Keynes himself developed a special theory of these forces in the ‘General Theory’. He felt that the propensity to save, if it is too high, summons up depression; unemployment would display a steadily rising trend. There was another reason. One of Keynes most influential followers, professor Alvin H. Hansen, developed an alarming theory about the prospect of permanent depression.


He foresaw not only too great a propensity to save, but also a constant abatement of investments. Population growth would come to a stop which was supposed to discourage capital outlay. As such the entrepreneur would be dis heartened. Hansen’s view was depression economics with a vengeance. This was, however, not due to the logic of the Keynesian system but to the special premises that Hansen had incorporated in his theory. However, this criticism of Keynes theory is misplaced, for Keynesian logic and its ‘generality’ and the depression theory are two different things.

There is good deal of substance in Prof. Schumpeter’s thesis that “those who seek universal truths, applicable in all places and at all times had better not waste their time on the ‘ General Theory’.” By general theory, Keynes meant merely a theory that dealt with full employment as but a special case. Impressed by institutional changes and considerations, Keynes was impelled to rewrite economics. In his view, Keynes was doing economics a disservice in presenting as universal truths, in the Ricardian tradition…. He also did not subscribe to the view that Keynes’ medicine is curative only for Great Britain.

Schumpeter found it even more helpful in the American economy, with its institution rigidities, strong group interests. Keynesian economics applies to hybrid economic societies-partly capitalist and partly socialist-and so long as these societies prevail, Keynes’ economics will serve as very useful guidepost for policy.

In a changing institutional set-up, Keynesian economics will have to be adapted and modified on the same grounds that the General Theory replaces Mill’s Political Economy or Marshall’s Principles of Economics, a newer general theory will ultimately replace Keynes General Theory. Thus, the ‘generality’ of the General Theory lies in the integrated nature of Keynes’ analytical framework, in the integration of the theories of value and money, in studying all levels of employment instead of the special case of full employment, in examining the aggregates of the economic system and in studying at the same time inflation and deflation as aspects of effective demand, in denying that it is only a depression economics.