The General Theory of Employment, Interest and Money (1936): Unemployment Equilibrium
A Treatise on Money was written more or less in isolation, but it was exposed even before publication to the criticism of members of the Macmillan Committee. Keynes also received criticism from Hayek, but they were not on the same wavelength: Hayek expected a theory which would encompass capital theory in the manner of Bohm- Bawerk, but Keynes’s frame of reference was different.
Keynes did reply concerning the quantity theory, showing that Hayek retained loanable funds theory, which Keynes rejected on the grounds that it was incompatible with the facts of modern money and finance (Keynes 1931a [1973]).Some of his younger Cambridge colleagues, among other Richard Kahn, Piero Sraffa, Austin Robinson, Joan Robinson and (on leave from Oxford) James Meade, formed a group known as “The Circus”, to discuss TM in detail. They soon found themselves debating and contributing to the development of Keynes’s new ideas, which he began to introduce into his Cambridge teaching as early as 1931. The following year he changed the title of his lectures (Skidelsky 1992: 460) from ‘The pure theory of money’ to ‘The monetary theory of production’, reflecting the contrast he made with the real theory of exchange (the subject of neoclassical theory) in a short forthcoming article (Keynes 1933a [1973]). Kahn developed the idea of the multiplier, which Keynes had introduced in 1929, into a formal system (Kahn 1931); it becomes a central concept in The General Theory.
There is both continuity and great change between TM and The General Theory of Employment, Interest and Money (hereafter GT, Keynes 1936 [1973]). The main problem with TM was that it followed tradition in taking for granted a “long run”, fullemployment equilibrium as its reference point. This was dispensed with in GT and the concept of equilibrium had to change as a consequence. These changes were only the beginning of the radical shift in method that the GT presents.