Keynes's macroeconomic method

John Maynard Keynes (1883–1946) made a sea change in macroeconomic methodology when publishing The General Theory of Employment, Interest and Money (GT) in 1936. His method of the economy as a whole deviated substantially from the neoclassical convention of applying Say’s Law and full employment equilibrium. His fellow dissertation A Treatise on Probability, published in 1921, was an important building block for his new theory of economic behaviour in a realm of uncertainty. Equally important was his challenge to the market economic system considered a self-adjusting system towards full employment. The combination of these two methodological novelties made it possible for him to develop his new macro theory labelled the ‘principle of effective demand’. Within GT Keynes redefined the concept of equilibrium as a point of rest, where there is no inducement for employers as a whole to change employment. To achieve this conclusion he had developed an open-system method, where even a well-functioning market system could get stuck in high unemployment equilibrium due to lack of demand. Furthermore, he demonstrated that a more flexible wage level or rate of interest would not solve the problem with persistent unemployment. It would rather have the opposite effect by making the system more unstable and hereby increase uncertainty. So, in the longer run the macroeconomics development is open determined partly by institutional path dependency and partly by economic policy. This was a real methodological challenge to the economists’ society in the 1930s – and still is.