Joe: For over a century, the smartest economists on the planet operated on one core belief: a free market can't fail. It always fixes itself. Lewis: The ultimate "it is what it is." Just trust the process. Joe: Exactly. Today, we're talking about the book that called that idea a dangerous, destructive lie, right in the middle of the Great Depression. Lewis: A book with a title that sounds like it could cure insomnia. Joe: I know, I know. And that book is, of course, The General Theory of Employment, Interest and Money by John Maynard Keynes. Lewis: Which, I have to say, sounds like the most boring title ever created. My eyes glazed over just hearing it. Joe: It does! But the man behind it was anything but. Keynes wasn't some dusty academic; he was a brilliant, Cambridge-educated public figure, a core member of the Bloomsbury Group, deeply involved in arts and culture. And he was horrified by the mass unemployment he saw all around him in the 1930s. Lewis: So this wasn't just a thought experiment for him. Joe: Not at all. He wrote this book in 1936, not for a library shelf, but as an emergency response to the Great Depression, a crisis that the dominant economic theory of his day was utterly powerless to explain. It was an intellectual fire alarm.

Joe: And to understand the alarm he was pulling, you have to see the world through the eyes of the classical economists he was attacking. They had a very neat, very comforting view of how things worked. Lewis: Let me guess, it was simple and wrong? Joe: Simple and, as Keynes argued, catastrophically wrong in a crisis. The core idea was called Say's Law, which basically boils down to "supply creates its own demand." Lewis: Okay, break that down. What does that actually mean? Joe: Think of it like this: a baker decides to bake a hundred loaves of bread. To do that, he has to pay for flour, for the oven, and most importantly, he pays wages to his workers. Say's Law says that the money he pays out in costs and wages is the exact amount of money that now exists in the economy to buy those hundred loaves. The very act of producing something creates the income to buy it. The system is a perfect, closed loop. It can't fail. Lewis: That sounds… a little too perfect. Like a cartoon law of physics. What’s the catch? Joe: The catch is human beings! The theory assumes that people spend all the money they get. But Keynes, looking around at the Great Depression, saw the flaw. What if the baker pays his workers, but the workers are scared? What if, instead of buying bread, they take their wages and stuff them under a mattress because they're afraid of getting fired tomorrow? Lewis: Then the baker is left with a pile of unsold bread. Joe: Exactly. And the next day, he doesn't bake a hundred loaves. He bakes fifty. He lays off half his workers. Those laid-off workers now have no income, so they can't buy anything. And the cycle spirals downwards. That, Keynes said, was the Great Depression in a nutshell. It wasn't a failure of production. It was a failure of what he called "effective demand." Lewis: Effective demand just means… total spending? People buying stuff? Joe: Precisely. It's the total spending in the economy. And if that level of spending is too low, the economy doesn't magically fix itself. It can get stuck in a terrible equilibrium, with idle factories and millions of people willing to work but with no jobs to be had. Lewis: Wait, so what did the classical economists think was happening? If millions were jobless, what was their explanation? Joe: This is the truly brutal part. Their theory only allowed for two types of unemployment. 'Frictional,' meaning you're just between jobs, or 'voluntary,' meaning you're choosing not to work because the wage offered is too low. Lewis: Hold on. They thought the millions of people in breadlines during the Great Depression were… voluntarily unemployed? That they were just being picky about wages? Joe: That was the logical conclusion of their own theory. They believed that if wages just fell far enough, businesses would eventually find it profitable to hire everyone back. So, if people were unemployed, it was because they, collectively, were refusing to accept a pay cut. Lewis: That’s not just wrong, that’s a deeply cruel explanation. It’s blaming the victim on a massive scale. Joe: And that's exactly what Keynes was fighting against. He called it a "misleading and disastrous" teaching. He was the detective at the crime scene of the Depression, and while everyone else was blaming the corpse for its own demise, Keynes pointed the finger at a systemic failure. The elegant, self-correcting machine of classical economics was, in fact, a myth.

Lewis: Okay, so the machine is broken. The culprit is a lack of spending, or 'effective demand'. But that just raises the next question: why do people just… stop spending? Why does investment dry up? It seems completely irrational to let the whole system collapse. Joe: Ah, but that's the genius of Keynes's next move. He says, you're right. It is irrational. And that's the point. The classical model was built on the idea of a rational economic man, someone who makes decisions based on careful calculation of costs and benefits. Lewis: The spreadsheet guy. Joe: The ultimate spreadsheet guy. But Keynes argued that the most important economic decisions, especially about long-term investment, are made in a fog of deep, unshakeable uncertainty. You can't calculate the future. So what do you do? You run on gut instinct. You run on what he famously called "animal spirits." Lewis: 'Animal spirits'? That sounds more like something from a self-help retreat than an economics textbook. Isn't that just a fancy way of saying 'vibes'? Joe: It's a bit more than vibes, but you're on the right track! It’s the spontaneous urge to action rather than inaction. It's the optimism that makes an entrepreneur build a factory without any certain knowledge that people will buy her products in ten years. It's hope, it's confidence, it's the raw psychological energy that drives investment. And crucially, it can vanish in an instant. Lewis: So the boom is when everyone's feeling good and the bust is when the collective mood sours. Joe: Precisely. And Keynes had a brilliant analogy for how this works in financial markets. He compared it to a newspaper beauty contest from his time. Lewis: A newspaper beauty contest? Okay, you have to explain this. Joe: The contest would print a hundred photographs of faces, and the readers had to pick the six prettiest. The winner wasn't the person who picked the faces they thought were prettiest. The winner was the person whose picks most closely matched the average preference of all the other competitors. Lewis: Whoa. Okay. So you're not trying to be right. You're trying to guess what everyone else thinks is right. Joe: And it gets deeper! A clever competitor realizes that everyone else is also playing this game. So he's not trying to guess what the average person thinks is pretty. He's trying to guess what the average person thinks the average person thinks is pretty. It's a game of anticipating mass psychology. Lewis: That's the stock market. That's crypto. It’s not about the fundamentals of the company or the technology. It's about guessing what the herd is going to do next week, or even next hour. Joe: You've nailed it. And this leads to the other side of the psychological coin: the "fetish of liquidity." When those animal spirits falter, when panic sets in, what does everyone want? Lewis: Cash. They want out of the game. Joe: They want the safest, most flexible asset there is: money. They'd rather earn zero percent on cash in the bank than risk losing their capital in a falling market. This is what Keynes called 'liquidity preference'. It’s a flight to safety. But when everyone does it at once, the result is catastrophic. Lewis: Because if everyone is hoarding cash, no one is investing. And if no one is investing, the whole system you described earlier grinds to a halt. The engine jams. Joe: The engine jams. The animal spirits are dead, and the desire for liquidity strangles the economy. And Keynes's point was that there is absolutely no reason to believe the system can restart itself from that state. The fear becomes a self-fulfilling prophecy.

Lewis: So if you can't just wait for the 'animal spirits' to feel better on their own, what was Keynes's solution? What un-jams the engine? Joe: This is where he becomes truly radical and where his ideas have been debated for almost a century. He argued that if the private sector, driven by its volatile psychology, is unwilling or unable to invest, then the state must step in. Lewis: And this is where people start screaming 'socialism,' right? The government takes over? Joe: That's the common criticism, but it's a misunderstanding of his view. Keynes was a firm believer in capitalism and individual initiative. He didn't want the government to own the factories or the businesses. He just believed the state had a responsibility to act as a balance wheel. It should manage the overall volume of investment in the economy. Lewis: How? By doing what? Joe: Through public works. Building roads, bridges, dams, schools. During a slump, the government should borrow money and spend it on these projects. The point isn't even whether the projects themselves are immediately profitable. The point is to inject spending into the economy, to pay wages to workers who will then go out and spend that money, creating demand and coaxing the private sector back to life. The government acts as the conductor, getting the orchestra playing again. Lewis: So it’s a jump-start. The government provides the initial spark when the private sector's battery is dead. Joe: A perfect analogy. And this idea had a profound influence on the post-World War II world. The massive government spending of the war effectively proved his theory, wiping out unemployment. The welfare states and economic management policies of the mid-20th century were built on this Keynesian foundation. Lewis: But he took it even further, didn't he? I saw a wild phrase in the notes: 'the euthanasia of the rentier'. What on earth is that? Joe: That's him at his most provocative and philosophical. A 'rentier' is someone who lives off the interest from their wealth. They don't build things or take risks; they just own capital and lend it out. Keynes envisioned a future where, through intelligent management, capital becomes so abundant that its price—the rate of interest—falls close to zero. Lewis: A world with no interest rates? Joe: Or very, very low ones. In such a world, the power of the rentier class would simply wither away. You could no longer get rich just by being rich. Wealth would come from genuine enterprise, from creating things, from taking risks—from those 'animal spirits'—not from passively lending out accumulated money. Lewis: Wow. 'Euthanasia of the rentier.' That's a heck of a phrase. He was basically saying the ultimate goal is a world where just having money doesn't automatically make you more money. Joe: Exactly. For Keynes, it was a deeply moral point. He saw the scarcity of capital, and the high interest rates it commanded, as a major source of inequality and economic instability. He believed we could create a more just and efficient form of capitalism, one that serves the whole community, not just the owners of capital. It was an incredibly bold and optimistic vision.

Joe: When you pull it all together, you see that Keynes's revolution wasn't just about government spending. It was a fundamental shift in how we see the economy—from a perfect, natural system governed by immutable laws, to a flawed, man-made one, driven by the messy, irrational, and often fearful parts of our own psychology. Lewis: He basically said the economy has feelings, and sometimes it gets depressed. And you can't just tell it to 'cheer up' or 'get over it'. You have to actively intervene, like a good therapist or, in his case, a government with a big infrastructure budget. Joe: That's a great way to put it. He put humanity back into the machine. He showed that the fate of millions shouldn't be left to the whims of market psychology or the cold logic of a theory that didn't match reality. He argued that we have the tools to build a better, more stable, and more just economic world. Lewis: It makes you wonder, in our own volatile times, with all our booms and busts, are we listening to the right economic story? Are we still trying to apply the old, comforting rules of a self-healing market to a world that Keynes showed us is anything but? Joe: It's a huge question, and one that's more relevant than ever. We'd love to hear what you think. Does our economy feel rational to you, or is it all 'animal spirits'? Let us know your thoughts on our socials. We're always curious to hear your take. Joe: This is Aibrary, signing off.