SpringerBriefs in Economics Development Bank of Japan Research Series Series Editor Keimei Kaizuka Ministry of Finance, Policy Research Institute, Chiyoda-ku, Tokyo, Japan This series is characterized by the close academic cohesion of financial economics, environmental economics, and accounting, which are the three major fields of research of the Research Institute of Capital Formation (RICF) at the Development Bank of Japan (DBJ) Readers can acquaint themselves with how a financial intermediary efficiently restructuring firms in financial distress, can contribute to economic development The aforementioned three research fields are closely connected with one another in the following ways DBJ has already developed several corporation-rating methods, including the environmental rating by which DBJ decides whether or not to make concessions to the candidate firm To evaluate the relevance of this rating, research, which deploys not only financial economics but also environmental economics, is necessary The accounting section intensively studies the structure of IFRS and Integrated Reporting to predict their effects on Japanese corporate governance Although the discipline of accounting is usually isolated from financial economics, structural and reliable prediction is never achieved without sufficient and integrated knowledge in both fields Finally, the environmental economics section is linked to the accounting section in the following manner To establish green accounting (environmental accounting), it is indispensable to explore what the crucial factors for the preservation of environment (e.g emission control) are RICF is wellequipped to address the acute necessity for discourse among researchers who belong to these three different fields More information about this series at http://www.springer.com/series/13542 Masayuki Otaki Keynes’s General Theory Reconsidered in the Context of the Japanese Economy Masayuki Otaki Institute of Social Sciences, The University of Tokyo, Tokyo, Japan Research Institute of Capital Formation, Development Bank of Japan, Tokyo, Japan ISSN 2191-5504 e-ISSN 2191-5512 ISBN 978-4-431-55913-9 e-ISBN 978-4-431-55915-3 DOI 10.1007/978-4-431-55915-3 Library of Congress Control Number: 2016936441 © Development Bank of Japan 2016 This work is subject to copyright All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made Printed on acid-free paper This Springer imprint is published by Springer Nature The registered company is Springer Japan KK Foreword I am extremely pleased to announce that the Research Institute of Capital Formation of Development Bank of Japan Inc (DBJ) hereby starts a new booklet series on economic affairs Japan has been suffering through longtime economic sluggishness since the collapse of the bubble economy in the early 1990s As is often mentioned, Japan has had one or two “lost decades,” marked by a lack of satisfactory growth There have been several reasons And many measures for restoration have been implemented, including economic structural reforms, but it seems that the country has yet to find an effective solution Despite the lack of success, however, I think it can be useful to derive lessons from this period of unprecedented economic events I believe that Japan has produced too little lively debate and too few valuable studies about its difficult experiences It is my hope that this new booklet series will address these deficits and thereby benefit society not only in Japan but also in other economies facing similar challenges The first director of our research institute, founded in 1964, was Dr Osamu Shimomura, an economist famous for having elaborated in 1960 the Ikeda Cabinet’s “Income Doubling Plan” for rapid economic growth after the Second World War In the early 1970s, prompted by oil shock impacts on the Japanese economy, Dr Shimomura in turn developed the “zero economic growth” theory, having foreseen the slowdown Our institute inherits his spirit and method for research, based on prudent analysis of daily events and long-range foresight Our research, long centered on private company capital formation and social infrastructure, has in recent years expanded to include general corporate behavior and governance, corporate value, regional development, and environmental issues We frequently collaborate with outside professional researchers, tapping, for example, our longstanding strong relationships with the academic community Another resource is DBJ’s enormous base of long-term finance customers who play vital capital investment roles in the economy These companies have provided not only ideas and other seeds for our research but often even solutions to the issues identified in that research In line with our institute’s motto of “liberal communication,” this new booklet series will be built on an integration of our myriad resources, including those mentioned above, with the aim of providing you an access to the fruits of our research as well as other intellectually stimulating content Masaaki Komiya (The Research Institute of Capital Formation of Development Bank of Japan Inc.) Preface In this book, I reconsider Keynes’s The General Theory of Employment, Interest and Money ( The General Theory ) from the perspective of modern microeconomic dynamics It comprises two parts: (i) the reconsideration of The General Theory and (ii) the applications of the extended theory derived from such reconsideration to the current Japanese economy There are two prominent issues in Part I, which deals with the reconsideration The first is that I clarify that Keynes has surely succeeded in proving the existence of involuntary unemployment without an ad hoc price rigidity assumption by using the method of comparative statics although the way in which the nominal wage is determined remains an open question Namely, Keynes shows that there are some involuntarily unemployed workers for any given nominal wage to the extent that effective demand is insufficient The second issue asserts the inseparability of effective demand and liquidity preference theories I shall show that unless the flow aspect of an economy (the effective demand theory) depends on the stock aspect (the liquidity preference theory), Say’s law is upheld To the extent that any firm maximizes its market value, this implies that industries overall are only surrogates for the savings of individuals Accordingly, capital investment is always equal to the saving In order to the sustain Keynes’s theory, the existence of an alternative investment opportunity other than capita, namely money is essential Part II explores the theoretical relationship between Japanese radical quantitative easing (QE) monetary policy and prolonged stagnation As will be discussed in Part I, since the flow and stock aspects of an economy are inseparable, a change in the nominal money supply immediately affects the equilibrium condition of the fund market (or equivalently, the aggregated goods market) The real rate of return for money should be increased against that of real capital to equilibrate the fund market whenever money is rapidly injected into the economy by a radical QE monetary policy As such, a radical QE monetary policy advances disinflation/deflation although such consequences seem to be unpredictable for the monetary authority Moreover, the heightened rate of return for money raises the opportunity cost of capital investment Accordingly, a radical QE monetary policy possibly slows down the economy Contents Part I Reconsideration of The General Theory Analyzing the Structure of The General Theory References Analyzing Book I of The General Theory 2.1 Introduction 2.2 Involuntary Unemployment and the Stability of Society 2.3 The Existence Proof of Involuntary Unemployment References Analyzing Book II of The General Theory 3.1 Introduction 3.2 The Conundrum in the Aggregation Problem of Prices and Quantities 3.3 Some Definitions 3.3.1 Definition of forced saving Appendix 1: A Solvable Case of the Aggregation Problem Regarding Total Employment Reference Analyzing Book III of The General Theory 4.1 Introduction 4.2 The Propensity to Consume References Analyzing Book IV of The General Theory 5.1 Introduction 5.2 Investment Function and Stock Market 5.3 Liquidity Preference and the Theory of Interest Appendix 2: The Derivation of the Formula of the Marginal Efficiency of Investment References Analyzing Book V of The General Theory 6.1 Introduction 6.2 Effects of Change in the Nominal Wage 6.3 The Employment Function 6.4 Liquidity and the Stable Nominal Wage References Analyzing Book VI of The General Theory 7.1 Introduction 7.2 Keynes’s View of the Business Cycle 7.3 The Obituary to Keynes’s Predecessors 7.4 Some Philosophical Notes References Concluding Remarks of Part I 8.1 The Misunderstanding of Keynes and His Conscience as a Liberalist Reference Part II Developing a New Collective Intelligence from The General Theory Developing a New Collective Intelligence from The General Theory 9.1 Introduction 9.2 Exorbitant Accumulation of Public Debt and Economic Growth 9.2.1 The Nature of Public Debt and Taxation 9.2.2 Adjustment Cost and Investment Function 9.2.3 Market Equilibrium 9.2.4 Economic Policy and Its Long-Run Implication: Exorbitant Expansionary Monetary Policy Suppresses the Potentiality of an Economy References 10 Concluding Remarks of Part II Index About the Author Masayuki Otaki is a Professor of Economics at the Institute of Social Sciences at the University of Tokyo; and Academic Advisor of the Research Institute of Capital Formation, Development Bank of Japan His main areas of research are macroeconomic theory, environmental economics, educational economics, and economic thought Born in 1957, Prof Otaki received a Bachelor’s degree in Economics at the University of Tokyo in 1981 and a Ph.D in Economics at the University of Tokyo in 1990 He was appointed Professor of Economics at the Institute of Social Sciences in the University of Tokyo in 2001 the marginal cost, which is the real wage The equation below tells us that the marginal cost for investment becomes equal to the ratio of the profit rate to the rate of return for money In this sense the right-hand side of the equation below in Eq (9.6) is a kind of Tobin’s q Since w is the real reservation wage and an increasing function of the inflation rate , the profit rate, , becomes a decreasing function of Whether inflation stimulates investment or not depends on which of the two factors is effectual: inflation lowering the opportunity cost for investment or inflation heightening the real wage and depressing the rate of profit I assume that the former effect dominates the latter; and hence investment, , is an increasing function of In other words, I assume that Tobin’s q is an increasing function of the inflation rate Let this relation be denoted as where (9.7) is the scale-adjusted Tobin’s q which takes into account the effect of lowering the efficiency of investment along with the expansion of an economy, which is summarized by By using Eqs (9.6) and (9.7), one obtains the following investment function That is, (9.8) 9.2.3 Market Equilibrium When the individual’s lifetime utility function is homothetic, and noting that the production function is linear homogenous, the aggregate goods market equilibrium condition is represented by (9.9) where s is the marginal propensity to saving and m denotes real money supply per unit of capital Equation (9.9) can be regarded as the implicit aggregate demand function As with Curve DD in Fig 9.2, such a curve becomes upward sloping for any arbitrarily given and m This is because of the following: when inflation is accelerated, it increases investment and suppresses saving Hence, via the multiplier effect, employment and income increases are associated with a rise in Fig 9.2 The short-run equilibrium The above equation in Eq (9.6) corresponds to the aggregate supply function When inflation advances, workers demand a higher real wage This is because they prepare for the consumption of more costly future goods Thus, the acceleration of inflation heightens the marginal cost of labor This depresses employment and lowers the labor-capital ratio , and result in a decrease in output Accordingly, the aggregate supply curve SS becomes downward sloping as in Fig 9.2 Short-run equilibrium is achieved at the intersection; Point However, an economy cannot remain the same at this point because capital accumulation varies capital stock level, , through time To analyze the dynamics of the transition of market equilibrium, let Eq (9.9) be combined with Eq (9.6) such as: (9.10) Solving Eq (9.10) on K, one obtains The locus of Eq (9.11) is illustrated by Curve the accumulation of capital ceases whenever (9.11) in Fig 9.3 In addition, from Eqs (9.5)–(9.7), (9.12) is satisfied This locus corresponds to Curve KK in Fig 9.3 On the right domain of Curve KK, capital disinvestment occurs because capital is too abundant for its opportunity cost Capital investment is not advanced until the existing stock is so scarce that an economy is located within the left domain of Curve KK The loci of Eqs (9.11) and (9.12) are upward sloping as illustrated in Fig 9.3 Elementary calculus shows that the slope of Eq (9.12) is steeper than that of Eq (9.11) Ultimately, along Curve , an economy will converge to stationary equilibrium, Point Fig 9.3 Adjustment process towards stationary equilibrium 9.2.4 Economic Policy and Its Long-Run Implication: Exorbitant Expansionary Monetary Policy Suppresses the Potentiality of an Economy In this subsection, I analyze the economic consequences of unintellectual aggregate-demand stimulating policies in a period of contraction such as when the investment adjustment function takes the shape presented in Eq (9.5) First, I consider the short-run effect of the expansionary policy in the sense that the change of capital stock associated with an increase in real money supply, m, can be neglected Real money supply is expanded via government expenditure financed by printing money or issuing new public debt Since one can regard public debt as a kind of money, the nominal value of which autonomously increases by the nominal rate of interest, under the prevalence of the zero-interest policy as in current Japan one can ignore the difference between public debt and money In order to describe the short-run effect of monetary expansion, it is convenient to make use of Fig 9.2 A monetary expansion makes Curve DD shift rightward as in Fig 9.4 Fig 9.4 Impact of monetary expansion (short-run) This is because to the extent that the inflation rate remains unchanged, the income and labor capital ratio is increased by the multiplier process Consequently, an economy moves from Point to As such, monetary expansion causes disinflation and/or deflation in exchange for the temporary upturn in business One should note that disinflation suppresses capital investment because it heightens the opportunity cost for investment, or equivalently raises the rate of return of the alternative asset: money Otaki (2015b) calls such a damaging effect of expansionary monetary policy asset crowding out Thus, we obtain: Proposition 9.3 Let the term short run be defined by the interval during which a change in capital stock can be neglected In the short run, expansionary monetary policy discourages investment because such a policy heightens the rate of return for money (i.e., the opportunity cost for investment) while employment and income increases Next, I would like to analyze the long-run effect of expansionary monetary policy (i.e., the dynamics of an economy) This time, Fig 9.5 is of use The downward shift of Curve toward is followed by an increase in the real cash balance as in Fig 9.5 Fig 9.5 Impact of monetary expansion (long-run) Assume that an economy is located at stationary equilibrium, At the beginning, the location of an economy changes from Point to This corresponds to the short-run effect as previously discussed One should note that Point is located at the right of Curve KK This implies that the economy holds excessive capital judging from the prevalent inflation rate Accordingly, capital investment is suppressed further In addition, the acceleration of disinvestment lowers aggregate demand Income, which initially increases because of the expansionary monetary policy, gradually decreases via the multiplier processes, and the labor-capital ratio steadily increases One should note that such a process is cumulative: the increased labor-capital ratio, which refers to the sag of the real wage, provokes further disinflation; thus, disinvestment continues This process does not stop until the return of the existing capital stock meets the inflation rate Thus, the economy goes forward with a new stationary equilibrium, Point , along the Curve To summarize: Proposition 9.4 Let the term long run be defined by the sufficiently long interval during which the economy enlarged through the expansionary monetary policy and reaches a new stationary equilibrium where no new investment/disinvestment exists In the long run, the capital stock level becomes smaller compared with the short run because of the incessant advance in disinflation/deflation prompted by the expansionary monetary policy In this sense, the expansionary monetary policy during the period of contraction, as symbolized by Eq (2.5), suppresses the potential production capacity of an economy In addition, whether or not such a policy ultimately stimulates effective demand is questionable On the one hand, the increased government expenditure surely stimulates an economy On the other hand, however, disinflation/deflation thwarts capital investment and raises the marginal propensity to saving Hence, the total effect to effective demand is ambiguous Moreover, one cannot ignore that an economy, which faces technological constraint such as presented in Eq (9.5), cannot achieve autonomous and sustainable growth because it is evident that capital stock remains constant in any stationary state By integrating Propositions 2.3 and 2.4, we realize that the ceaseless and incessant enlargement of government expenditure is unavoidable if one wishes for economic growth to make the economy diverge from stationary equilibrium Such an unwise attempt damagingly provokes a significant accumulation of nominal assets (i.e money and public debt) Accordingly: Proposition 9.5 To boost and maintain economic growth to some extent, by using the properties of short-run and long-run equilibrium, an exponential enlargement of nominal assets is inevitable Nevertheless, as Propositions 9.1 and 9.2 show, such growth is unsustainable in the sense that it ultimately results in zero-growth and a capital shortage significantly impairs the well-being of their descendants Proposition 9.5 suggests how new collective intelligence is required and important in the present economy The conventional wisdom of liquidity preference that an increase in money supply induces a fall in the rate of return for money is hardly tenable in the present economic condition where such a rate of return is on the rise despite radical QE monetary policies As discussed in Sect 5.3, if the concept of liquidity is defined by confidence in the rate of return for money, one should note that such confidence is profoundly related to the risk incurred by hoarding money in terms of goods What the liquidity preference theory overlooks is that the value of money ultimately originates from the stability of its role in the transaction medium The liquidity preference theory is basically a portfolio choice theory, which almost neglects the vital role of money as a transaction medium In this regard, The General Theory (1936) has a crucial ambiguity at the point how flow variables such as saving and investment relate to stock variables such as money supply If one recognizes that the supply of money by individuals and firms is followed by consumption or investment, at least some part of the total money stock consists of aggregate demand Actually, when we consider a two-period overlapping-generations model , as in Sect 5.3, all money stock is directed toward consumption This is because the only money holder is the older generation, which does not possess a heritance motive Thus, flow variables are not separable from stock variables as The General Theory implicitly assumes; namely, the principle of effective demand describes the flow aspect of an economy and liquidity preference is related to the stock aspect According to Keynes’s description, both theories can be separately established Hicks-Samuelson’s IS/LM analysis typically stands on this assumption However, this analysis asserts that a monetary expansion always stimulates economic activities and an increase in business This traditional way of thought may plausible as a first-order approximation to the extent that the direct expenditure from hoarded money is negligibly small Nevertheless, whenever such expenditure becomes exorbitant, as in the present Japanese economy, no one can ignore such an effect to the economy As previously discussed, if one recognizes the inseparability between the decisions of flow and stock dimension, monetary expansion immediately implies an expansion in expenditure As such, as far as income remains in the same, the rate of return for money (the inverse of the inflation rate) increases and thus the opportunity cost of capital investment becomes more expensive Ultimately, capital investment is crowded out by monetary expansion.3 This can be regarded as belonging to a new collective intelligence For example, any new Keynesian model, which deploys the money in utility function (MIU) , is never able to explain the phenomenon of the coexistence of monetary expansion, disinflation and/or deflation, and suppressed capital accumulation This is entirely because money ultimately becomes neutral at least in the long run whenever one adopts the assumption of MIU If one eliminates the negligible lag structure with stochastic perturbation because of the existence of menu cost and/or staggered economic decisions, which are not essential elements for the important properties of a new Keynesian model, one will surely find that a new Keynesian is also a captive of the quantity theory of money, which alleges a positive correlation between the nominal money stock and the price level.4 Our new collective intelligence , which is entirely separate from the baseless thesis of the quantity theory of money, is summarized as follows: the expansion of money stock, at least partly increases aggregate spending, ceteris paribus If such an effect is not small, disinflation/deflation follows monetary expansion Accordingly, this retards capital investment and suppresses potential production capacity in the long run What is important in this collective intelligence is that there is also an interest rate of money For example, in Chap 17 of The General Theory, Keynes demonstrates that there is an interest rate for wheat References Gali, J (2008) Monetary policy, inflation, and the business cycle: An introduction to the New Keynesian framework Princeton: Princeton University Press Keynes, J M (1936) The general theory of employment, interest and money London: Macmillan Lerner, A P (1944) The economics of control: The principle of welfare economics London: Macmillan Otaki, M (2015a) Keynesian economics and price theory: Re-orientation of a theory of monetary economy Tokyo: Springer Japan [CrossRef] Otaki, M (2015b) The origin of the prolonged economic stagnation in contemporary Japan: The factitious deflation and meltdown of the Japanese firm as an entity London: Routledge Ricardo, D (1817) On the principles of the political economy and taxation London: John Murray In P Sraffa & M H Dobb (Eds.), Reprinted in the works and correspondence of David Ricardo, 2005 Indianapolis: Liberty Fund Uzawa, H (1969) Time preference and Penrose effect in a two-class model of economic growth Journal of Political Economy, 77, 628–652 [CrossRef] Footnotes For more detail of the model, see Otaki (2015a: Chap 2) In this current book, I have shown that if there is no lower bound of hours worked per capita (i.e., there is no indivisibility in labor supply), full employment is always achieved regardless of the length of hours worked See Otaki (2015a: Chap 12) for more detail on the derivation of this formula See Otaki (2015a: Chap 12) for more detail on the derivation of this formula As indicated previously, Otaki (2015b) calls this phenomenon asset crowding out For a typical example of a new Keynesian model, see Gali (2008) © Development Bank of Japan 2016 Masayuki Otaki, Keynes’s General Theory Reconsidered in the Context of the Japanese Economy, SpringerBriefs in Economics, DOI 10.1007/978-4-431-55915-3_10 10 Concluding Remarks of Part II Masayuki Otaki1, (1) Institute of Social Sciences, The University of Tokyo, Tokyo, Japan (2) Research Institute of Capital Formation, Development Bank of Japan, Tokyo, Japan Masayuki Otaki Email: ohtaki@iss.u-tokyo.ac.jp Abstract This chapter comprises new theoretical findings induced from Part I and their applications to the current Japanese economy The most important finding is that the (net) supply of inside money is the opposite side of autonomous expenditure independent of aggregate income This means that, contrary to the existing Keynesian theory, the nominal money supply directly relates to aggregate demand That is, the liquidity preference theory and the principle of effective demand are inseparable Such a finding helps to explain the current stagnation in Japan despite the radical QE policy Keywords Collective intelligence – Functions of money – No economic growth in the long run Part II has considered a collective intelligence derived from a reconsideration of The General Theory in Part I The most important issue, which the reconsideration has prompted, is the theoretical process of how to describe the functions of money: as a transaction medium and a store of value In The General Theory, the function of money as a transaction medium is treated with ambiguity Although spending money means the same amount of dissaving, and vice versa, such an effect is never taken into consideration in the principle of effective demand Keynes’s discussion is confined to the property of money as a store of value However, it is an undeniable fact that the two functions of money are inseparable Money as a store of value is dysfunctional unless every individual is confident that money will be exchangeable for any goods that one wishes to purchase at a reasonable price Thus, the demand for money is not unrelated to the consumption/saving decision At least some part of money becomes autonomous expenditure if there is no motive for bequest In addition, one should not forget that there is an interest rate not only in terms of money, which Keynes discussed in The General Theory, but in terms of goods; namely, the real rate of interest The interest rate for money in terms of goods is the inverse of the inflation rate If one is to capture a portfolio decision on the same dimension as a consumption/saving decision, which is rigorously justified in the case of a two-period overlapping-generations model, the opportunity cost for capital investment becomes this rate Thus, the difference between aggregate saving and capital investment is equal to the total stock of money as in Eq (5.9) Accordingly, whenever money stock increases, such a difference should be extended This implies that the rate of return for money rises or disinflation and/or deflation advances Contrary to conventional wisdom in Keynesian economics, easy money retards capital investment Consequently, the initial expansionary effect of government expenditure, which is financed by a new issuance of public debt, is almost canceled by this consecutive depressive effect Such an unsustainable growth strategy ultimately leaves a significant accumulated public debt, a capital equipment shortage, and a sagged real wage associated with lowered inflation rate or even deflation This represents a new collective intelligence induced from The General Theory in an era of contraction when capital investment has lost the self-augmenting power that originates from the linear homogeneity of the investment adjustment cost function In this sense, the most serious problem is inefficiency within organizations, such as firms and governments, which hinders stationary economic growth by incurring a disproportionately increasing cost for capital accumulation Since this problem belongs to the supply-side of an economy, there is a limit on the procurement of a vigorous economy through an aggregate demand managing policy Index A Adjustment cost function Aggregation problem Arendt Asset crowding out B Borrower’s risk Burden of the future generation Burke C Carr Collective intelligence Confidence Confident D Disutility of labor Diversity E Effective demand Employment multiplier F First postulate Forced saving Friedman, Milton Fundamental value G The General Theory Global warming Great Depression H Hawtrey Hobson Hume Hyperinflation I Impurely altruistic Incentive compatibility of workers Inflation rate Inside money Intrinsic value of money Inventory cycle Investment multiplier Involuntary unemployment J Jevons K Kahn Keynes L Labor market Lender’s risk Lerner Liquidity preference Liquidity preference theory Liquidity trap Long-term expectation Lucas M Malthus Marginal efficiency of capital Marginal efficiency of investment (MEI) Marginal propensity to consume Marshall Medium of exchange Menu costs Mercantilists Mill, John Stuart Money illusion Money in utility function (MIU) Monopolistic competition More, Thomas Multiplier process N Nested structure of a monetary economy New Keynesian O Otaki Overlapping-generations model P Paradox of saving Pigou The principle of effective demand Propensity to consume Public debt Q QE monetary policies QE policy R Ramsey Real cash balance Ricardo Robertson S Say’s law Second postulate Separation between ownership and management Short-term expectation Social democracy Social planning Socialism Socialization of investment Speculative bubbles Store of value (the speculative motive) T Tobin’s q Totalitarian countries Totalitarianism Transaction motive Trevelyan U User cost Uzawa ... presented in the final chapter I illustrate the structure of The General Theory in Fig 1.1 Fig 1.1 Structure of The General Theory It is clear that the first three books of The General Theory take the. .. Keynes’s General Theory Reconsidered in the Context of the Japanese Economy, SpringerBriefs in Economics, DOI 10.1007/978-4-431-55915-3_2 Analyzing Book I of The General Theory Masayuki Otaki1, (1) Institute... written’’ is The General Theory itself Chapter (The Principle of Effective Demand) of The General Theory concludes Keynes’s model by taking the conditions of the demand-side of the economy into consideration