Keynes’s First Claim: The Free Market’s Chronic State of Depression Is Caused by Too Much Saving and Not Enough Consumption and/or Investment

To Keynes, a state of high unemployment is a part of the normal conditions of a free market. He claims, “the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence.” He also says, “it [the economic system] seems capable of remaining in a chronic condition of sub-normal activity for a considerable period.” To understand what Keynes means by a “condition of sub-normal activity,” one must keep in mind that he wrote The General Theory when economies were still recovering from the Great Depression and he was referring to an economy that was in a state of depression.

This chronic state of “sub-normal activity,” according to Keynes, is caused by too much saving and not enough consumption and/or investment. In Keynes’s words, “If the propensity to consume and the rate of new investment result in a deficient effective demand, the actual level of employment will fall short of the supply of labour potentially available.” . . . 

The problem of too much saving and the chronic state of depression is especially true for a wealthy society, according to Keynes. He states:

The richer the community, the wider will tend to be the gap between its actual and its potential production. . . . [A] poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment.

—Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 18-19.