Uncertainty and Economic Instability in Keynes’s Theory

The central theme of John Maynard Keynes’s The General Theory of Employment, Interest and Money (henceforth, The General Theory) is that uncertainty governs economic activity. Because people lack the information needed to make informed decisions and pursue their best interests, they can only act in ways they believe will best serve them or fall back on convention. However, the conventions households rely on may lead to deficient or excessive demand for commodities. As businesses respond to demand deficiencies or excesses, production and employment may also become unstable. When demand is modestly deficient or excessive, contractions and expansions will be mild, as in the trade cycle. However, if demand is extremely deficient or excessive, contractions and expansions could be severe, as in the Great Depression and the 2008 Financial Crisis. This paper examines how uncertainty leads to the trade cycle in Keynes’s theory, while setting aside the more severe form of instability for another occasion.