Keynes on the Marginal Efficiency of Capital and the Great Depression

This paper argues that Keynes’s analysis of the marginal efficiency of capital is consistent with the principle of effective demand and is, in this sense, characteristically different from the related classical or neoclassical conceptualisations. Furthermore, the notion of the marginal efficiency of capital is used not only as an explanation of the short term fluctuations in the level of economic activity but also as an interpretation of more serious long term fluctuations such as that of the Great Depression. Finally, some of Keynes’s economic policy proposals are critically evaluated.