The Role and Importance of Liquidity Preference, Marginal Efficiency of Capital, and Marginal Propensity to Consume in Keynes’s General Theory

Abstract

This article builds an understanding of Keynes’ General Theory as an advancement upon the Classical theory of economics with the introduction of new postulates including analysis of the propensity to consume, marginal efficiency of capital and the concept of the rate of interest. Based upon Keynesian General Theory, the key concepts, and variables of Liquidity Preference, Marginal Efficiency of Capital, and Marginal Propensity to Consume are familiarized and elaborated in terms of their role and importance in theory. Different references have been cited to support the interpretations as originally presented in Keynes’s General Theory. Literature has widely discussed the vital postulates of Keynes on the principle of effective demand, the consumption function, multiplier and interest rate, interest rate and investment. These postulates take account of the subjected variables and elaborate on the importance of these in Keynes General theory and models. Furthermore, the criticism of General theory is discussed, and conclusions are drawn at the end of the article.