Keynes' line of reasoning, which he did not invent, but only helped to explain, is known as the see-saw theory of savings and investment. As a see-saw go up and down, savings goes up when investment goes down. The reverse is also true. In his polished examination of the see-saw theory, Keynes concluded that depression arises from a decline of investment on one side and an increased accumulation of savings on the other. However, depression is only temporary, for an abundant supply of savings reduces interest rates, leading to a higher rate of return to be gained from investment. Thus, prosperity returns.
Unfortunately, the see-saw theory has one shortcoming — its failure to explain a prolonged depression, such as the Great Depression of the 1930s. While interest rates declined during that period, no upswing of investment occurred. Recognizing this shortcoming, Keynes pondered the problem and published a revolutionary solution: The General Theory of Employment, Interest, and Money (1936). In it, he made the following pessimistic diagnosis of capitalism:
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There is nothing automatic in economic developments which will relieve a depression. An economy in depression can remain so indefinitely.
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Prosperity depends on savings being put to use. Otherwise, a descending spiral will result in depression.
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Investment cannot be counted on, as it depends on the expansion of production. The entrepreneur cannot be expected to increase production beyond demand for goods, so the capitalistic economy continuously lives in the shadow of collapse.
