We have seen that if there is too low a level of demand in an economy, the result is unemployment: during the 1920s and 1930s there was too little demand in Britain, and the consequence was prolonged unemployment. But what happens if there is too much demand in an economy? What is the opposite of unemployment? Naturally enough, Keynes did not devote a great deal of the General Theory to this question, but nevertheless he did answer it quite clearly. What one means by saying that there is too much demand in the economy is, to put it rather loosely, that the economy is already going flat out, with full employment of men and machinery, so that output is at its highest possible level—and that there is then an increase in demand. This increase in demand cannot call forth more output. All it can do is one of two things; either it can pull up the price of the goods and services that are already being produced—the consequence of a larger amount of money being spent on the same amount of staff. Or, in an economy with trades with other countries, it can increase, the quantity of goods available—but only by sucking in more imports and diverting to the home market goods that otherwise have been exported. In practice, an excessive level of demand will probably result in some of each; there will be some rise in prices, and imports will be higher, and exports lower than they would otherwise have been.
Now anyone who has lived in post-war Britain in even moderate possession of his faculties will observe that there is something familiar about this: rising prices, too low a level of exports, too high a level of imports; surely these are at the heart of our post-war economic problems. If Keynes’s analysis showed us how to prevent unemployment by ensuring that there is enough demand in the economy, why has it not also shown us how to prevent rising prices and balance of payments crises by avoiding too much demand?