The book is split into three parts, the Analytic Part, the Synthetic Part and the Theoretical Part. The Analytic Part begins with an excellent synopsis of earlier theories of comedy, joking and wit, followed by a meticulous psychological taxonomy of jokes based on such features as wordplay, brevity, and double meanings, richly illustrated with examples. This section ends with Freud's famous distinction about the "tendencies" of a joke, in which he attempts to separate those jokes that have tendencies towards hidden meanings or with a specific hidden or partly hidden purpose, from the "abstract" or "non-tendentious" jokes, which are completely innocuous. He struggles to provide any examples of the latter. In the midst of his first example, he suddenly admits that he begins "to doubt whether I am right in claiming that this is an un-tendentious joke"(89) and his next example is a joke that he claims is non-tendentious, but which he elsewhere studies quite intensely for its tendencies. Freud uses this to springboard into an exploration of how a joke involves an arrangement of people - a joketeller, an audience/listener, and a butt, often involving two (the jokester and the listener) against one, who is often a scapegoat. He describes how jokes may be sexual, "stripping" that person, and then turns towards how jokes package hostility or cynicism.

The synthetic part is an attempt to bring together the structure of the joke and the pleasurable tendencies of the joke. Why is it that jokes are pleasurable? Freud's answer is that there is a pleasure to be obtained from the saving of psychic energy: dangerous feelings of hostility, aggression, cynicism or sexuality are expressed, bypassing the internal and external censors, and thus enjoyed. He considers other possible sources of pleasure, including recognition, remembering, appreciating topicality, relief from tension, and the pleasures of nonsense and of play. Then, in a move that would either baffle his critics or is ignored by them, Freud turns to jokes as a "social process", recognizing that jokes may say more about social life at a particular time than about particular people; he turns this into an investigation of why people joke together, expanding on his economical psychic perspectives with discussions of social cohesion and social aggression.

In the third part, Freud connects his theories of joking with his dream theories in order to explain some of the more baffling aspects of joking (including how jokes seem to come from nowhere; how we usually get the joke so very quickly, even when it expresses very complicated social phenomena; and why we get a particular type of pleasure from an act of communication). He ends with an examination of some of these themes in other varieties of the comic, such as physical comedy and caricature.