Friday, 18 November 2011

Keynes - Raw Notes

The General Theory of Employment, Interest and Money - By John Maynard Keynes

Capitalism - "An economic and political system in which a country's trade and industry are controlled by private owners for profit".

Keynesian - Believe: A) Aggregate demand is influenced by a host of economic decisions
                                B) Changes in demand have their greatest short run effect on employment, not prices
                                C) Prices respond slowly to supply and demand
                                D) Unemployment is subject to demand

Interest - "A fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets".

The Great Depression - Keynes' solution: Reduce interest rates / Government investment in infrastructure


* British economist
* Considered one of the most influential economists of the 20th Century
*  1883 - 1946
* His father was also an economist, as well as a philosopher
* His greatest work (General Theory) published in 1936, became a benchmark for future economic thought

Keynes Message

* "Keyne's was no socialist - he came to save capitalism, not to bury it"
* Some of the theory was delivered in a witty style
* It was written during times of mass unemployment
* Keynes argued that the issue of unemployment could be solved with a narrow and technical solution
* He said that less intrusive government policies would mean the market economy could go on as before (It would ensure 'adequate effective demand')
* Some people have a clear reason to disagree with Keyne, who was saying that free markets and minimal government intervention was the way forward

Key points made within the General Theory:

1) Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment

2) The economy's automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully - Long term effects of demand fall are severe, but will fix

3) Government policies to increase demand, by contrast, can reduce unemployment quickly

4) Sometimes increasing the money supply wont be enough to persuade the private sector to spend more, and government spending must step into the breach.

[ "The general theory is a work of informed, disciplined radicalism" ]

The General Theory was written in an economy with interest rates already so low that there was little an increase in the money supply could do to push them lower.

Keynes and the Moderns

* John Hicks, 1937 review of Keynes- Hick's states the General Theory can be interpreted in two curves. The IS curve (shifted by tax / spending changes) and the LM curve (shifted by changes in money supply)
* Critics have issues with whether adding to the money supply is enough to restore full employment

Keynes' Legacy - Lost?

* Some economists feel we've lost the true Keynesian path
* They add that modern macroeconomic theory (which reduced Keynes to a static equilibrium model) is a betrayal of Keynesian thinking.
* One of Keynes strategic decisions, Paul Krugman states, is that he pushed the whole question of why investment rises and falls into the background

Krugman - "The bottom line is that really we are all Keynesians now" ( A large part of what modern macro economists do derives from the General Theory )


* Keynes mistook an episode for a trend
* 'Written in a decade where even a near-zero interest rate wasn't low enough to restore full employment'
* When the Bank of England and the Federal Reserve were unable to create employment despite raising money supply, Keynes assumed that the monetary environment of the 1930's would be the norm from then on.
* "He underestimated the ability of mature economics to stave off diminishing returns"
* Keynes failed to foresee a future of persistent inflation. Because of this, he was pessimistic about the future of monetary policy


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