Assigned reading "Introduction by PAUL KRUGMAN to 'The General Theory of Employment, Interest and Money' by JOHN MAYNARD KEYNES".
"I find it helpful to describe it as a meal that begins with a delectable appetizer and ends with a delightful dessert, but whose main course consists of rather tough meat" [KRUGMAN on "The General Theory"]
We are all Keynesians.
KEYNES was writing during the 1930's when America was going through a "deflationary gap", of which there was more goods than money. Resources appeared to be limitless which led to advancements in mechanised agriculture. With new invention came new investment. "The Money Effect" - Money has the power to affect human behaviour.
His Economic Philosophy was that 'money matters'. The economy should remain in a stable state of "Equilibrium" whereby the amount of money should match the amount of goods. In the event of a recession, for example, the economy goes through a process of "Disequilibrium" A products value increases as the money supply pumped into the economy decreases. This leads to negative economic growth.
"The General Theory" (1936) Written during a time of mass unemployment and a response to a global economic crisis. "The composition of this book has been for the author a long struggle of escape, and so must the reading of it be" [KEYNES] His aim was to save Capitalism. He was ANTI-MARXIST and with the alleged failure of Capitalism people began to turn to Socialism. "The God that failed". Idea that we need to change parts not the whole.
KEYNES Economic Policy. Need to fix "barter economy". Economy suffers from lack of demand. To solve this, banks need to reduce interest rates by increasing the money supply. A fall in wages will, in turn, increase employment. "Say's Law" [JEAN-BAPTISTE SAY] The law of the market. Idea that supply creates demand.
KEYNES Manifesto. Describes the relationship between wages and employment. "Static Model" - Economy is stuck in Depression; a permanent state of "Disequilibrium". This kind of economic slump is necessary after a boom with the efficiency of capital that determines the rate of investment. Employment is determined when both are equal. "Equilibrium Employment".
KEYNES Monetary Policy. Macroeconomics. The shift in money supply [JOHN HICKS, 1904-1989]. Free Trade no longer serves a social function, but is necessary with failure of demand. "Economic Stabilization" Change in quantity of money affects rate of interest.
Figure 1. [Courtesy of KRUGMAN, PAUL] Shows the rate of interest in the U.S between 1920-2002. KEYNES was writing at lowest point on the diagram. With a dramatic dip in the economy, bank's decided to drive down interest rate to increase demand. However, the level of investment was insufficient to maintain the economy. People began to question KEYNES monetary policy as an increase in money supply would do nothing to stimulate economy. As the amount of capital increases, its efficiency and value decreases. "Euthanasia of the Rentier".
With World War II came new inventions and new investment. ADAM SMITH (1723-1790) and "The Wealth of Nations" described a self-regulating system, whereby the individual "is led by an invisible hand to promote an end which was no part of his intention".
KEYNES theories were a bust, but are still seen today as a valuable solution to the problems of an economic slump.
No comments:
Post a Comment