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John Maynard Keynes and the Keynesian Revolution

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Title: John Maynard Keynes and the Keynesian Revolution


1
John Maynard Keynes and the Keynesian Revolution
2
  1. Background and Characteristic of John Maynnard
    Keynes
  2. Keynes Tract
  3. General Theory of Employment, Interest and Money
  4. Post Keynesians and Neu Keynesians

3
John Maynard Keynes (1883-1946)
  • Born in 1883 in Cambridge, England
  • Son of John Neville Keynes
  • Neville was a professor of Economics and Logic at
    Cambridge Univ., and wrote on Economic
    Methodology
  • Won a scholarship to Eton
  • Boy Genius
  • Won prizes for his work in the classics,
    mathematics, history, English essays
  • Wrote papers on contemporary social problems,
    participated in crew and debate, acted, read
    everything
  • Became an expert in medieval latin poetry
  • Part of Etons social elite
  • Won a scholarship to Kings College, Cambridge

4
Keynes at College
  • President of the Student Union
  • President of the University Liberal Club
  • Rowed, studied philosophy, played bridge, visited
    art galleries, collected rare books, went to the
    theatre
  • Became a member of the Apostles, a secret and
    highly exclusive Cambridge intellectual society
  • Became a member of the literary set called the
    Bloomsbury Group.

5
Keynes After College
  • Studied economics for perhaps 1 year, but did
    poorly on his exams.
  • Took a civil service exam and took a job at the
    India Office for 2 years.
  • 1908, his father managed to get him a job as a
    lecturer at Kings College. Later he became a
    Fellow.
  • 1911, he became editor of the Economic Journal.
  • Worked at the Treasury during WWI.
  • 1921, he published A Treatise on Probability.
    This was his dissertation. It won him a
    fellowship at Kings College, Cambridge.
  • Marries Lydia Lopokova.

6
Keynes, Inter-war Years
  • Keynes wrote the Economic Consequences of the
    Peace (1919), regarding reparation payments
  • Best Seller
  • Made him a public celebrity
  • 1923, Tract on Monetary Reform (against returning
    to the pre-war gold standard)
  • Economic Consequences of Mr Churchill (1925,
    warned of depression)
  • 1930, Treatise On Money
  • Makes millions in the stock market, commodity,
    and forex markets.
  • 1936, General Theory of Employment, Interest and
    Money
  • 1937, he has a serious heart attack

7
John Maynard Keynes (1883-1946)
  • Keynes lived as if he had more than 24 hours per
    day.
  • Keynes kept himself busy with a variety of jobs
    and tasks.
  • Keynes had a golden touch as an investor and
    raised money for himself and various causes.
  • He wrote and edited economic articles and books.
  • He was a great teacher.
  • Overall, he was extraordinary person.

8
  • World War I was followed by sense of economic
    stagnation and istability.
  • Keynes perceived that the economy, the world, and
    especially the capitalist institutions were
    breaking down.

9
He believed that in the very long run, economic
progress would endure.
  • Keynes believed the economy would grow at two
    percent annually.
  • He concluded that, barring wars, the economic
    problem would be solved within one hundred years.
  • Although he believed that the short-run outlook
    was terrible, he was confident that things would
    improve in the long run.

10
Keynes Tract
  • Relates money supply variability and uncertainty
    to inflation and deflation.
  • Variability of prices is a major cause of
    business cycles.
  • Wages and other costs of production adjust more
    slowly than prices.
  • Therefore price variability affects profits and
    therefore investment.
  • Investment cycles cause business cycles.

11
General Theory of Employment, Interest and Money
  • The main his book is the General Theory of
    Employment, Interest, and Money.

12
The General Theory
I believe myself to be writing a book on
economic theory which will largely
revolutionizenot, I suppose, at once but in
the course of the next ten years the way the
world thinks about economic problems. --
John Maynard Keynes
13
Comment by Paul Samuelson
It is a badly written book, poorly organized
any layman who, beguiled by the authors previous
reputation, bought the book was cheated of his 5
shillings. It is not well suited for classroom
use. It is arrogant, bad-tempered, polemical, and
not overly-generous in its acknowledgements... In
it the Keynesian system stands out indistinctly,
as if the author were hardly aware of its
existence or cognizant of its properties and
certainly he is at his worst when expounding on
its relations to its predecessors. Flashes of
insight and intuition intersperse tedious
algebra. An awkward definition gives way to an
unforgettable cadenza. When it is finally
mastered, we find its analysis to be obvious and
at the same time new. In short, it is the work of
genius.
14
The General Theory
  • If the consumer is an economic optimizer, he/she
    must be unable to buy the goods they planned to
    buy because of some kind of constraintrisk,
    convention, social institutions, cash, or ...?
  • According to the classical model, the consumer
    has insatiable wants.
  • The consumer sells his/her labor in exchange for
    enough income to buy the goods.
  • The money value of the incomes received must be
    equal to the value of the output produced.
  • So how can unsold goods pile up in warehouses,
    causing firms to lay off workers?

15
The General Theory (2)
  • Says Law cannot hold. (Supply creates its own
    demand.)
  • If spending constraints are in effect, then there
    will be a difference between (unlimited) demand
    and effective demand.
  • Actual (effective) demand will usually be
    deficient to purchase total output.

16
The General Theory (3)
  • Microeconomics and macroeconomics do not operate
    on the same basis. One cannot assume that what is
    true for the economic agent at the level of the
    individual consumer or firm is true in aggregate.
    This amounts to the fallacy of composition.
  • In microeconomics, relative price effects
    dominate. This is not true in macroeconomics. In
    macroeconomics, income effects dominate, making
    income more important in determining aggregate
    economic behavior.

17
The General Theory (4)
  • Therefore, consumption depends primarily upon
    income, not interest rates.
  • C ? C(r), but rather C C(Y)
  • People dont change their standard of living
    simply because the interest rate changes a few
    points.

18
The General Theory (5)
  • Saving occurs as the result of a habit,
    convention, or social norm. People on average set
    aside a certain percentage of their income.
    Saving is not a function of interest rates.
  • S ? S(r), but rather S S(Y)
  • Investment is related to interest rates, but also
    to businesspeoples expectations for the future.
  • That is, I I(r,E).

19
The General Theory (6)
  • If S S(Y) and I I(r,E), then there is no
    coordinating variable to bring supply and demand
    together in the loanable funds (capital) market.
  • There is no reason to assume that supply equals
    demand in this market.
  • There is no reason to believe that there will be
    adequate funds available to provide adequate
    investment demand.
  • Since AD C I G NX, if investment demand
    is deficient, then AD lt AS, and inventories may
    pile up, with unemployment a natural outcome.
  • Without the coordinating variable, this will be
    the normal outcome, with AD AS only happening
    accidentally.

20
The General Theory (7)
  1. Investment is a large and long-term commitment,
    and is based on weakly supported expectations
    about the future. This makes investment very
    different from consumption. Investment decisions
    will be erratic and emotional, and the risks
    associated with investment are very high. As a
    result, business decision makers will tend to
    under-invest, further worsening the problem of
    deficient investment.

21
The General Theory (8)
  1. It may be a natural outcome of the organization
    and institutions of modern economies that prices
    and wages may not be fully flexible. This would
    result in markets (like the labor and goods
    markets) being unable to clear, leading to
    unemployment and aggregate supply exceeding
    demand.

22
The General Theory (9)
  • Money plays a key role in the economy. The use of
    money leads to uncertainty, and makes piercing
    the veil impossible. A money economy is
    fundamentally different from a barter economy.
    The classical dichotomy cannot hold.
  • Interest rates are established in the money
    market.
  • People may rationally hoard money, holding money
    for purposes other then making transactions.
  • Equilibrium is not AD AS. It is a state that
    persists.

23
  • Economists balanced these contrary issues.
  • In the long run, innovation grew the economy, but
    in the short run there was a grinding of gears.
  • Keynes believed that we need to be concerned
    about the processes and the immediate
    difficulties.

24
  • Keynes ideas are open to some criticism.
  • All economic problems are not solved today, as
    Keynes had predicted.
  • Growth does not actually look after itself, as
    Keynes had thought.

25
General Theory of Employment, Interest and Money
  • Keynes attempted to explain the reasons for the
    Great Depression.
  • Keynes distinguished between the decision to save
    and the decision to invest.
  • In practice Keynes thought people generally saved
    the same amount regardless of interest rates.
  • Yet he also thought that business investment
    fluctuated greatly depending on the interest
    rates.
  • Therefore savings and investment would be out of
    sync.

26
Keynes criticized stock market investors and the
disease of speculation.
  • He thought that stock market investing was merely
    a game, based on anticipation rather than on
    logic or sense.
  • He proposed a tax on speculation to slow it
    down.

27
Keynes found that a lack of effective demand
caused economic problems.
  • He believed that when savings increased and
    investment was discouraged, buying power, and in
    turn production, would decrease, causing a
    vicious circle to develop.
  • He found that as an economy became richer, people
    saved their money, which also slowed down the
    economy.

28
Keynes felt that businesses had two choices when
demand fell.
  • He believed that business could respond to the
    lack of demand by cutting wages or laying off
    workers.
  • He argued it was easier for workers to accept a
    rise in inflation than a personal cut in pay.

29
Keynes defendad the governments ability to pump
up demand.
  • He wonted the government to inject money into the
    economy.
  • He encouraged the government to do something
    other than watch the economy sink into a
    depression.

30
  • Keynes altered economic thinking.
  • He referred to his predecessors and used their
    work.
  • He acknowledged Mandeville, the mercantilists,
    and Malthus.
  • Keynes was not wholly orginal in his ideas.
  • Keynes moved from one equilibrium to another
    equilibrium.

31
Keynes highlighted the negative aspects of saving.
  • He showed the effects of too much saving.
  • He showed the effects of too much savings on the
    government deficit.
  • He thought that the government needed to
    encourage demand in the economy.

32
Keynes brought macroeconomic analysis to the fore.
  • Macroeconomics did not exist pior to the 1930s.
  • Keynes focused on the overall system and the
    aggregate demand in the economy.

33
Keynes conceived the idea that goverment had the
responsibility and power to manege the economy.
  • Due to Keynes, we hold the president accountable
    for the economy.
  • His analysis focused on solving current economic
    problems.
  • He understood both the policies and the theories
    of economics.

34
Keynes developed a philosophy of correctable
capitalism.
  • Keynes thought that capitalism could coexist with
    some forms of government intervention.
  • He defended capitalism, but he believed that at
    times the government must monitor the overall
    economic weather.

35
Keynes inspired numerous groups of modern
economic followers.
  • The Old Keynesians believed that goverment should
    ensure a certain level of aggregate demand, low
    interest rates, and abundant credit.
  • The Post Keynesians argued that the economy was
    full of monopolistic tendencies. They fevored
    wage and price control.
  • The New Keynesians focused on wages, process,
    and problems of information.

36
Post Keynesians
  • Sraffa, Robinson, Pasinetti, Weintraub, Davidson
  • Neo-Ricardian view of production, value, and
    distribution
  • Oligopolistic corporations. markup pricing
  • Endogenous money
  • Cyclical instability
  • Incomes policy
  • Class struggle for income shares, markup pricing
    necessitate a permanent incomes policy

37
New Keynesians
  • Fischer, Taylor, Howitt, and many others
  • Rational expectations, general equilibrium,
    microfoundations
  • Offer theoretical support at the firm profit
    maximization level for Keynesian features in the
    economy
  • Contracting models
  • Menu/transactions costs
  • Efficiency wages
  • Insider-Outsider theory
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