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John Maynard Keynes
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30 Mar 15
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modern macroeconomics
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t free markets would, in the short to medium term, automatically provide full employment, as long as workers were flexible in their wage demands
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His radical idea that governments should spend money they don't have may have saved capitalism
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Super Generalist"was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, and informed the economic policies of governments. He built on and greatly refined earlier work on the causes of business cycles, and is widely considered to be one of the founders of modern macroeconomics and the most influential economist of the 20th century.[3][4][5][6] His ideas are the basis for the school of thought known as Keynesian economics, as well as its various offshoots."
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In the 1930s, Keynes spearheaded a revolution in economic thinking, overturning the older ideas of neoclassical economics that he
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hat free markets would in the short to medium term automatically provide full employment, as long as workers were flexible in their wage demands. Key
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s instead argued that aggregate demand determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment. Following the outbreak of World War II, Keynes's ideas concerning economic policy were adopted by leading Western economies. During the 1950s and 1960s, the success of Keynesian economics resulted in almost all capitalist governments adopting its policy recommendations
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waned in the 1970s,
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partly because of critiques from Milton Friedman and other economists who were pessimistic about the ability of governments to regulate the business cycle with fiscal policy.[2] However, the advent of the global financial crisis in 2007 caused a resurgence in Keynesian thought. Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the crisis by Presidents George W. Bush and Barack Obama of the United States, Prime Minister Gordon Brown of the United Kingdom, Prime Minister Kevin Rudd of Australia, and other global leaders
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In addition to being an economist, Keynes was also a civil servant,
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Keynes's Civil Service career began in October 1906, as a clerk in the India Office.
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his first professional economics article in the Economics Journal, about the effect of a recent global economic downturn on India.[17] Also in 1909, Keynes accepted a lectureship in economics funded personally by Alfred Marshall.
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By 1913 he had published his first book, Indian Currency and Finance. He was then appointed to the Royal Commission on Indian Currency and Finance[18] – the same topic as his book – where Keynes showed considerable talent at applying economic theory to practical problems.
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. He believed that budget deficits were a good thing, a product of recessions. He wrote, "For Government borrowing of one kind or another is nature's remedy, so to speak, for preventing business losses from being, in so severe a slump as to present one, so great as to bring production altogether to a standstill."[26]
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Keynes's magnum opus, the General Theory of Employment, Interest and Money was published in 1936.
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. In doing so Keynes was partly setting himself against his former teachers Marshal and Pigou.
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Classical economists had believed in Say's Law, which, simply put, states that "supply creates its own demand", and that in a free market workers would always be willing to lower their wages to a level where employers could profitably offer them jobs. An innovation from Keynes was the concept of price stickiness – the recognition that in reality workers often refuse to lower their wage demands even in cases where a classical economist might argue it is rational for them to do so.
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While economists and policy makers had become increasingly won over to Keynes's way of thinking in the mid and late 1930s, it was only after the outbreak of World War II that governments started to borrow money for spending on a scale sufficient to eliminate unemployment. According to economist John Kenneth Galbraith (then a US government official charged with controlling inflation), in the rebound of the economy from wartime spending, "one could not have had a better demonstration of the Keynesian ideas."[44]
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Neo-Keynesian economics
The IS-LM Model is used to analyse the effect of demand shocks on the economy.
Main article: Neo-Keynesian economicsIn the late 1930s and 1940s, economists (notably John Hicks, Franco Modigliani, and Paul Samuelson) attempted to interpret and formalise Keynes's writings in terms of formal mathematical models. In a process termed "the neoclassical synthesis", they combined Keynesian analysis with neo-classical economics to produce Neo-Keynesian economics, which came to dominate mainstream macroeconomic thought for the next 40 years.
By the 1950s, Keynesian policies were adopted by almost the entire developed world and similar measures for a mixed economy were used by many developing nations. By then, Keynes's views on the economy had become mainstream in the world's universities. Throughout the 1950s and 1960s, the developed and emerging free capitalist economies enjoyed exceptionally high growth and low unemployment.[47] [48] Professor Gordon Fletcher has written that the 1950s and 1960s, when Keynes's influence was at its peak, appear in retrospect as a Golden Age of Capitalism.[33]
In late 1965 Time magazine ran a cover article with the title inspired by a possibly tongue-in-cheek comment from Milton Friedman, a comment later echoed by U.S. President Richard Nixon, that "We are all Keynesians now". The article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government." The article also states that Keynes was one of the three most important economists who ever lived, and that his General Theory was more influential than the magna opera of other famous economists, like Smith's The Wealth of Nations.[49]
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Economics: out of favour 1979–2007
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Friedman however began to emerge as a formidable critic of Keynesian economics from the mid-1950s, and especially after his 1963 publication of A Monetary History of the United States.
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hey pick out a key 1968 event as being when America suspended the conversion of the dollar into gold except on request of foreign governments, which they identify as when the Bretton Woods system first began to break down. [52]
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Keynes's limited use of mathematics was partly the result of his scepticism about whether phenomena as inherently uncertain as economic activity could ever be adequately captured by mathematical models. Nevertheless, many models were developed by Keynesian economists, with a famous example being the Phillips curve which predicted an inverse relationship between unemployment and inflation. It implied that unemployment could be reduced by government stimulus with a calculable cost to inflation. In 1968 Milton Friedman published a paper arguing that the fixed relationship implied by the Philips curve did not exist.[53] Friedman suggested that sustained Keynesian policies could lead to both unemployment and inflation rising at once – a phenomenon that soon became known as stagflation.
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The academic credibility of Keynesian economics was further undermined by additional criticism from other Monetarists trained in the Chicago school of economics, by the Lucas Critique and by attacks from Hayek's Austrian School.[33] So successful were these attacks that by 1980 Robert Lucas was saying economists would often take offence if described as Keynesians.[54] Keynesian principles fared increasingly poorly on the practical side of economics – by 1979 they had been displaced by Monetarism as the primary influence on Anglo-American economic policy.[33
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1984 the Federal Reserve officially discarded monetarism, after which Keynesian principles made a partial comeback as an influence on policy making.[55] Not all academics accepted the criticism against Keynes – Minsky has argued that Keynesian economics had been debased by excessive mixing with neo-classical ideas from the 1950s, and that it was unfortunate the branch of economics had even continued to be called "Keynesian".[
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Gresham's Law (where weak currencies undermine strong currencies).[5
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The Financial crisis of 2007–2010 led to public skepticism about the free market consensus even from some on the economic right. In
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Nobel laureate Paul Krugman also actively argued the case for vigorous Keynesian intervention in the economy in his columns for the New York Times.[64][65][66] Other prominent economic commentators arguing for Keynesian government intervention to mitigate the financial crisis i
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This is in stark contrast to the action permitted to Indonesia during its financial crisis of 1997, when it was forced by the IMF to close 16 banks at the same time, prompting a bank run.[78] Much of the recent discussion reflected Keynes's advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the IMF and the World Bank, which many had argued should be reformed at a "new Bretton Woods" even before the crises broke out.
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In February 2009 Shiller and George Akerlof published Animal Spirits, a book where they argue the current US stimulus package is too small as it does not take into account Keynes's insight on the importance of confidence and expectations in determining the future behaviour of businessmen and other economic agents.
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Keynes's idea of a centrally managed global reserve currency. Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's banco
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Zhou proposed a gradual move towards increased use of IMF special drawing rights (SDRs)
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Chris inCa...Keynes instead argued that aggregate demand determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment. Following the outbreak of World War II, Keynes's ideas concerning
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relationship between unemployment, money and prices
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if the amount of money being saved exceeds the amount being invested – which can happen if interest rates are too high – then unemployment will rise.
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The Means to Prosperity
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specific policy recommendations for tackling unemployment in a global recession, chiefly counter cyclical public spending.
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he received considerable support for his views on counter-cyclical public spending in Chicago
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General Theory challenged the earlier neo-classical economic paradigm, which had held that provided it was unfettered by government interference, the market would naturally establish full employment equilibrium. In doing so Keynes was partly setting himself against his former teachers Marshal and Pigou.
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"special case" that applied only to the particular conditions present in the 19th century
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"supply creates its own demand"
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General Theory argues that demand, not supply, is the key variable governing the overall level of economic activity.
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total un-hoarded income in a society
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one can only enhance employment and total income by first increasing expenditures for either consumption or investment.
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activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works.
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Keynes's ideas were diluted by those keen to compromise with classical economists or to render his concepts with mathematical models like the IS/LM model
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How to Pay for the War,
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largely financed by higher taxation and especially by compulsory saving
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rather than deficit spending, in order to avoid inflation.
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workers loaning money to the government
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fairer than punitive taxation
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James K. Galbraith used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack against the consensus for monetarist economics and argued that Keynesian economics were far more relevant for tackling the emerging crises.[
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02 May 09
omar khooryJohn Maynard Keynes
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John Maynard Keynes, 1st Baron Keynes (pronounced /ˈkeɪnz/ "cains") (June 5, 1883 – April 21, 1946) was a British economist whose ideas, called Keynesian economics, have had a major impact on modern economic and political theory as well as on many governm
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