Keynes

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JOHN MAYNARD KEYNES (1883-1946)

John Maynard Keynes, can be described as the greatest economist of the 20th century. Educated to a high level, Keynes took up various public posts both in government and in educational establishments.

His early work focused on monetarist policies. Keynes came to prominence during the second world war when he was a senior economic advisor to the government.

His works greatly re-directed economic theory from simply being concerned with the accumulation of wealth, to how government economic policy should be concerned with national re-generation.

The bulk of Keynes work was during the post second world war re-construction period. The work of Keynes could be said to have laid the foundations for modern International Monetary Policy, the International Monetary Fund, and the World Bank.

Although much of his work was not original, it did bring together some of the most coherent economic logic into one single piece, his work entitled 'General Theory of Employment, Interest and Money.' We shall now briefly discuss the main areas of his work:

KEYNES CORE ECONOMIC BELIEF - For Keynes the focus of economics was to examine why economic fluctuations occur present measures to eradicate them.

You have to bear in mind at the time of writing his general there was a massive global depression which was a result of the second world war.

KEYNES AND THE CLASSICAL SCHOOL - Keynes accepted the underlying principles regarding market prices as set in the classical school, as there were no other valid explanations, he stated:

'There is no objection to be raised with the classical analysis'

Keynes further extended the work of Marshall, in the sense that economists should look beyond the long term classical approach to economic policy and observe short term analysis and corrective measures.

KEYNES ON SAYS LAW - Keynes firmly believed that the classical acceptance of Says Law was incorrect. The so called invisible hand which adjusted everything in the market was revoked by Keynes.

ECONOMIC ANALYSIS - Keynes suggested that the way to analyse the economic strength of a nation was to observe the money that nation held. The money could be seen as how the nation could afford to conduct itself in terms of government services, economic policies, etc.

SAVINGS & INVESTMENT - The earlier classical writers had tended to observe savings as hoarding (piling things up - like the old landowners and capitalist saving their fortunes in gold bullion). Keynes viewed savings in the 1900's as:

'The habit of overlooking the relation of the rate of interest to hoarding, may be part of the explanation why interest has usually been regarded as the reward of not spending whereas in fact it is the reward of not-hoarding'

Keynes further expands on the dilemma of savings and interest:

'The richer the community, the wider will tend to be the gap between its actual and potential production; and therefore the more obvious and outrageous the defects of the economic system'

Keynes was trying to suggest that the more the wealthy invested into savings, the less likely they were to put the money into other areas:

'For a poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment if the savings propensities of its wealthier members are to be compatible with the employment of its poorer members.'

WAGES - Keynes argued that a decrease in wages would lead to a creation of employment. Keynes stated:

'With a given organisation, equipment and technique, real wages and the volume of output (and hence of employment) are uniquely correlated so that in general, an increase in employment can only occur to the accompaniment of a decline in real wages.'

Keynes contended that workers were likely to resist decreased wages, they accepted inflation, he stated:

'Whilst workers will usually resist a reduction of money wages it is not their practice to withdraw their labour whenever there is a rise in the price of wage goods'

TRADE UNIONS - At the time of his writing, the trade union movement in the UK was growing in strength. It hard to determine how the strength arose in part to Socialism and in part to Marxism. Keynes accepted the role of trade unions as a bargaining force to try and bring about equality in society.

KEYNES AND ECONOMIC POLICY - To Keynes there was little governments could do to influence interest rates, particularly in times of economic depression.

The whole ethos of government was control interest rates to ensure economic prosperity.

Keynes had realised that in periods of high inflation people did not invest, and unemployment arose, whilst in periods of low inflation people were put off investing.

The whole logic of government was to maintain as best possible a stable interest rate, by stabilizing industry:

'Economic policy should not be a matter of tearing up the roots but of slowly training a plant to grow in different direction'

Keynes although in favour of the free-trade 'laissez-faire' system did believe that some form of intervention was required as unchecked markets had the potential to cause serious damage to global economies.

KEYNES AND GLOBAL INTERVENTION - Keynes understood the need for a global network of governments to maintain global stability.

At the time of his work, the world had undergone the tremendous struggle of the second world war. It needed a blue print for re-construction.

In essence Keynes was suggesting that the different economies of the world be viewed as looking at their cash balances to see what wealth they had.

Using this wealth the role of each international government should be to look at the provision of goods and services to aid national output.

Where different nations had insufficient wealth, a global organisation should be set up to offer loans to help deprived nations re-build and compete in the global marketplace. The initial idea behind the IMF and world bank.

ESSENTIAL FEATURES OF THE WORK OF JOHN MAYNARD KEYNES

Acceptance of classical rules governing market forces, pricing and distribution.
Economic analysis of nation to be based on the cash reserves that nation held.
Little governments could do to maintain stability of interest rates.
Acceptance of the role of trade unions.
A reduction in real wages will lead to a rise in employment.
Some form of interventionist policies were need by governments to exercise control in markets.

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