Keynes was born in the
year 1883, dying in 1946. His best remembered work is The General
Theory of Employment, Interest and Money,
written during and influenced by the Great Depression. It was
published in 1936. He was a capitalist and the Great Depression did
not, as it did to other thinkers in this time, turn him towards
socialism. Where others sought a socialist or communist
overthrow of the system during the Great Depression, he saw the
economic issue as like a car with a broken part – to fix the car
all you have to do is fix or replace the part; there is no reason to
get a whole new car.
The conclusions of the
General Theory can be
stripped down to four points:
- Economies can suffer from overall lacks of demand, which leads to involuntary unemployment.
- The economy's automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully.
- Government policies to increase demand, by contrast, can reduce unemployment quickly.
- Sometimes increasing the money supply won't be enough to persuade the private sector to spend more, and government spending must step into the breach.
These
ideas were unthinkable in the time of Keynes. The success of Keynes's
book is displayed in the seeming straightforwardness of these four
points.
One
of Keyne's crucial innovation is the taking apart of Say's Law, which
was one of the driving economic theories of the 19th
century. Writing in the early 1800s, the French businessman
Jean-Baptiste Say, states that “products are paid for by products”.
This means that when a product is sold, the value earned is then used
to purchase another product. For example, if a carpenter sold a table
for £15, that £15 might then be spent on purchasing groceries. In
effect, the table was traded for the groceries, with transfer of
money acting as a medium between these sales and purchases. Thus, by
Say's logic, the creation of one product opens the possibility for
new products on the market. However Keynes refutes this, stating that
the option of accumulating money, as in savings, renders Say's law
meaningless. Returning to the previous example, if the carpenter then
saved all or most of the revenue made from his sale instead of
spending it on something else, he would have broken Say's law.
I
actually don't entirely understand Keyne's refutation of this (at
least as it was summarised in the reading). Surely if you accumulate
money instead of spending it on another product, you will then at
some point in the future spend that money? For example if you save to
buy a car, or just as an emergency fund. And even if that money is
taxed, or never used by yourself and eventually inherited by your
children, it will over the long run be used at some time in the
future. But perhaps this goes back to the point mentioned earlier,
that the economy's tendency to balance falls in demand is incredibly
slow.
The
classical model of economics wasn't the only thing Keynes broke away
from: he also escaped from the business cycle theory of the time.
Many economists wrote on the boom and bust economic cycle and tried
to explain the complexities of the cycle. Keynes instead focused his
study on an economy fixed in depression, such as that of the Great
Depression, and the problems of unemployment. Rather than ask “Why
is there a depression?”, Keynes asks, “How can we create more
employment?” By asking this question, instead of why the depression
occurred, Keynes helped move economic thought away from the idea that
busts had a redemptive quality, like an economic purgatory.
One
criticism of Keynes's book is that he mistook an episode of history
as a trend that would continue. He did not see an end to the Great
Depression, and wrote with no end of it in mind. He also didn't see a
future of persistent inflation, as is what followed after the Second
World War.
Writing
his introduction, Krugman states that he thinks the greatest economic
theories are those that transform the way we view the world, and in
this way Keynes's General Theory
ranks as highly as Adam Smith's Wealth of Nations.
He made the idea that mass unemployment is the result of inadequate
demand completely comprehensible.
In
his documentary series The Age of Uncertainty,
Galbraith, another economist of the same generation, described what
it was like the first time he read the General Theory,
in 1936. He said:
“I remember the shock. All I had been taught to believe and was teaching others to believe was at risk. There could be a shortage of purchasing power; unemployment was not an aberration – in the absence of corrective action it may be normal; to balance the budget might not be an act of wisdom; it tore the possibility that I might have to change my mind, and for an economist there's nothing worse.”
One
interesting point, if I've understood correctly, is that Keynes
believed that one of the ways in which to get out of a recession for
government to spend. If the public sector spends more, the private
sector spends more too, resulting in a revitalisation of the economy.
Our own government right now is characterised by cuts, and increasing
unemployment. By Keynesian logic as I've understood it, this is
entirely the opposite direction the government should be taking,
sending the economy into a deeper bust rather than bringing it back
into a boom.
And
in fact, this point is best demonstrated with today's newspaper
headlines.
To
finish off, I'll end with some food I think is relevant to the whole
of HCJ, a quote from Keynes:
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.”
