Keynes Flashcards
Keynes
- Avid Capitalist SO wanted to disprove Marxian theory that Capitalism was doomed
- Unregulated Capitalism incompatible with maintenance of full-employment/economic stability
- Laissez-Faire approach inadequate
- Against Classical Political Economists and Neo-Classical
Neo-Classical Economics and Market Equilibrium
Say’s Law
-Belief markets always clear - supply and demand always balances (Say’s Law)
-Self-regulated markets - goods available correspond to those waiting to buy goods
(Quantity of goods offered = quantity of demand
-People offer goods + services so spend money expect to obtain
-Produce goods because know want to buy goods
- no money saving!
-Rate of interest sensitive mechanism for forming equilibrium between saving and investment
-Ensure income not spent on consumption is then spent on investment!
Neo-Classical Economics and Recessions
- Recession = slowdown of economic activity
- No balance of supply and demand = no equilibrium
- Neo-classical view that markets restore via self-regulation
Logic behind self-regulation
- Recession = fewer commodities = people save money in banks, distorting Say’s Law
- Consequences:
1. Interest rates go down - more money in banks (so encouraged to borrow)
2. Wages cut to produce cheaper products - less keen to save money - buying - Consumption increases:
- Businesses borrow money cheaply - invest
- Cheaper products = more consumption
- More employed to satisfy demands
- Say’s Law restored/ market equilibrium! - Gov do nothing!
Keynes Critique
- Views money as held rather than in motion
- Money function = store of value, people DO hoard
- People don’t save in a recession - can’t afford to
- SO savings don’t pressure interest rates down - no borrowing/ investing
- Wage reductions for cheaper commodities - less income so buy less
- Selling fewer products = unemployment rise
- Reduced sales = businesses cut investment - reducing productive capacity of economy
- Vicious cycle of economic contraction
- Self-regulating market failure!
Keynes Solution - Gov. Investing
- Rate of interest governed by supply and demand for money
- Demand due to preferences of community
- Gov. spending on public works to stimulate economy
- Employment - increase demand for outputs - increase demand for raw materials - more employment!
- Wages for workers, buy from other companies, hire more people, spend new money in economy
Other Solutions
- Redistribution of income - taxes - poor spend more where rich saving
- Low interest rates encourage borrowing (not saving)
- Need for gov intervention
- Rising national income = more likely to hoard
- High rate of interest = income yielding assets to idle balances
Keynes and Government Intervention
- Power of monetary authorities to influence interest rate limited
- Monetary authorities can add to supply of money but unable to control demand
- Full employment and more economic stability = need for more active government role
- Trade unions legitimate bargaining agents (role in wage setting)
- Wage cutting no cure for unemployment - aggravates further
- Price cutting depressing effects on economy
- Increases the burden of outstanding debt
- Critique of Laissez-Faire based on chronically unstable market
Problems with Neo-Classical Economics (from Keynes)
- Few people highly sensitive to interest rates when saving
- Save when income sufficient to cover consumption
- Decision to save and invest independent of each other
- Different people for differing reasons
Keynes and Interest Rates/ Investments
- Volume of private investment due to cost of borrowing and anticipated rate of return
- Capital stock growth = expected returns to added units falls
- Expectations of entrepreneurs should be considered (Investment expenditures might not be taken out when conventional calculations show profitable)
- Active monetary policy to push down interest rates to aid full employment/ restore prosperity
- Changes in investment has multiple effects on income -Lower interest rates stimulate economy
- Employment linked to changes of income with supply and demand considerations
Problems with Keynes
-Heavy state involvement - some say markets shouldn’t be interfered with (ideological grounds)- and don’t trust the state for responsible finances
-Globalised world more difficult
(UK increase wages and prices, may spend more elsewhere - more French imports, UK uncompetitive)
-Critics say Keynes dangerously radical and threat to capitalist order
Keynes Response to criticism
-Limit world market - shouldn’t trade with other countries (BUT this is less and less possible)
-Create international agency to regulate world market
(International Clearing Union) -facilitate trade with new currency; mechanisms to encourage balancing or imports/exports
