1883-1946
Keynes an elite member of the Bloomsbury's Club, lectured at Cambridge, where he earned a degree of
Mathematics in 1905. In 1944 he attended the Bretton Woods Conference that established the International Monetary Fund that
helped to architect the Post War System of Fixed Exchange Rates.
Prior to the great depression, Keynes supported the classical view of economics, which suggested the best way to
fix an economy was to stabilize the price level. The theory follows that when prices drop interest rates should
rise, and in contrast, when prices raise the interest rates should lower.
With the advent of the great depression Keynes adopted a more revolutionary approach. He began to explore the
root cause of the economic woes from the period. What followed was the introduction of the Keynesian principles
of economic theory.
This introduced two revolutionary concepts.
- The conception of aggregate demand as the sum of consumption, investment , and Government spending.
- The demonstration that full employment could only be maintained with the help of government spending.
Keynes argued a reduction of price, including wages, would reduce aggregate demand. This in turn offset the the benefit
of the increased output that the lower wages would produce. The reduction of wages, in turn, reduced the expenditure
of the overall economy, thus creating a lesser demand. The proposed solution was for deficit spending to help the ailing economy.
It was this theory that led to the New Deal introduced by Roosevelt. While deficit spending met with initial resistance, once
adopted, policy makers took this new principle to heart.
Keynesian theory investigates the total spending (aggregate demand) in an economy and its effect on its output and inflation.
Keynesians generally support six tenants. The first three are ussually supported
by all modern economist.
1. Aggregate demand is influenced by a host of economic decisions,
both in the private and public sectors, though an economy is prone to occasional erratic behavior. These decisions include
those on fiscal and monetary policy.
2. Changes in the aggregate demand have the greatest impact on
the short-term outlook of an economy, the primary impact being to output and employment, not prices. This is followed by the
assumption of a Keynesian multiplier, which is to suggest, the increase of expenditure from any one source (consumption, investment,
or government) has a compounding effect on output.
3. Prices, especially wages, respond slowly to supply/demand,
resulting in shortages and surpluses. (If demand is down, and wages remain stable, there is a surplus of labor.)
4. The typical level of unemployment is not ideal, because
a) unemployment is subject to aggregate demand b) prices adjust slowly, and that periods of recession
are economic maladies.
5. Keynesians advocate the need for activist stabilization
policies to reduce the amplitude of the business cycle
6. Keynesians are more concerned with conquering unemployment
than inflation because a) Macro-economic fluctuation significantly reduce economic well being. b) Governments
are capable and knowledgeable enough to improve upon the free market. c) Unemployment is more significant than inflation.
