The General Theory of Employment - Case Study Example

KEYNESIANISM & PRESENT CRISIS TABLE OF CONTENT PAGES Introduction 03 Keynes World and Theory 04 First Emergence of Keynes 06 Re-emergence of Keynes Theory 07 Comparison and Contrast 09 Conclusion 09 References 10 John Maynard Keynes comes into light in the era when there is high depression in the economy after the First World War. He elaborated the concept of consumptions and savings, which both are the mandatory parts of the Gross domestic product (GDP); let's have a glance over the background of the great economist "John Maynard Keynes". INRODUCTION: John Maynard Keynes was born on 5 June 1883, in Cambridge. He belonged to a well educated family. His father was an economist and a great philosopher of his time and his mother was the first female mayor of the town. He studied mathematics form the Eton Collage and then from the Cambridge University. He went to India for work, after completing his graduation. He earned fellowship of King's college due to his work on dissertation. In the year 1908 he returned back to Cambridge from India by quiting his civil service job. After leaving the job Keynes joined the Treasury (Davidson, 2007). His first published book was "The Economic Consequences of the Peace" in which he abundantly criticized the wars and forecasted about the German revenge. That particular book became the best selling book of its time and made Keynes world famous (Davidson, 2007). Keynes known work was "The General Theory of Employment, Interest and Money" which was published in the year 1936, in which he elaborated about the employment and the causes of underestimated or overestimated the interest rates and its impact on the economy, which eventually became the yardstick for the future economic thoughts. Due to his great work he was awarded as the 'Most Influential Economist' of Britain which motivated him to join the country's treasury again in 1942. He played a decisive role during the world war which always secures his name as a great economist (Samuelson, 2002). KEYNES WORLD AND HIS THEORY: Keynes put forward the main causes of depression in order to tackle with the hazards and symptoms of the depression. Keynes introduced the theory of liquidity preference framework, which is known as "Keynesian Liquidity Preference Framework", which defines the people's intentions and desire to hold the money in cash or in redeemable assets. According to Keynes, income can be categorized into three broad terms which are defined in his liquidity preference framework. Cash to Cash Precautionary Speculative Keynes defines the concept of high money supply and high savings, and related his topic with the unemployment rate and increasing economy of the country. As per him, money must not be hoarded and it must be rolled over which eventually induces the investment graph of the country to rise (Begg, 1998). He intimated that no doubt that the high supply of money condenses the unemployment rate but on the contrary it will hike the inflation rate up to an optimal level, let say if every American becomes a millionaire after a number of printing of treasury in Federal Reserve Bank (FED), then there will be no servant or worker left to do biddings which urges the nation to hire people from outside the country on high salaries and wages which ultimately influences the inflation rate to rise. So, persistently sending the money can be the remedy to overcome these circumstances, which is known as the best cure of recession. Keynes said that if a "Liquidity Gap" occurs in the economy of the country then the country badly plunges. A liquidity gap occurs when the people of the country are reluctant to invest and willing to hoard the money rather than spending, which is mainly due to the consumers loss of confidence on the economy probably due to the stock market crash or the prevailing situation in the country. Hurricane and other natural disasters can be a cause which hampered between the consumer spending and savings. The concept of Keynes was very clear, he tried to elaborate the people that no doubt saving is a good thing but how can a country be viable if the spending of money and level of investment are not adequate Keynes on the basis of functional relationship maintained between income and consumption, laid the foundation stone of his famous "psychological law of consumption". He says that distribution of income, population, prices and the habit of the people to consume do not change rapidly so the propensity to consume also remains unchanged in the short period. He also added that inflationary or deflationary situations or wars are extraordinary situations which can reduce or enhance the Marginal Propensity to Consume (MPC) for the time being of the consumers. This great economist assume that generally the nature of economy is Capitalistic where the people are free to decide that, what, how and for whom to produce. Keynes is one of the great economists who contribute alot to stabilize and strengthen the economy, he died on 21 April 1946 but his contributions for the economy are still alive among us. FIRST EMERGENCE OF KEYNES: As already mentioned above that Keynes came up when the economy was in a worst depression after the Second World War, which is termed as the first emergence of Keynes. He emerged first time in 1930 when there was a great depression in the economy of the world and bought a new concept to strengthen the economy with curing the problem of depression. He percept that during the World War II, people became covets and intended to hoard the money, while the country had need sufficient weapons and a high defense budget to equip their personnel with immense power to save their country (Myers, 1998). Are you aware with the fact that "Wars are beneficial for economy" Yes! Almost every economist agrees that World War II cured the great depression because the citizens of United States (U.S) finally began massive spending on defense. We can recognize the success of Keynes theory after having a glance over the recession periods occurred in US. Eight recessions worsened into depression before the World War II in the United States which was happened in (1807, 1837, 1882, 1893, 1920, 1933 and 1937). By contrast after the World War II or we can say after implementing on the Keynes policies and theory there were 9 recessions that took place in (1945-46, 1949, 1954, 1956, 1960-61, 1970, 1973-75, 1980-83, 1990-92) but not a single recession turned into a depression. The concept of Keynes was very clear, He consensus that saving is equal to investment and every dollar which is been saved is ultimately be utilize as an investment in the economy. John Maynard Keynes became the God of that time, who gave a cure in a form of a theory to save the economy from deeper recession. The importance of his work can be recognized from the words of Mr. Richard Nixon, who was the 37th president of the United States (1969-1974) once declared during a meeting of World Economic Forum (WEF) that: "We are all Keynesians now" RE-EMERGENCE OF KEYNES THEORY: We are well cognizant with the fact the whole world are in the fatal claws of the credit crunch. Financial crisis leaves a very bad impact on each country's economy even on those economies which were claimed to be the strongest in the world. Mounting unemployment rates, slashing jobs and closing of industries are some of the disasters which we envisaged during this financial crisis tsunami, which broke the backbone of almost every country. These impacts again urged the Keynesianism to come into play or reemerge in the society to keep the economy back on track again. Now the concept of money supply and price level effect again come into consideration. When the economy of the whole world reached on an optimal level before the current global crisis which eventually stress the peoples to become less interested in investing money and push the level of price of the commodities or more precisely the overall country's Consumer price Index (CPI) and inflation. In liquidity preference framework Keynes equates that the money demand can be elaborated with the term Marginal Efficiency Unit (MEU). Keynes intimated that, nothing will compel the people to invest if the people percepts that the economy is standing on an optimal level and now it becomes unable to increase more in the future. These concepts force the prices of the commodities to arise and grow up the inflation rate up to a vulnerable position. Due to the financial crisis people are reluctant to deposit their money in the banks or to invest somewhere. Financial institution is the industry which is badly affected by the crisis. Reluctance of deposits and investment creates unemployment within the country which ultimately raises the interest and discount rates of banks which eventually urges the industries or the individuals to cut down the borrowings from the banks, which are a big source of income for the financial institutions. Current financial crisis induce the Keynesianism to again come up with some strategies for the crisis management. The question is that how the Keynes theory works in the current scenario and how any country gains the confidence of their citizens. That's the Keynes theory we discussed earlier that how the consistent flow of money is an essential tool or ingredient to keep the economy of a country alive and viable, so in order to achieve the same we have to apply the same on the current situation. Mitigation of the interest rates is one of the best tools which Keynes defined to boost the moral of the investors which will definitely leave a positive impact over the economy and will condense the graph of unemployment, which seems to be horrifying since last 6-8 months and surpasses the record high (Houlder, 2009). Currently the United States of America and the United Kingdom cut down its interest rate as low as zero percent to attract the investors. Lowering interest rate induces the enterprises as well as the individuals to borrow money from the financial institutions and keeps the money inflow which would be beneficial for the economy to arise again and also assist to abate the unemployment rate up to some extent. Recent action of lowering the interest in US and in UK influenced the macroeconomic indicators to show green signals for the economy, which shows that the economy of the world is recovering and optimistically the world will completely overcome the credit crisis soon. Recently Obama administration of US and Alistair Darling of UK took brave actions to overcome on the catastrophic unemployment rate and guaranteeing everyone under age of 25 who has been out of work for 12 months to offer a job, and they also hike the Income tax rates to 50%, which will be helpful to create new jobs for the citizens. COMPARASION AND CONTRAST: The comparison of the Keynes theory is the same in both above examples, in its first emergence and in 2nd emergence as well. In 1st emergence the Keynes's liquidity preference framework came into the consideration to save the economy from depression. By contrast the reemergence of the Keynes theory came into consideration to save the economy from the current severe financial turmoil. The remedies are the same in both the cases to keep the flow of the economy pertinently. CONCLUSIONS: John Maynard Keynes was a great economist who contributed a lot to strengthen the economy. He was the one who gave the concept of continuously rolling over the money and reduce Marginal Propensity to Save (MPS), although he was well aware with the fact that the saving are good for the economy but the conditions becomes worst if people are not willing to consume it or reluctant to roll it over. John Maynard Keynes gave a cure for the depression and for the deepening economy which is applicable in current scenario as well. The current financial crisis are said to be the worst after the Second World War, which threw the economy of the entire world in a great recession and the world will take a long time to stabilize again but thanks to Keynes now, who gave the idea to the currently existing economists to tackle the current situation through different strategies which is beneficial either for rolling over the money supply and keeping the momentum of the economy up to a certain benchmark. In presence of the Keynes liquidity preference framework, we do not need any other alternative to be implemented to save the shrinking economy from the global financial tsunami. More precisely we can say that Keynesianism is the best tool to the current crisis management. REFERENCES Keynes, M, 1936, The General Theory of Employment, Interest and Money, McGraw Hill Publications. Salter, A & Stamp, B, 1932, The World's Economic Crisis and the Way of Escape, Blackett, H. Clay and W. Beveridge. Begg, D, Fischer, S & Dronbrush, R, 1998, "Economics", London McGraw Hill Publications. Samuelson P. 1997, Economics, London McGraw Hill Publications. Samuelson, P. 2002, Economics, 17th Edition, London McGraw Hill Publications. Stanlake, GF, 1995, Introduction to Economics, British Library Publications. Myers, D. 1994, Economics and Property, Pitman Publications. Harvey J, 1996, Urban Land Economics, Cornell University, USA. Pimlott, D. 2009, "Service Sectors Records Small Growth", 07 May, Financial Times, viewed 10 May 2009, Houlder, V. (May 04, 2009), "Recession Pace to Slow, Says Study", 04 May, Financial Times, viewed 10 May 2009, Davidson, P. 2007, John Maynard Keynes (Great Thinkers in Economics), Palgrave Macmillan. Read More