John Maynard Keynes: The Relevance of His Economic Theories - Research Paper Example

? John Maynard Keynes: The Relevance of His Economic Theories Details: al Affiliation: Submission John Maynard Keynes: The Relevance of His Economic Theories John Maynard Keynes, a man of towering intellect with a capability of moving an entire generation towards an economic thought, was, without a doubt, a gravitating influential figure whose efforts have, though not entirely, enabled a democratic, flourishing civil world. Coming from a background with a hard academic excellence coupled with a solid experience of a working economy spanning from the Kings College to Cambridge University [the heart of knowledge], right into the money control systems of the British Treasury, Keynes was an economist of real economics, recognizing so early in his life the need to convert theoretical prescriptions into politically relevant, workable plans able to assist an economy in need. To Keynes, the nineteenth-century classical economics was inherently inadequate not only in eliminating national unemployment for those qualified and able to work at the prevailing wage rates, but they were also inefficient in distributing the national cake, thus creating unnecessarily the poor and uncivilized middle class (Keynes, 1963). Accordingly, he [Keynes] modeled a theoretical alternative framework, allowing governmental intervention to eliminate the faults of an economic system as they arise (Harrod, 1951). Indeed as it is, Keynes ended up with a powerful model, whose application is currently underway in sorting wide ranging practical human distress under the existing economic systems, right from the United States, a world economic leader struggling with massive deficits in the aftermath of a deadly crisis, to smaller, poor nations in the developing world. In his General Theory of Employment, Interest and Money (basically the heart of Keynesian economics), Keynes directed his energies in challenging the classical orthodoxy with an explicit analysis of what determines and what is the essential nature of effective demand within any economic system. With the exception of foreign trade, effective demand, according to Keynes, consists of three expenditure streams: household consumptions, investments, and government overheads, all of which are determined autonomously (Davidson, 2007). A realist with a strong distaste for the Panglossian philosophy, Keynes argued that the level of aggregate demand may well outstrip or fall way below the national physical production capacity. As such, the philosophy of automatic adjustment to produce at a level tending to the full employment of all available productive resource was a flawed economic assumption that might not be realized after all, for ‘In the long-run we are all dead', a fundamental theoretical shocker to the traditional economic optimism regardless of the circumstances, however strenuous (Davidson, 2007, p. 15). In his own words, Keynes notes that: The optimism of traditional economics, which looks at economists as Candides, who, even though left critical analysis for other duties [cultivation their gardens], still teach “all is for the best in the best of all possible worlds” provides us with a false hope. For sure, there would be a natural tendency towards the full employment in a Society which was functioning in the manner of the classical postulates. It may be that they [the classical theorists] provided a representation of how we would want our Economy to behave. Nonetheless, assuming the Economy operates so only means assuming national difficulties. (1936, pp. 33–4) Nothing could be further from the truth; whether in the traditional or modern times, governments are voted in to decisively tackle the existing social deficiencies. With arguments that went against the old Say’s law supply creating demand, Keynes maintained that a government has the possibilities of stimulating the economy by increasing the aggregate demand, thereby arousing the existing firms to respond by utilizing the available unemployed resources (employing more people) to produce the needed goods and resources (Davidson, 2007). Conversely, a fall in the aggregate demand does the exact opposite, signaling the scaling down of output with a subsequent mounting unemployment of the hitherto employed resources, such as manpower. It is now more than confirmed that a market economy short of governmental policing is far worse than the Hobbesian state of nature. Keynes, thus, rejected Adam Smith’s laissez-faire economics arguing that automatic full employment in such an environment was an illusion with a near zero possibility of actualization. To be sure, government action was, according to Keynes, the only way of stabilizing unstable economies, and without authoritative corrective measures, unemployment and depression would be much more familiar terms right to the local level. No economist would dare deny that governments the world over are running counter-cyclical demand management policies to 'fine-tune' their economies, and more so, as buffer zones of countering any eventuality of a possible negative effect of a trade cycle attack. There is, therefore, a case for the government to oversee the running of its economic affairs as a moral duty by either intervening to stimulate demand when there is little activity within the system, or by slowing down excess activities that are sometimes harmful to the economy, and so they are justified even to the extent of running a budget deficit. Additionally, Keynes’ premises of altercation proved beyond reasonable doubt that the classical presumptions of maximum efficiency and prosperity under the unfettered flexible exchange markets are thoroughly misleading at times, and are particularly dangerous for progress. Indeed, the wonderful promises of the liberalization policies that followed the breakdown of the Bretton Woods international monetary management system in the 1970s have not fared any better without government regulations. In fact, more than any other time in history, the developing nations, particularly those in Africa, have experienced even worse deficits in their balance of payments, more specifically as a consequence of inequitable redistribution of global wealth. Though questioned due to the difficulties, particularly with regard to sticky unemployment and inflationary pressures in the 1970s, Keynes ideas were highly popular both among leading economists and within government circles. He was an inspirational figure for almost four decades following the Great Depression of the 1930s. While his economic thoughts acquired massive support as early as in the late 1930s, large scale government spending only began after World War II under the threat of crippling unemployment. John Kenneth Galbraith, serving then as the director of the US Office of Economic Security Policy, accorded to Keynesian ideas their rightful place in history, noting that the rebound from wartime spending was magnificently enabled by Keynes economics (Madrick, 2005). The widespread recognition of Keynes’ ideas became even more evident with the US abolition of the money system pegged on the gold standard in 1971, along time premise of critique from Keynes (Pearlstein, 2008). As if the historical lessons of the Roaring Twenties’ prosperity never taught classical economists, and indeed the public at large, the consequences of unfettered financial markets, the errors that led to the Great Depression surfaced in the winter of 2007 with a deadly financial crisis as much. For decades, mainstream economists, led in part by Milton Friedman, preached their gospel as politicians internalize wholly without questioning the myth of efficient free markets. The events of the financial crisis, beginning with the subprime mortgage crisis in the United States, have clearly demonstrated that the proponents of efficient free Capital Markets have Nobel Prize medals only to cover naked errors long foreseen by Keynes. Following the recommendations from the pro-Keynesian economist such as Nobel laureate Paul Krugman, Economist Robert Shiller, among other renowned economists and governments across the world, beginning with the United States (the source of the problem), had little choice other than embracing the hitherto disdained Keynesian economics in bailing out a deteriorating crisis (Krugman, 2009; Shiller, 2008). Through his long probabilistic search for the unknown via the magic use of numbers, Keynes made a distinctive line separating risk and uncertainty, the two terms that classical economics, perhaps, never had time to critically delineate with respect to the theory of the self-regulating markets. Contrary to the epistemological assumption of the classical perfect expectations of future occurrences, an impaired projection that brought the world to its knees twice in less than a century apart, Keynes’ knowledge of the future was a subject littered, most frequently, with immense degree of disappointment (Skidelsky, 2011). It is a fact that though available information can yield useful prognostic probabilities, the guide to the combinative factors in the future postulates remains rather grim, thus the decision by Keynes to ‘build trust and anchor expectations’, especially in investment matters. We are where we are because of a watered down trust and a subsequently gagged expectation as a result of securitized market failure that brought with it unfair and non-orderly investment practices. A great thinker who was able to reorient economic analysis away from the binds of the classical analysis towards a realistic perspective of economic circumstances at hand, Keynes designed economics that has, no doubt, saved the crumbling possibilities of modern civilization. I am certain that were he [Keynes] to be alive today, his recommendations to the federal government would be to (1) embark immediately on fixing any dilapidated infrastructure such as roads, sanitation, public recreational facilities, bridges, and/or anything of the sort within the system; (2) increase spending in the search for alternative energy solutions; and (3) possibly tighten the regulations for an orderly operation of the public financial markets free from deceptive information, misconceptions and any other fraudulent sale of securities. The stimulus package among other raft of measures taken by the Obama administration has clearly demonstrated the effectiveness of Keynes’ economics. Definitely, Keynes would have demanded even more action from the administration to eliminate the sticky unemployment and the economic challenges of our time. References Davidson, P. (2007). John Maynard Keynes. Basingstoke: Palgrave Macmillan. Harrod, R. F. (1951). The Life of John Maynard Keynes. London: MacMillan. Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. New York: Harcourt, Brace. [Reprinted as: The Collected Writings of John Maynard Keynes, (1973), London: Macmillan]. Krugman, P. (2009, January 5). Fighting off depression. The New York Times. Retrieved from http://www.nytimes.com/2009/01/05/opinion/05krugman.html?_r=0 Madrick, J. (2005). A Mind of His Own. Review of John Kenneth Galbraith: His Life, His Economics, His Politics. The New York Review of Books, 52 (9), 15-18. Pearlstein, S. (2008, November 26). Keynes on Steroids. The Washington Post. Retrieved from http://articles.washingtonpost.com/2008-11-26/opinions/36859712_1_financial-system-central-bank-balance-sheet Shiller, R. (2008). The Subprime solution: How today's global financial crisis happened, and what to do about it. Princeton N.J.: Princeton University Press Skidelsky, R. (2011). The relevance of Keynes. Cambridge Journal of Economics, 35 (1), 1-13. Read More