John Maynard Keynes: The Relevance of His Economic Theories Author’s Details: Institutional Affiliation: 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…
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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
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In the income-expenditure framework, real GDP’s equilibrium level is real GDP’s level that is in agreement with the existing aggregate expenditure level (Tucker 2008). *picture taken from Tucker (2008, p. 224) The above diagram is the income-expenditure model of real GDP’s equilibrium formulated by Keynes.
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