The Economic Contributions of John Maynard Keynes - Essay Example

The economic contributions of John Maynard Keynes Name Course Instructor’s Name Date John Maynard Keynes (1883- 1946) was a British economist whose views had a great impact on political theory, modern economics and government fiscal policies. Keynes had an interest in collecting books, for instance he collected and protected with great passion so many papers of Isaac Newton. Generally, Keynes was also interested in literature and particularly drama. He showed this by extending financial support to the Cambridge Arts Theatre and this allowed the establishment to be one major British stage outside London for some time. Keynes was destined to be a very powerful free market force, for example when the world experiencing a problem between choosing capitalism and communism, he instead offered a third choice that was seen to turn economics world upside down. Keynes is perhaps one of the best known economists whose views and ideas have greatly influenced the theory and practices of modern macroeconomics and also the government economic policies. He to a great extent developed the earlier work on causes of the business cycles, as well as recommend great use of fiscal as well as monetary measures in the mitigation of the undesirable impacts of economic recessions as well as depressions. Other economists consider Keynes as one of the most important founders of the Keynesian theory also known as the school of thought and its various offshoots. In this essay, we will discuss some of the major economic contributions of Keynes giving examples of how the society have applied Keynes theories in solving economic downturns such as unemployment, recessions and depression among others. Keynes economic contributions commenced during the great depression. According to Keynes, free market capitalism was essentially unstable and indeed it required to be formulated in order to fight both the great depression and Marxism. Keynes ideas were all included in his book “The General Theory of Employment, Interest and Money” which was published in 1936. During the great depression in 1920s, Keynes had begun a hypothetical work to study the relationship between money, prices and unemployment. The main view of the work was that when the amount of money that is being saved is much more than the amount being invested, which often takes place when the interest rates are quite high, then unemployment highly increases. This is as a result of employees not wanting to spend a high percentage of what employers pay, hence making it very hard for the employers in total to make profits. The great depression acted as a channel which attracted Keynes attention although he wrote his book some years after the depression. During this time, most key figure such as President Franklin D. Roosevelt had a feeling that the use of government expenditure to control the depression seemed too simple. Due to this, Keynes theory only stuck by placing the economy in terms of demand for goods and services. In his New Deal, President Roosevelt hired employees in public projects. This as a result offered jobs to workers thus reduced unemployment levels and at the same time, created demand for goods and services which were produced by businesses (Krugman par. 7). Keynes theory was also applied during the Second World War as the government used government spending to purchase military equipments from industries manufacturing the same. Another economic contribution of Keynes was in the treatment of unemployment. Unlike the classical economics that centered on the perception that markets only settle at full employment, Keynes however contradicted with them as he said that prices and wages are flexible, and that full employment is not essentially achievable or optimal (Radcliffe par. 7). This as explained by Keynes implies that the economy seeks out to discover a balance between the demand and supply of wages by the workers and businesses respectively. In case of a fall of unemployment rates, then there will be low demand of labour and this implies that employees can demand for higher wages (Radcliffe par. 7). At some point, business will be forced to quit hiring more workers. Wages are generally expressed both in nominal and real terms. Apparently, real wages usually take in to account the impacts of inflation whereas for nominal wages, this is not the case. According to Keynes, employees cannot accept low wages unless there is deflation (a fall in the prices of goods), or a fall in other wages in the economy (Radcliffe par. 8). Furthermore, it is very hard for businesses to force employees to cut down their nominal wages. Keynes believed that employment levels could only be increased by cutting down the real wage rates which is inflation adjusted (Keynes pp. 231-256). Nevertheless, this could lead in a deepening depression, reduced aggregate demand and a lower sentiment (Radcliffe par. 8). In addition, Keynes speculated that prices and wages responded very slowly to modifications in demand and supply. In order to solve this, Keynes advocated for direct government intervention. In 1925, Keynes expressed his concern regarding the continual unemployment of the British shipyard workers, coal miners and textile employees. Keynes gave his support to the liberal Party Program of public works in giving jobs to the unemployed staff. However, this was criticized by the classical economists who expected the market forces of demand and supply to solve these predicaments and also, the treasury believed that increasing government deficit by reducing unemployment levels would lead to a decline in the private investment. Keynes however put forth that, the only solution in reducing unemployment levels is by increasing government expenditure and in addition run a budget deficit, rather than cutting on employees wage rates (Krugman par. 7). Many governments and most of his professional colleagues enthusiastically, accepted Keynes perceptions. It is apparent that, in the modern day, his ideas of reducing unemployment levels are still applied by most countries. It is apparent that many people remember Keynes general theory by the fact that, he gave governments a central responsibility in economics. This is perceived to be supposedly written in order to prevent capitalism from taking part in central planning, but it gave the governments a role to intervene directly in the markets. As viewed by Keynes, deficit financing, taxation, public expenditures and consumption are more significant compared to private investments, savings, low taxes and balanced government budgets (Radcliffe par. 9). The latter are classical economic virtues. According to Keynes, direct government intervention could fix a state of depression by increasing it’s spending, and at the same time, employing different macroeconomic methods to smooth future cycles. In backing up his general theory, Keynes added government spending to the general national output. This however, was contentious from the start as government do not really invest or save as private business do but instead raises money by debt issues or mandatory taxes. By adding government spending to the national output, he demonstrated that this would in turn stimulate the economy whilst individuals and businesses were tightening the budgets. Theses ideas were very significant and they greatly influenced the New Deal and the welfare state of the united state which grew up in the postwar era (Radcliffe par 12). Through Keynes theory, it is true to say that the central government is one of the main players in a country’s economy. This is evidenced by the fact that, the central government is capable of influencing the direction of the economy by controlling the supply of money. This it can do by both altering the rates of interest or by buying or selling government bonds. Unlike in the classical economics who believes that market forces of demand and supply should be left to improve employment and GDP, Keynesian economics believe that governments should intervene by the use of deficit spending. As put forth by Keynes, government spending is also capable of creating demand for goods and services in cases where business are not willing to construct more factories and persons are not willing to consume more. In such a case, government spending can expend the extra production ability. Keynes as well hypothesized that the general impact of government expenditure would be multiplied in cases whereby, business employed more people and these workers in turn uses up the money earned through consumption (Keynes pp. 231-246). It is vital to comprehend that government function in the economy is not exclusively to dampen the impacts of recessions or pull a nation from a state of depression; but it must also keep the economy away from boom. As suggested by the Keynesian economics, the interaction between the overall economy and the government move in the opposite directions of the business cycles: less spending in an upturn and more spending in a downturn (Radcliffe par. 11). In case of an economic boom that leads to high inflation rates, the government can take actions of increasing taxes or cutting back on its expenditure. This is termed as fiscal policy. It is true to say that many governments all over the world are using Keynes general theory to control the economy. His idea of government intervention in the economy is still applied up to date. Governments usually use fiscal policy to regulate the economy. In macroeconomic theory, liquidity preference denotes the demand for money. Keynes first developed this concept in his book the general theory of employment, interest and money (1963) in an attempt to explicate the determination of interest rate by demand and supply for money. Keynes explains that the demand for money depends on the interests foregone without holding bonds. He further argues that interest rates can never be rewards for saving precisely because, if one hoards his own savings in cash by hiding it some place for instance, he will not receive any interests, although he will have refrained himself from consuming his income. Keynes argues that interest is a reward for investing liquidity rather than saving (Lalnunmawia par. 1). The demand for liquidity, according to Keynes is determined by three motives: precautionary motive whereby people will choose having liquidity just in case of any unexpected social problems that will need unusual costs, the speculative motive; where people tend to hold liquidity in speculation that the bond prices could fall and the transactions motive where people will prefer having liquidity as an assurance for their basic transactions since income is not always available and the level of income is what determines the liquidity demanded (Lalnunmawia par 3, 4 &5). Currently, the Keynesian general theory is seldom used in its original form. However, its solutions to depression and drastic approach to business cycles had a philosophical effect on the field of economics as a whole. Nowadays, most governments apply some portions of Keynes theory to control booms and economic cycles. Most economists today merge Keynesian principles with monetary policy and macroeconomic while determining what kind of action to take. Works Cited Radcliffe, B. Can Keynesian Economics Reduce Boom-Bust Cycles? 14th June 2009. available at http://www.investopedia.com/articles/economics/08/keynesian-economics.asp#13114550800622&close. Accessed July 25, 2011. Lalnunmawia, H. Keynes’ liquidity preference theory of interest. 13th August 2010. Available at http://www.trcollege.net/study-materials/97-keynes-liquidity-preference-theory-of-interest?catid=63%3Aeconomics. Accessed July 25, 2011. Krugman, P. "Fighting Off Depression". The New York Times. 5th January 2009. available at http://www.nytimes.com/2009/01/05/opinion/05krugman.html . Accessed July 25, 2011. Keynes, J M. The General Theory of Employment, Interest and Money. New Delhi: Atlantic Publishers & Dist., 2006. Read More