Analysis Of Keynes Economic Thought Critically Economics Essay

Abstract

The purpose of this paper is to investigate Keynes' Economic thought critically, how his thoughts have revolutionized macroeconomic thinking and how his insurance policy issues have affected the insurance policy decisions of the governments of different countries of the world. Finally, this newspaper will try to investigate the relevance of Keynes' plan views in the point of view of Bangladesh.

Introduction:

John Maynard Keynes was a English economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economical policies of government authorities. He identified the causes of business cycles, and advocated the utilization of fiscal and economic measures to mitigate the adverse effects of financial recessions and depressions. His ideas are the basis for the school of thought known as Keynesian economics, and its own various offshoots.

A analysis of the evolution of Keynes' insurance plan views is, by itself, both interesting and worthwhile. The issues involved are quite sophisticated and, in the region, there a whole lot of misconception on the list of historians of financial thought. It really is quite true that Keynes' global fame lies basically in his contribution to natural theory. In fact he revolutionized macroeconomic thinking by his magnum opus, The General Theory of Work, Occupation and Money (1936). But it is also equally true that his real interest, as an economist, place not in 100 % pure theory however in policy. He always wanted to correct the current economic climate by suitable insurance plan devices. His strong interpersonal sense and determination never allowed him to live on very long in the ivory tower of academe.

Background:

John Maynard Keynes was created on 5 June, 1883 in Cambridge to a middle-class family. His dad, John Neville Keynes, was an economist and a lecturer in moral sciences at the College or university of Cambridge and his mother Florence Ada Keynes an area cultural reformer. Keynes received a scholarship to study at Eton, where he shown talent in a wide range of subjects, particularly mathematics, classics and history. In 1902 Keynes still left Eton for King's University, Cambridge after obtaining a scholarship because of this also to study mathematics. The famous Alfred Marshall begged Keynes to be an economist. Keynes started out his professional career with a solid, substantial book, Indian Currency and Money (1913). This book was essentially insurance policy oriented. It was an invasion on the Article of the Uk Rose Committee of 1898 which experienced advised the adoption of the Platinum Standard for India. Thereafter for some time, he didn't employ himself in any scholarly economic evaluation. But in 1919 he had written a reserve -- The Economic Implications of the Peacefulness - which helped bring him instant international popularity. It was chiefly concerned with coverage issues - the German reparations problem. To be able to understand the changes in Keynes' thought we have to consider the three main catalogs that he composed in the inter conflict period. They are (1) A Tract on Monetary Reform (1923), (2) The Treatise on Money (Oct 1930), and (3) THE OVERALL Theory of Job, Career and Money (February1936). Inside the first Keynes' implemented the number theory of money which he learnt from his teachers-Alfred Marshall and Alec Pigou. He didn't break any new ground but followed the traditional path. In the next reserve Keynes' really wished to innovate. The 3rd book, the overall Theory (GT), which completely modified the type of macroeconomic theory in the form of his well known C+I+G=Y equation was entirely novel and truly original. In every these three catalogs Keynes' was concerned with the most intractable contemporary monetary problem-that of unemployment. This was the situation that was plaguing British isles economy since the end of the First World Warfare. In all these three literature Keynes had been arguing contrary to the classical way of combating unemployment with a lower in the nominal wage rate.

Keynesian Economics:

According to Keynesian theory, some microeconomic-level activities - if used collectively by a huge proportion of individuals and businesses - can lead to inefficient aggregate macroeconomic final results, where the current economic climate works below its potential outcome and expansion rate. Such a situation had recently been described by traditional economists as a general glut. Keynes contended a general glut would appear when aggregate demand for goods was inadequate, leading to an economical downturn with unnecessarily high unemployment and deficits of potential productivity. In that situation, government regulations could be utilized to increase aggregate demand, thus increasing financial activity and cutting down unemployment and deflation. Keynes argued that the perfect solution is to the fantastic Despair was to activate the economy ("inducement to invest") through some mixture of two techniques: a decrease in interest levels and government investment in infrastructure. Investment by federal injects income, which results in more spending in the overall economy, which stimulates more production and investment concerning still more income and spending and so forth. The initial stimulation begins a cascade of happenings, whose total increase in financial activity is a multiple of the initial investment. Keynes desired to distinguish his theories from and oppose those to "classical economics, " where he designed the economic ideas of David Ricardo and his followers, including John Stuart Mill, Alfred Marshall, Francis Ysidro Edgeworth, and Arthur Cecil Pago. A central tenet of the traditional view, known as Say's legislations, state governments that "supply creates its own demand". Say's Rules can be interpreted in two ways. First, the declare that the full total value of end result is add up to the amount of income acquired in production is because a countrywide income accounting identification, and is also therefore indisputable. Another and stronger lay claim, however, that the "costs of result are always protected in the aggregate by the sale-proceeds caused by demand" is determined by how intake and keeping are linked to creation and investment. Specifically, Keynes argued that the next, strong form of Say's Regulation only contains if raises in individual cost savings exactly match an increase in aggregate investment.

Keynes sought to build up a theory that could clarify determinants of saving, utilization, investment and creation. In that theory, the connection of aggregate demand and aggregate source determines the level of output and job throughout the market.

Marginal Propensity to take and Marginal Efficiency of Capital:

Keynes developed the idea of marginal propensity to take (MPC) and Marginal efficiency of Capital.

Marginal propensity to take: If the income of family members increase by a specific amount, only a fraction of the increase is allocated to usage. If we look at the consumption function-

C=`C + cY

Here the coefficient c is called the MPC. Keynes argued based on a psychological law of consumption that the MPC out of income was significantly less than unity and would decline as income increased. The implication is the fact, in the developed capitalist current economic climate, the nationwide propensity to take tends to decline, which if not matched up by increased investment, will cause the effective demand to fall short of full employment output.

Marginal efficiency of Capital: The Marginal Efficiency of Capital is the partnership between the possible yield of the investment and its supply price or replacement cost, i. e. the relation between the prospective yield of one more unit of this kind of capital and the cost of producing that product, furnishes us with the marginal efficiency of capital of this type.

Keynes says on webpage 135 of General Theory

"I explain the marginal efficiency of capital to be equal to that rate of discount which would make today's value of the series of annuities given by the dividends expected from the capital-asset during its life just equal to its source price. "

Wages and spending:

During the fantastic Depression, the traditional theory defined economical collapse as simply a lost incentive to create, and the mass unemployment as a result of high and rigid real wages.

To Keynes, the dedication of wages is more complicated. First, he argued that it's not real but nominal wages that are occur negotiations between employers and personnel, as opposed to a barter marriage. Second, nominal wage cuts would be difficult to put into result because of laws and wage agreements. Even traditional economists admitted these exist; unlike Keynes, they advocated abolishing minimum amount wages, unions, and long-term deals, increasing labor-market versatility. However, to Keynes, people will resist nominal wage reductions, even without unions, until they see other wages slipping and an over-all fall of prices.

He also argued that to improve employment, real wages had to go down: nominal wages would need to show up more than prices. However, doing so would reduce consumer demand, so the aggregate demand for goods would drop. This would in turn reduce business sales earnings and expected revenue. Investment in new plants and equipment-perhaps already discouraged by prior excesses-would then become more risky, not as likely. Instead of elevating business expectations, wage cuts could make concerns much worse.

Further, if salary and prices were falling, people would commence to expect those to fall. This could make the economy spiral downward as those who acquired money would simply wait around as slipping prices made it more valuable-rather than spending. As Irving Fisher argued in 1933, in his Debt-Deflation Theory of Great Depressions, deflation (falling prices) can make a depression deeper as dropping prices and income made pre-existing nominal debts more valuable in real conditions.

Money Illusion: The term was coined by John Maynard Keynes in the first twentieth century, and Irving Fisher composed an important e book on the subject, The Money Illusion, in 1928. The lifetime of money illusion is disputed by financial economists who contend that individuals work rationally (i. e. think in real prices) in regards to to their prosperity. It's been contended that money illusion influences economic tendencies in three main ways

Price stickiness. Money illusion has been suggested as one reason why nominal prices are gradual to change even where inflation has brought on real prices or costs to rise.

Contracts and regulations are not indexed to inflation as frequently as one would rationally expect.

Social discourse, in formal press plus more generally, reflects some dilemma about real and nominal value.

Money illusion can also influence people's perceptions of results. Experiments show that individuals generally understand a 2% slice in nominal income as unfair, but visit a 2% surge in nominal income where there is 4% inflation as reasonable, despite them being almost rational equivalents. Further, money illusion means nominal changes in price can influence demand even if real prices have remained constant.

If employees use their nominal wage as a reference point when evaluating wage offers, organizations can keep real pay relatively lower in a period of high inflation as workers accept the apparently high nominal wage increase. These lower real salary would allow companies to employ more staff in intervals of high inflation.

Excessive Cutting down:

To Keynes, increased saving, i. e. keeping beyond designed investment, was a serious problem, encouraging downturn or even despair. Excessive keeping results if investment falls, perhaps scheduled to falling consumer demand, over-investment in previous years, or pessimistic business prospects, and if cutting down will not immediately fall season in step, the economy would drop.

The traditional economists argued that interest levels would fall because of the excess supply of "loanable funds". The first diagram, designed from the only real graph in The General Theory, shows this technique. (For straightforwardness, other sources of the demand for or way to obtain funds are disregarded here. ) Presume that permanent investment in capital goods comes from "old I" to "new I" (step a). Second (step b), the causing excess of saving causes interest-rate slices, abolishing the excess source: so again we have saving (S) add up to investment. The interest-rate (i) street to redemption inhibits that of production and occupation.

Keynes had a complex argument from this laissez-faire response. The graph below summarizes his debate, assuming again that fixed investment falls (step A). First, conserving does not fall season much as rates of interest fall, since the income and substitution effects of falling rates use conflicting guidelines. Second, since organized set investment in herb and equipment is mainly based on long-term anticipations of future profitability, that spending will not climb much as interest levels fall season. So S and I are drawn as steep (inelastic) in the graph. Given the inelasticity of both demand and supply, a huge interest-rate fall is needed to close the saving/investment difference. As drawn, this requires a negative interest at equilibrium (where the new I sections would intersect the old S collection). However, this negative interest rate is not essential to Keynes's argument.

Third, Keynes argued that saving and investment aren't the key determinants of interest levels, especially in the short run. Instead, the way to obtain and the demand for the stock of money determine interest rates in the brief run. (This is not drawn in the graph. ) Neither changes quickly in response to abnormal saving to permit fast interest-rate modification.

Finally, because of fear of capital deficits on assets besides money, Keynes suggested that there may be a "liquidity capture" establishing a floor under which rates of interest cannot land. While in this trap, interest levels are so low that any increase in money supply may cause bond-holders (fearing increases in rates of interest and therefore capital losses on their bonds) to sell their bonds to achieve money (liquidity). In the diagram, the equilibrium suggested by the new I sections and the old S line cannot be reached, so that surplus saving persists. Even if the liquidity capture does not are present, there is a fourth (perhaps most important) component to Keynes's critique. Keeping will involve not spending all of one's income. It thus means insufficient demand for business outcome, unless it is well balanced by other sources of demand, such as predetermined investment. Thus, excessive cutting down corresponds to an unwanted accumulation of inventories, or what traditional economists called an over-all glut. This pile-up of unsold goods and materials promotes businesses to diminish both production and employment. This in turn lowers people's incomes-and saving, causing a leftward change in the S lines in the diagram (step B). For Keynes, the street to redemption in income did most of the job by ending unnecessary saving and allowing the loanable cash market to achieve equilibrium. Instead of interest-rate adjustment resolving the issue, a recession will so. Thus in the diagram, the interest-rate change is small.

Active Fiscal Plan:

As known the classicals wanted to balance the government budget. To Keynes, this might exacerbate the fundamental problem: pursuing either insurance plan would raise keeping (broadly defined) and thus lower the demand for both products and labor. For instance, Keynesians see Herbert Hoover's June 1932 tax increase as making the Despair worse.

Keynes† ideas influenced Franklin D. Roosevelt's view that inadequate buying-power induced the Unhappiness. During his presidency, Roosevelt used some aspects of Keynesian economics, especially after 1937, when, in the depths of the Melancholy, america suffered from downturn yet again following fiscal contraction. But to numerous the true success of Keynesian coverage is seen at the starting point of World Warfare II, which provided a kick to the earth economy, removed uncertainty, and obligated the rebuilding of destroyed capital. Keynesian ideas became almost established in social-democratic Europe after the battle and in the U. S. in the 1960s.

Keynes† theory suggested that active government policy could be effective in taking care of the economy. Rather than seeing unbalanced federal government budgets as incorrect, Keynes advocated what has been called countercyclical fiscal insurance policies, that is procedures which acted up against the tide of the business enterprise circuit: deficit spending whenever a nation's economy suffers from tough economy or when recovery is long-delayed and unemployment is persistently high-and the suppression of inflation in growth times by either increasing taxes or reducing on federal outlays. He argued that government authorities should solve problems in the short run rather than waiting for market forces to do it over time, because "in the long run, we all have been dead.

This contrasted with the classical and neoclassical financial examination of fiscal plan. Fiscal stimulus (deficit spending) could actuate production. But to these colleges, there is no reason to believe this excitement would outrun the side-effects that "crowd out" private investment: first, it would boost the demand for labor and raise wages, hurting profitability; Second, a federal government deficit escalates the stock of federal bonds, minimizing their market price and pushing high interest levels, making it more costly for business to finance fixed investment. Thus, efforts to encourage the current economic climate would be self-defeating.

The Keynesian response is that such fiscal insurance plan is only appropriate when unemployment is persistently high, above the non-accelerating inflation rate of unemployment (NAIRU). If so, crowding away is nominal. Further, private investment can be "crowded in": fiscal stimulus boosts the market for business output, raising cash flow and profitability, spurring business optimism. To Keynes, this accelerator effect meant that government and business could be suits alternatively than substitutes in this situation. Second, as the stimulus occurs, gross local product rises, boosting the quantity of saving, assisting to finance the upsurge in resolved investment. Finally, government outlays need not always be wasteful: government investment in public goods that will not be provided by profit-seekers will encourage the private sector's development. That is, government spending on such things as basic research, general public health, education, and infrastructure may help the long-term progress of potential productivity.

Multiplier Effect and INTEREST:

Two areas of Keynes' model had implications for policy:

First, you have the "Keynesian multiplier", first developed by Richard F. Kahn in 1931. Exogenous increases in spending, such as a rise in federal outlays, improves total spending by a multiple of this increase. A authorities could stimulate significant amounts of new creation with a modest outlay if

The people who obtain this money then spend most on usage goods and save the others.

This extra spending allows businesses to employ more people and pay them, which allows an additional increase consumer spending.

This process persists. At each step, the increase in spending is smaller than in the last step, so the multiplier process tapers off and allows the attainment of equilibrium. This story is modified and moderated if we move beyond a "closed market" and generate the role of taxation: the go up in imports and duty payments at each step reduces the amount of induced consumer spending and the size of the multiplier impact.

Second, Keynes re-analyzed the effect of the interest on investment. In the classical model, the supply of funds (keeping) determined the amount of fixed business investment. That is, since all personal savings was placed in banks, and everything business investors looking for borrowed funds went to banks, the quantity of savings determined the amount that was open to invest. To Keynes, the amount of investment was driven individually by long-term income objectives and, to a lesser extent, the interest rate. The latter opens the opportunity of regulating the market through money source changes, via financial policy. Under conditions like the Great Despair, Keynes argued that this methodology would be relatively ineffective compared to fiscal plan. But during more "normal" times, monetary expansion can energize the current economic climate.

Criticism:

While Milton Friedman identified THE OVERALL Theory as 'a great reserve', he argues that its implicit separation of nominal from real magnitudes is neither possible nor advisable; macroeconomic coverage, Friedman argues, can reliably influence only the nominal. He and other monetarists have therefore argued that Keynesian economics can lead to stagflation, the mixture of low expansion and high inflation that developed economies endured in the first 1970s.

Austrian economist Friedrich Hayek criticized Keynesian economical procedures for what he called their fundamentally collectivist strategy, arguing that such theories encourage centralized planning, which leads to malinvestment of capital, which is the cause of business cycles. Hayek also argued that Keynes' analysis of the aggregate relations in an market is fallacious, as recessions are induced by micro-economic factors. Hayek claimed that what starts off as short-term governmental fixes usually become permanent and expanding federal government programs, which stifle the private sector and civil population.

Other Austrian school economists have also attacked Keynesian economics. Henry Hazlitt criticized, paragraph by paragraph, Keynes' Standard Theory in his 1959 intensive critique of Keynesianism: The Inability of the brand new Economics. In 1960 he posted the e book The critics of Keynesian Economics where he collected collectively the major criticisms of Keynes made up to that yr.

Murray Rothbard accuses Keynesianism of having "its roots deep in middle ages and mercantilist thought. "

Another influential school of thought was predicated on the Lucas critique of Keynesian economics. This called for greater reliability with microeconomic theory and rationality, and particularly emphasized the idea of rational goals. Lucas and more argued that Keynesian economics required remarkably foolish and short-sighted habit from people, which totally contradicted the economic knowledge of their habit at a micro level.

My Understanding:

Although Keynes explicitly addresses inflation, The General Theory will not address it as an essentially monetary phenomenon nor suggest that control of the money supply or interest rates is the key solution for inflation. This issues both with neoclassical theory and with the knowledge of pragmatic policy-makers.

It is not always true which is said in multiplier impact that when a government will activate the economy, the excess spending will generate businesses to employ more people and pay them. Those who get the excess spending anticipated to government excitement may follow the capital-intensive method somewhat than labor-intensive method.

Keynes has argued that in the developed countries countrywide propensity to consume tends to drop as income raises. But if we consider in the perspective of some developed countries like USA among others, this interpretation is different with the reality, as nationwide propensity to consume tends to increase in these countries as income increases.

Keynes nevertheless successfully convinced multitudes of supposedly knowledgeable economists to accept a series of arguments. Savings became bad and deficits became good, and the prudent deposition of reserves for foreseeable and unforeseeable contingencies was imprudently in charge of disastrous implications. The deposition of capital belongings becomes an economic obstacle rather than an monetary advantage. Investment and career is stimulated by inflation and hindered by price declines. Market liquidity becomes more of a problem than an advantage.

As is repeatedly described throughout Keynes, "The General Theory, " there is no evidence that extra cost savings play any role in initiating durations of economic stress.

Like Marx and all socialists, Keynes looks totally ignorant of the inherent inefficiency of authorities management. He has total beliefs in the features of federal and "community" implemented economical systems. Keynes offers narrower given solutions directed at controlling interest levels, directing investment flows, redistributing riches, and finally directing the activities of major business entities.

Keynes thus pulls a broad final result predicated on his very slim special circumstance. His conclusion is applicable only for a shut system - thus actually hobbled with grossly limited financial production and living benchmarks - that determinedly ignores long-term implications. Even for shut systems, rigid wage systems must put higher pressures for modification on other cost factors - each with their own complex of influences - that Keynes doesn't consider.

Bangladesh Perspective:

Keynesian economics, insofar as it is designed in the overall Theory of Career, Interest and Money, has little validity in the framework of underdeveloped economies like Bangladesh that Keynesian involuntary unemployment is not the type of unemployment which these economies suffer, and the problem is one of long-term financial development as opposed to the attainment of 'full career' in the Keynesian sense. The doctrines of excessive saving and inadequate ingestion do not apply to underdeveloped countries like Bangladesh, where insufficient keeping is one factor limiting the expansion of investment and income. However, many of the doctrines of Keynes can be useful if they're properly executed.

At a period of tough economy, Keynes advised an economic insurance plan to raise the aggregate demand (e. g. through utilization, investment, and administration purchases). No surprise big economies round the world have declared big finances and considered unprecedented investment programs in the recent financial recession. Bangladesh's countrywide cover FY2009-10 appeared to have targeted the Keynesian need for investment. Admittedly, Bangladesh is a passive sufferer of the global recession and cannot blindly follow the steps of developed economies. The federal government budget of Bangladesh has always been in deficit. The reason behind this deficit is leaner government revenue collection and higher government spending. Rather than seeing unbalanced administration budgets as incorrect, A Keynesian interpretation of the approximated results suggests that by raising utilization expenditures, government shelling out for infrastructure also stimulates the demand-constrained Bangladesh market, which causes better utilization of development capacities. Subsequently, it increases nationwide output by way of a multiplier-accelerator device. Thus, deficit spending in a proper way induces positive effects on GDP development and on employment in the short-run through increased usage demand. This initial administration investment may 'group out' private investment by increasing interest rate. If so expansionary monetary insurance plan can be implemented to decrease interest and cause private investment. So, a powerful policy combine can improve the level of employment without impacting on private spending too much. Though there is certainly chance of inflationary pressure to expand even as we are experiencing now, an effective circulation of the way to obtain money need to be assured to prevent the condition of inequality and poverty from worsening.

Conclusion:

Keynes is broadly considered to be the father of modern macroeconomics, and by various commentators such as economist John Sloman, the most influential economist of the 20th century. Ahead of dying Keynes was a key number in the establishment of the International Monetary Account (IMF). The development of the global financial meltdown in 2007 has induced resurgence in Keynesian thought. The ex - British Best Minister Gordon Brown, President of america Barack Obama, and other world leaders have used Keynesian economics to justify authorities stimulus programs because of their economies. Though Keynes's ideas have been doubted, distrusted, nearly discarded and closely improved his ideas remain a subject of debate and practice in 21st century monetary policy.

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