Seminar Notes - Keynes

This week was a change of pace in the HCJ side of the course and we learned about economics. I have to admit that prior to the lecture and seminar, I had absolutely no idea about the details of economics and had heard of Keynes but did not know what his economic theory was. The following are brief notes about Keynes from the reading and seminar.

• John Maynard Keynes's magnum opus was The General Theory of Employment, Interest and Money.
• Keynes wrote during a time of mass unemployment, waste and suffering.
• He highlighted the failures of capitalism as being surprisingly narrow and technical, as were the causes of mass unemployment.

There are four key points of The General Theory:

1. Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment.
2. The economy's automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully.
3. Government policies to increase demand, by contrast, can reduce government unemployment quickly.
4. Sometimes, increasing the money supply won't be enough to persuade the private sector to spend more, and government spending must step into the breach.

At the time these ideas were radical and unthinkable.

• Keynes believed that the then conventional view about the relationship between wages and employment involved a fallacy of composition.
• Keynes needed to 'provide an alternative construction.'
• He appreciated the power of the reigning orthodoxy.
• He believed it was naive to believe a fall in wages can increase employment
• He made a crucial innovation with the demolition of Say's Law.
• He tried to explain why the economy sometimes operates below full employment; given that overall demand is depressed - how can we create more employment?
• Keynes believed that changes in the quantity of money can affect the rate of interest and through the rate of interest can affect aggregate demand.
• The General Theory was written in a monetary environment where interest rates stayed close to zero.
• Keynes believed that the conditions of the 1930s would persist indefinitely - he was wrong.
• His consumption function is grounded in psychological observation rather than intertemporal optimization.
• Keynes mistook an episode for a trend.
• He underestimated the ability of mature economies to starve off deminishing returns.
• Persistant inflation has kept interest rates high and monetary policy effective.

Hicks interpreted The General Theory in two curves:

1. The IS curve - shifted by changes in taxes and spending
2. The LM curve - shifted by changes in money supply.

• Keynes wrote during the Depression when other economists took a socialist stance
• He rejected Say's Law - which stated that supply creates demand aka supply side economics.
• Gross domestic product (GDP) is the total value of market prices on all goods.
• A recession is when the national GDP decreases for 3/4 of the year.
• When this happens for two or more years consecutively it is a depression.
• Economic growth must be faster than the demographic (population increase)
• A larger population and less money results in unemployment and poverty.
• Unemployment is the cause and result of negative economic growth.
• Full employment would equal economic growth.
• According to Classical Economists government causes unemployment.
• According to Keynes lack of demand causes unemployment.
• Keynes said that the answer would be to just print money and give it to people - the multiplier effect.