john maynard keynes. keynesian economics
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John Maynard Keynes Keynesian economics
Abdul Ruhulla
Financial University under the Government of the Russian Federation
(1883-1946)
The Early J. M. Keynes Born in 1883 in Cambridge, England Son of John Neville Keynes
Neville was a professor of Economics and Logic at Cambridge Univ., and wrote on Economic Methodology
Won a scholarship to Eton Boy Genius
Won prizes for his work in the classics, mathematics, history, English essays
Wrote papers on contemporary social problems, participated in crew and debate, acted, read everything
Became an expert in medieval latin poetry Part of Eton’s social elite Won a scholarship to King’s College, Cambridge
Keynes as a College Student President of the Student Union President of the University Liberal Club Rowed, studied philosophy, played bridge, visited
art galleries, collected rare books, went to the theatre
Became a member of the “Apostles”, a secret and highly exclusive Cambridge intellectual society
Became a member of the literary set called “the Bloomsbury Group.”
Keynes After College Studied economics for perhaps 1 year, but did poorly
on his exams. Took a civil service exam and took a job at the India
Office for 2 years. 1908, his father managed to get him a job as a
lecturer at King’s College. Later he became a Fellow. 1911, he became editor of the Economic Journal. Worked at the Treasury during WWI. 1921, he published A Treatise on Probability. This was
his dissertation. It won him a fellowship at King’s College, Cambridge.
Marries Lydia Lopokova.
Keynes, Inter-war Years Keynes wrote the Economic Consequences of the Peace
(1919), regarding reparation payments Best Seller Made him a public celebrity
1923, Tract on Monetary Reform (against returning to the pre-war gold standard)
Economic Consequences of Mr. Churchill (1925, warned of depression)
1930, Treatise On Money Makes millions in the stock market, commodity, and forex
markets. 1936, General Theory of Employment, Interest and Money 1937, he has a serious heart attack Died in 1946
Keynesian EconomicsThe main ideas
Keynesian Economics Based on the idea of the need for
state regulation of the economy. No more self-adjustments
For the prosperity of the economy: All have to spend as much money
as possible; The state should stimulate
aggregate demand growth even by the budget deficit, debt and unsecured issue of money.
Laissez-faire
Business cycle During Great Depression
He outlined the limitations of Microeconomics theory. Due to unemployment and poverty, the demand for good and services dropped. Many workers were unwilling to accept lower wages.
Keynesian Economics Impact Aid in the formation of the 20th Century’s economy Consequences of the Great Depression were lessened Government took an active role in the country's economy (Departure
from neoclassical theories)
Intro to Macroeconomic Theory High unemployment rate greatly influenced
the development of macroeconomics Challenged the established neoclassical
economics Introduced important concepts such as:
Consumption Multiplier Marginal efficiency of capital Liquidity preference
Government's responsibility is to Reach and maintain full employment Regulate markets and free trade
END OFNEOCLASSICAL
THEORIES!such as Laissez-faire
Debates Over Aggregate SupplyClassical Theory vs. Keynesian Theory
13
Three Ranges of Aggregate Supply1. Keynesian Range - Horizontal at low output2. Intermediate Range - Upward sloping3. Classical Range - Vertical at Physical Capacity
Price level
Real domestic output, GDP
AS
Qf14
Keynesian Range
IntermediateRange
ClassicalRange
Consumption Function
C0
Yd
C
c = mpc = C/Yd = marginal propensity to consumeC
Yd
C = C0 + mpc x YdM = 1/(1-mpc)
C = Consumer spendingA = Autonomous consumptionYD = Real disposable income
M - multiplier
Shows the relationship between real disposable income and consumer spending, the latter variable being what Keynes considered the most important determinant of short-term demand in an economy.
d
Plannedexpenditureexceeds real GDP
Real GDP (trillions of 1992 dollars per year)
Agg
rega
te p
lann
ed e
xpen
ditu
re(tr
illio
ns o
f 199
2 do
llars
/yea
r)
4.0
6.0
8.0
10.0
0 2 4 6 8 10
a
b c
e
f
Real GDP exceedsplanned expenditure
45o line
Equilibriumexpenditure
IG
C0
Total ExpenditureC+I+G
Income-Expenditure modelExplains fluctuations in production of goods and services and spending. The model basically states that we produce as many goods as will sell on the market and fluctuations in production and expenditure are tied to keep an economy stable.
The General Theory
Microeconomics and macroeconomics do not operate on the same basis. One cannot assume that what is true for the economic agent at the level of the individual consumer or firm is true in aggregate. This amounts to the fallacy of composition.
In microeconomics, relative price effects dominate. This is not true in macroeconomics. In macroeconomics, income effects dominate, making income more important in determining aggregate economic behavior.
The General Theory
Therefore, consumption depends primarily upon income, not interest rates.
C C(r), but rather C = C(Y) “People don’t change their standard of living simply
because the interest rate changes a few points.”
The General Theory
Money plays a key role in the economy. The use of money leads to uncertainty, and makes “piercing the veil” impossible. A money economy is fundamentally different from a barter economy. The classical dichotomy cannot hold.
Interest rates are established in the money market. People may rationally hoard money, holding money
for purposes other then making transactions.Equilibrium is not AD = AS. It is a state that persists.
Why did the Keynesian theory didn't work? Government spend too much money
on post-WWII events. (Examples: Vietnam war, sending the first man to the moon)
The Keynesian solution stopped working
Unemployment became worst It created Inflation In conclusion Keynesian theories
work best on economics catastrophes
Thank you for attention