The intent of this paper is to analyse Keynes ‘ Economic idea critically, how his ideas have revolutionized macroeconomic thought and how his policy issues have influenced the policy determinations of the authoritiess of different states of the universe. Finally, this paper will seek to analyse the relevancy of Keynes ‘ policy positions in the position of Bangladesh.
John Maynard Keynes was a British economic expert whose thoughts have deeply influenced the theory and pattern of modern macroeconomics, every bit good as the economic policies of authoritiess. He identified the causes of concern rhythms, and advocated the usage of financial and pecuniary steps to extenuate the inauspicious effects of economic recessions and depressions. His thoughts are the footing for the school of idea known as Keynesian economic sciences, and its assorted outgrowths.
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A survey of the development of Keynes ‘ policy positions is, by itself, both interesting and honoring. The issues involved are rather complex and, in the country, there a batch of misconception among the historiographers of economic idea. It is rather true that Keynes ‘ planetary celebrity lies fundamentally in his part to pure theory. In fact he revolutionized macroeconomic thought by his magnum musical composition, The General Theory of Employment, Employment and Money ( 1936 ) . But it is besides every bit true that his existent involvement, as an economic expert, lay non in pure theory but in policy. He ever wanted to rectify the economic system by suited policy devices. His strong societal sense and committedness ne’er allowed him to populate really long in the tusk tower of an academia.
John Maynard Keynes was born on 5 June, 1883 in Cambridge to a middle-class household. His male parent, John Neville Keynes, was an economic expert and a lector in moral scientific disciplines at the University of Cambridge and his female parent Florence Ada Keynes a local societal reformist. Keynes won a scholarship to analyze at Eton, where he displayed endowment in a broad scope of topics, peculiarly mathematics, classics and history. In 1902 Keynes left Eton for King ‘s College, Cambridge after having a scholarship for this besides to analyze mathematics. The celebrated Alfred Marshall begged Keynes to go an economic expert.[ 1 ]Keynes began his professional calling with a solid, significant book, Indian Currency and Finance ( 1913 ) . This book was basically policy oriented. It was an onslaught on the Report of the British Flower Committee of 1898 which had recommended the acceptance of the Gold Standard for India. Thereafter for some clip, he did n’t prosecute himself in any scholarly economic analysis. But in 1919 he wrote a book — The Economic Consequences of the Peace – which brought him instant international celebrity. It was chiefly concerned with policy issues – the German reparations job. In order to understand the alterations in Keynes ‘ idea we have to see the three chief books that he wrote in the inter war period. These are ( 1 ) A Tract on Monetary Reform ( 1923 ) , ( 2 ) The Treatise on Money ( October 1930 ) , and ( 3 ) The General Theory of Employment, Employment and Money ( February1936 ) . In the first Keynes ‘ followed the measure theory of money which he learnt from his teachers-Alfred Marshall and Alec Pigou. He did n’t interrupt any new land but followed the traditional way. In the 2nd book Keynes ‘ truly wanted to introduce. The 3rd book, the General Theory ( GT ) , which wholly changed the nature of macroeconomic theory in the signifier of his well known C+I+G=Y equation was wholly fresh and truly original. In all these three books Keynes ‘ was concerned with the most intractable modern-day economic problem-that of unemployment. This was the job that was blighting British economic system since the terminal of the First World War. In all these three books Keynes had been reasoning against the classical attack of battling unemployment by a cut in the nominal pay rate.
Harmonizing to Keynesian theory, some microeconomic-level actions – if taken jointly by a big proportion of persons and houses – can take to inefficient aggregative macroeconomic results, where the economic system operates below its possible end product and growing rate. Such a state of affairs had antecedently been referred to by classical economic experts as a general oversupply. Keynes contended that a general oversupply would happen when aggregative demand for goods was deficient, taking to an economic downswing with unnecessarily high unemployment and losingss of possible end product. In such a state of affairs, authorities policies could be used to increase aggregative demand, therefore increasing economic activity and cut downing unemployment and deflation. Keynes argued that the solution to the Great Depression was to excite the economic system ( “ incentive to put ” ) through some combination of two attacks: a decrease in involvement rates and authorities investing in substructure. Investing by authorities injects income, which consequences in more disbursement in the general economic system, which in bend stimulates more production and investing affecting still more income and disbursement and so forth. The initial stimulation starts a cascade of events, whose entire addition in economic activity is a multiple of the original investing.[ 2 ]Keynes sought to separate his theories from and oppose them to “ classical economic sciences, ” by which he meant the economic theories of David Ricardo and his followings, including John Stuart Mill, Alfred Marshall, Francis Ysidro Edgeworth, and Arthur Cecil Pago. A cardinal dogma of the classical position, known as Say ‘s jurisprudence, states that “ provide creates its ain demand ” . Say ‘s Law can be interpreted in two ways. First, the claim that the entire value of end product is equal to the amount of income earned in production is a consequence of a national income accounting individuality, and is hence incontestable. A 2nd and stronger claim, nevertheless, that the “ costs of end product are ever covered in the sum by the sale-proceeds ensuing from demand ” depends on how ingestion and salvaging are linked to production and investing. In peculiar, Keynes argued that the 2nd, strong signifier of Say ‘s Law merely holds if additions in single nest eggs precisely match an addition in aggregative investing.[ 3 ]
Keynes sought to develop a theory that would explicate determiners of salvaging, ingestion, investing and production. In that theory, the interaction of aggregative demand and aggregative supply determines the degree of end product and employment in the economic system.
Fringy Propensity to Consume and Marginal Efficiency of Capital:
Keynes developed the construct of fringy leaning to devour ( MPC ) and Marginal efficiency of Capital.
Fringy leaning to devour: When the income of the family addition by a certain sum, merely a fraction of this addition is spent on ingestion. If we look at the ingestion function-
C=`C + cY
Here the coefficient degree Celsius is called the MPC. Keynes argued on the footing of a psychological jurisprudence of ingestion that the MPC out of income was less than integrity and would worsen as income rose. The deduction is that, in the developed capitalist economic system, the national leaning to devour tends to worsen, which if non matched by increased investing, will do the effectual demand to fall short of full employment end product.
Fringy efficiency of Capital: The Marginal Efficiency of Capital is the relationship between the prospective output of an investing and its supply monetary value or replacing cost, i.e. the relation between the prospective output of one more unit of that type of capital and the cost of bring forthing that unit, furnishes us with the fringy efficiency of capital of that type.
Keynes says on page 135 of General Theory:
“ I define the fringy efficiency of capital as being equal to that rate of price reduction which would do the present value of the series of rentes given by the returns expected from the capital-asset during its life merely equal to its supply monetary value. ”
Wagess and disbursement:
During the Great Depression, the classical theory defined economic prostration as merely a lost inducement to bring forth, and the mass unemployment as a consequence of high and stiff existent rewards.
To Keynes, the finding of rewards is more complicated. First, he argued that it is non existent but nominal rewards that are set in dialogues between employers and workers, as opposed to a swap relationship. Second, nominal pay cuts would be hard to set into consequence because of Torahs and pay contracts. Even classical economic experts admitted that these exist ; unlike Keynes, they advocated get rid ofing minimal rewards, brotherhoods, and long-run contracts, increasing labor-market flexibleness. However, to Keynes, people will defy nominal pay decreases, even without brotherhoods, until they see other rewards falling and a general autumn of monetary values.
He besides argued that to hike employment, existent rewards had to travel down: nominal rewards would hold to fall more than monetary values. However, making so would cut down consumer demand, so that the aggregative demand for goods would drop. This would in bend cut down concern gross revenues grosss and expected net incomes. Investing in new workss and equipment-perhaps already discouraged by old excesses-would so go more hazardous, less likely. Alternatively of raising concern outlooks, pay cuts could do affairs much worse.
Further, if rewards and monetary values were falling, people would get down to anticipate them to fall. This could do the economic system coiling downward as those who had money would merely wait as falling monetary values made it more valuable-rather than disbursement. As Irving Fisher argued in 1933, in his Debt-Deflation Theory of Great Depressions, deflation ( falling monetary values ) can do a depression deeper as falling monetary values and rewards made preexistent nominal debts more valuable in existent footings.
Money Illusion: The term was coined byA John Maynard KeynesA in the early 20th century, andA Irving FisherA wrote an of import book on the topic, A The Money Illusion, in 1928.[ 4 ]A The being of money semblance is disputed byA monetaryA economic experts who contend that people act rationally ( i.e. believe in existent monetary values ) with respect to their wealth. It has been contended that money semblance influences economic behaviour in three chief ways:
Price stickiness. Money semblance has been proposed as one ground whyA nominal pricesA are slow to alter even whereA inflationA has causedA existent pricesA or costs to lift.
ContractsA andA lawsA are non indexed to rising prices every bit often as one would rationally anticipate.
Social discourse, in formal media and more by and large, reflects some confusion aboutA existent and nominal value.
Money semblance can besides act upon people ‘s perceptual experiences of results. Experiments have shown that people by and large perceive a 2 % cut in nominal income as unjust, but see a 2 % rise in nominal income where there is 4 % rising prices as carnival, despite them being about rational equivalents. Further, money semblance means nominal alterations in monetary value can act upon demand even if existent monetary values have remained changeless.
If workers use their nominal pay as a mention point when evaluating pay offers, houses can maintain existent rewards comparatively lower in a period of high rising prices as workers accept the apparently high nominal pay addition. These lower existent rewards would let houses to engage more workers in periods of high rising prices.
To Keynes, inordinate economy, i.e. salvaging beyond planned investing, was a serious job, promoting recession or even depression. Excessive economy consequences if investing falls, possibly due to falling consumer demand, over-investment in earlier old ages, or pessimistic concern outlooks, and if salvaging does non instantly fall in measure, the economic system would worsen.
The classical economic experts argued that involvement rates would fall due to the extra supply of “ loanable financess ” . The first diagram, adapted from the lone graph in The General Theory, shows this procedure. ( For simpleness, other beginnings of the demand for or supply of financess are ignored here. ) Assume that fixed investing in capital goods falls from “ old I ” to “ new I ” ( step a ) . Second ( measure B ) , the ensuing surplus of salvaging causes interest-rate cuts, get rid ofing the extra supply: so once more we have salvaging ( S ) equal to investing. The interest-rate ( I ) autumn prevents that of production and employment.
Keynes had a complex statement against this individualistic response. The graph below summarizes his statement, presuming once more that fixed investing falls ( step A ) . First, salvaging does non fall much as involvement rates fall, since the income and permutation effects of falling rates go in conflicting waies. Second, since planned fixed investing in works and equipment is largely based on long-run outlooks of future profitableness, that disbursement does non lift much as involvement rates fall. So S and I are drawn as steep ( inelastic ) in the graph. Given the inelasticity of both demand and supply, a big interest-rate autumn is needed to shut the saving/investment spread. As drawn, this requires a negative involvement rate at equilibrium ( where the new I line would cross the old S line ) . However, this negative involvement rate is non necessary to Keynes ‘s statement.
Third, Keynes argued that salvaging and investing are non the chief determiners of involvement rates, particularly in the short tally. Alternatively, the supply of and the demand for the stock of money determine involvement rates in the short tally. ( This is non drawn in the graph. ) Neither alterations rapidly in response to excessive salvaging to let fast interest-rate accommodation.
Finally, because of fright of capital losingss on assets besides money, Keynes suggested that there may be a “ liquidness trap ” puting a floor under which involvement rates can non fall. While in this trap, involvement rates are so low that any addition in money supply will do bond-holders ( fearing rises in involvement rates and hence capital losingss on their bonds ) to sell their bonds to achieve money ( liquidness ) . In the diagram, the equilibrium suggested by the new I line and the old S line can non be reached, so that extra economy persists. Even if the liquidness trap does non be, there is a 4th ( possibly most of import ) component to Keynes ‘s review. Salvaging involves non passing all of one ‘s income. It therefore means deficient demand for concern end product, unless it is balanced by other beginnings of demand, such as fixed investing. Thus, inordinate salvaging corresponds to an unwanted accretion of stock lists, or what classical economic experts called a general oversupply.[ 5 ]This pile-up of unsold goods and stuffs encourages concerns to diminish both production and employment. This in bend lowers people ‘s incomes-and economy, doing a leftward displacement in the S line in the diagram ( measure B ) . For Keynes, the autumn in income did most of the occupation by stoping inordinate economy and leting the loanable financess market to achieve equilibrium. Alternatively of interest-rate accommodation work outing the job, a recession does so. Therefore in the diagram, the interest-rate alteration is little.
Active Fiscal Policy:
As noted the serious musics wanted to equilibrate the authorities budget. To Keynes, this would worsen the implicit in job: following either policy would raise economy ( loosely defined ) and therefore lower the demand for both merchandises and labour. For illustration, Keynesians see Herbert Hoover ‘s June 1932 revenue enhancement addition as doing the Depression worse.
Keynesaˆ? thoughts influenced Franklin D. Roosevelt ‘s position that deficient buying-power caused the Depression. During his presidential term, Roosevelt adopted some facets of Keynesian economic sciences, particularly after 1937, when, in the deepnesss of the Depression, the United States suffered from recession yet once more following financial contraction. But to many the true success of Keynesian policy can be seen at the oncoming of World War II, which provided a boot to the universe economic system, removed uncertainness, and forced the rebuilding of destroyed capital. Keynesian thoughts became about official in social-democratic Europe after the war and in the U.S. in the sixtiess.
Keynesaˆ? theory suggested that active authorities policy could be effectual in pull offing the economic system. Rather than seeing imbalanced authorities budgets as incorrect, Keynes advocated what has been called countercyclical financial policies, that is policies which acted against the tide of the concern rhythm: shortage disbursement when a state ‘s economic system suffers from recession or when recovery is long-delayed and unemployment is persistently high-and the suppression of rising prices in roar times by either increasing revenue enhancements or cutting back on authorities spendings. He argued that authoritiess should work out jobs in the short tally instead than waiting for market forces to make it in the long tally, because “ in the long tally, we are all dead.[ 6 ]
This contrasted with the classical and neoclassical economic analysis of financial policy. Fiscal stimulation ( shortage disbursement ) could trip production. But to these schools, there was no ground to believe that this stimulation would outrun the side-effects that “ herd out ” private investing: foremost, it would increase the demand for labour and rise rewards, aching profitableness ; Second, a authorities shortage increases the stock of authorities bonds, cut downing their market monetary value and encouraging high involvement rates, doing it more expensive for concern to finance fixed investing. Thus, attempts to excite the economic system would be self-defeating.
The Keynesian response is that such financial policy is merely appropriate when unemployment is persistently high, above the non-accelerating rising prices rate of unemployment ( NAIRU ) . In that instance, herding out is minimum. Further, private investing can be “ crowded in ” : financial stimulation raises the market for concern end product, raising hard currency flow and profitableness, spurring concern optimism. To Keynes, this gas pedal consequence meant that authorities and concern could be complements instead than replacements in this state of affairs. Second, as the stimulation occurs, gross domestic merchandise rises, raising the sum of salvaging, assisting to finance the addition in fixed investing. Finally, authorities spendings need non ever be uneconomical: authorities investing in public goods that will non be provided by profit-seekers will promote the private sector ‘s growing. That is, authorities disbursement on such things as basic research, public wellness, instruction, and substructure could assist the long-run growing of possible end product.
Multiplier Effect and Interest Rate:
Two facets of Keynes ‘ theoretical account had deductions for policy:
First, there is the “ Keynesian multiplier ” , foremost developed by Richard F. Kahn in 1931. Exogenous additions in disbursement, such as an addition in authorities spendings, additions entire disbursement by a multiple of that addition. A authorities could excite a great trade of new production with a modest spending if:
The people who receive this money so spend most on ingestion goods and salvage the remainder.
This excess disbursement allows concerns to engage more people and pay them, which in bend allows a farther addition consumer disbursement.
This procedure continues. At each measure, the addition in disbursement is smaller than in the old measure, so that the multiplier procedure tapers off and allows the attainment of equilibrium. This narrative is modified and moderated if we move beyond a “ closed economic system ” and convey in the function of revenue enhancement: the rise in imports and revenue enhancement payments at each measure reduces the sum of induced consumer disbursement and the size of the multiplier consequence.
Second, Keynes re-analyzed the consequence of the involvement rate on investing. In the classical theoretical account, the supply of financess ( salvaging ) determined the sum of fixed concern investing. That is, since all nest eggs was placed in Bankss, and all concern investors in demand of borrowed financess went to Bankss, the sum of nest eggs determined the sum that was available to put. To Keynes, the sum of investing was determined independently by long-run net income outlooks and, to a lesser extent, the involvement rate. The latter opens the possibility of modulating the economic system through money supply alterations, via pecuniary policy. Under conditions such as the Great Depression, Keynes argued that this attack would be comparatively uneffective compared to financial policy. But during more “ normal ” times, pecuniary enlargement can excite the economic system.
While Milton Friedman described The General Theory as ‘a great book ‘ , he argues that its inexplicit separation of nominal from existent magnitudes is neither possible nor desirable ; macroeconomic policy, Friedman argues, can reliably influence merely the nominal.[ 7 ]He and other monetarists have accordingly argued that Keynesian economic sciences can ensue in stagflation, the combination of low growing and high rising prices that developed economic systems suffered in the early 1970s.
Austrian economic expert Friedrich Hayek criticized Keynesian economic policies for what he called their fundamentally collectivized attack, reasoning that such theories encourage centralized planning, which leads to malinvestment of capital, which is the cause of concern rhythms.[ 8 ]Hayek besides argued that Keynes ‘ survey of the aggregative dealingss in an economic system is unsound, as recessions are caused by micro-economic factors. Hayek claimed that what starts as impermanent governmental holes normally become lasting and spread outing authorities plans, which stifle the private sector and civil society.
Other Austrian school economic experts have besides attacked Keynesian economic sciences. Henry Hazlitt criticized, paragraph by paragraph, Keynes ‘ General Theory in his 1959 extended review of Keynesianism: The Failure of the New Economics. In 1960 he published the book The critics of Keynesian Economics where he gathered together the major unfavorable judgments of Keynes made up to that twelvemonth.[ 9 ]
Murray Rothbard accuses Keynesianism of holding “ its roots deep in medieval and mercantilist idea. ”[ 10 ]
Another influential school of idea was based on the Lucas review of Keynesian economic sciences. This called for greater consistence with microeconomic theory and reason, and peculiarly emphasized the thought of rational outlooks. Lucas and others argued that Keynesian economic sciences required unusually foolish and short-sighted behaviour from people, which wholly contradicted the economic apprehension of their behaviour at a micro degree.
Although Keynes explicitly addresses rising prices, The General Theory does non handle it as an basically pecuniary phenomenon nor suggest that control of the money supply or involvement rates is the cardinal redress for rising prices. This conflicts both with neoclassical theory and with the experience of matter-of-fact policy-makers.
It is non ever true which is said in multiplier consequence that when a authorities will excite the economic system, the excess disbursement will bring on concerns to engage more people and pay them. Those who get the excess disbursement due to authorities stimulation may follow the capital-intensive method instead than labour-intensive method.
Keynes has argued that in the developed states national leaning to devour tends to worsen as income additions. But if we consider in the position of some developed states like USA and others, this reading differs with the world, as national leaning to devour tends to increase in these states as income rises.
Keynes however successfully positive battalions of purportedly knowing economic experts to accept a series of statements. Savingss became bad and shortages became good, and the prudent accretion of militias for foreseeable and unforeseeable eventualities was imprudently responsible for black effects. The accretion of capital assets becomes an economic obstruction instead than an economic advantage. Investing and employment is stimulated by rising prices and hindered by monetary value diminutions. Market liquidness becomes more of a job than an advantage.
As is repeatedly pointed out throughout Keynes, “ The General Theory, ” there is perfectly no grounds that extra nest eggs play any function in originating periods of economic hurt.
Like Marx and all socialists, Keynes appears wholly nescient of the built-in inefficiency of authorities direction. He has entire religion in the capablenesss of authorities and “ community ” administered economic systems. Keynes offers narrower administered solutions directed at commanding involvement rates, directing investing flows, redistributing wealth, and finally directing the activities of major concern entities.
Keynes therefore draws a wide decision based on his very narrow particular instance. His decision applies merely for a closed system – therefore needfully hobbled with grossly limited economic productiveness and life criterions – that unfalteringly ignores long term deductions. Even for closed systems, stiff pay systems must set greater force per unit areas for accommodation on other cost factors – each with their ain composite of impacts – that Keynes does n’t see.
Keynesian economic sciences, in so far as it is formulated in the General Theory of Employment, Interest and Money, has small cogency in the context of developing economic systems like Bangladesh that Keynesian nonvoluntary unemployment is non the sort of unemployment of which these economic systems suffer, and the job is one of long-run economic development instead than the attainment of ‘full employment ‘ in the Keynesian sense.The philosophies of inordinate economy and unequal ingestion do non use to developing states like Bangladesh, where unequal economy is one factor restricting the growing of investing and income. But some of the philosophies of Keynes can be utile if they are decently implemented.
At a clip of recession, Keynes suggested an economic policy to increase the aggregative demand ( e.g. through ingestion, investing, and authorities purchases ) . No admiration large economic systems around the universe have announced large budgets and taken unprecedented investing plans in the recent economic recession. Bangladesh ‘s national budget for FY2009-10 seemed to hold targeted the Keynesian demand for investing. True, Bangladesh is a inactive victim of the planetary recession and can non blindly follow the stairss of developed economic systems. The authorities budget of Bangladesh has ever been in shortage. The ground behind this shortage is lower authorities gross aggregation and higher authorities disbursement. Rather than seeing imbalanced authorities budgets as incorrect, A Keynesian reading of the estimated consequences suggests that by raising ingestion outgos, authorities disbursement on substructure besides stimulates the demand-constrained Bangladesh economic system, which causes greater use of production capacities. In bend, it increases national end product through a multiplier-accelerator mechanism. Therefore, shortage disbursement in a proper manner induces positive effects on GDP growing and on employment in the short-term through increased ingestion demand. This initial authorities investing may ‘crowd out ‘ private investing by increasing involvement rate. In that instance expansionary pecuniary policy can be adopted to diminish involvement rate and bring on private investing. So, an effectual policy mix can increase the degree of employment without impacting private disbursement excessively much. Though there is opportunity of inflationary force per unit area to turn as we are sing now, a proper distribution of the supply of money demand to be assured to forestall the status of inequality and poorness from declining.
Keynes is widely considered to be the male parent of modern macroeconomics, and by assorted observers such as economic expert John Sloman, the most influential economic expert of the twentieth century. Prior to deceasing Keynes was a cardinal figure in the constitution of the International Monetary Fund ( IMF ) . The coming of the planetary fiscal crisis in 2007 has caused revival in Keynesian idea. The former British Prime Minister Gordon Brown, President of the United States Barack Obama, and other universe leaders have used Keynesian economic sciences to warrant authorities stimulation plans for their economic systems. Though Keynes ‘s thoughts have been doubted, distrusted, about discarded and to a great extent altered his thoughts are still a subject of treatment and pattern in 21st century economic policy.