Question

2. John Maynard Keynes – Answer the following questions: a) Describe what he did and what he is known as. b) Indicate his major paper that began the Keynesian Theory of Economics. Please make sure you indicate the right paper the last semester the groups listed the wrong papers. He is by far the most significant pioneer of economics. I would make sure you cover his life and what he did that shaped economics. Also please let me know if this is followed now by most economist and by our government.

Answer 1

Keynesian economics is based on the book " The General Theory of Employment, Interest and Money" written by John M Keynes published in 1936.
The book was written in the backdrop of great depression the first global economic crisis of the industrial society.
The great depression saw widespread unemployment in the western world which raised some serious questions about the classical macroeconomics.

Classical macroeconomics relied on the unfettered market mechanism to resolve the problem of unemployment. Any involuntary unemployment according to the classics is a short run phenomenon in nature and any policy to correct the situation would lead to worse economic outcome. The large scale unemployment of 1930s could not be ignored by calling it a short run phenomenon. Keynes wrote, “In the long run we are all dead".

Keynes explained unemployment as a systematic problem and prescribed policies to get away with it.
Keynes' fundamental contribution was his systematic focus on demand side of a macroeconomics which was ignored by all the major economists that preceded him.

The biggest contribution of Keynes was to analyze the role of aggregate demand in national income determination. Once demand is shown to play a role in aggregate income determination, use of fiscal or monetary policies to cure recession logically follows.

Keynes maintained that rate of interest may have a floor below which it may not drop leaving the credit market in excess supply condition . Keynes wrote that investment depends on the “animal spirit of man" and therefore there is no a priori reason that aggregate demand, of which investment constitutes a major part, is always equal to the aggregate supply.

IS-LM model was the flagship of Keynesian macroeconomics ruled the macroeconomics for 30 years after the second world war for a long time. The consensus view consisting of IS-LM model and Philips curve predicted negative relationship between inflation and unemployment. This view was seriously challenged in the 1970s on both empirical and theoretical grounds.

His main criticism was that the cut in wage may decrease cost for firm but it will also decrease
income of workers which will lead to less aggregate demand leading to lower price. The problem of marginal productivity theory as a theory of general employment is that it does not take up the issue of aggregate demand and its relation of wage cut.