Question

Describe the socioeconomic context of Keynes’ then unorthodox economic views and outline his views.

Answer 1

Keynes turned the mechanism which regulates savings and investment, the rate of interest, by showing that supply and investment were not independent of one another and thus could not be related to one another and therefore could not be related uniquely in terms of balancing of disutility and utility. If Say's law was the logic by which it was thought that financial markets came to a unique position in the long run, and if Say's law were to be discarded; the question which arose was the rules of the game of the financial markets, their functioning and ways in which they would remain stable. Keynes stated that 'Animal Spirits' - that were ruled by speculative behavior influenced by not only one's own personal equation but also of the speculative behavior of others; and in turn the behavior of others are motivated by their perception of the behavior of the rest, et al. Financial markets without Say's law keeping them in balance were thus inherently unstable and through this identification Keynes deduced the consequences to the macro economy of long run equilibrium being attained not at only one unique position which represented a Pareto Optima, but through a possible range of many equilibria that could far under employ human and natural resources.

A modern way of expressing Say’s law is that there can never be a general glut. Instead of there being an excess supply (glut or surplus) of goods in general, there may be an excess supply of one or more goods but only when balanced by an excess demand (shortage) of yet other goods. Thus there may be a glut of labor (cyclical unemployment). But that is balanced by an excess demand for produced goods. Modern advocates of Say’s law see market forces as working quickly – via price adjustment – to abolish both gluts and shortages. The exception would be the case where the government or other non-market forces prevent price changes.

According to Keynes, the implication of Say’s law is that a free market economy is always at what the Keynesian economists call full employment. Thus, Say’s law is part of the general world view of laissez-faire economics, i.e. that free markets can solve the economy’s problems automatically. Here the problems are recession, stagnation, depression, and involuntary unemployment.