John Maynard Keynes

Shahina Vhora Jai Singh

Introduction
John Maynard Keynes was born on 5th of June 1883 in Cambridge. He was from a bourgeous family and sport it always. In college he joined the most secret society apostles. Apostles studied aesthetics, philosophy andthemselves Most of apostles joined Bloomsbury group(1903). It deals with literature, aesthetics, criticismand economics as well as modern attitudes towards feminism, pacifism and sexuality. 1906 went to India and wrote Indian currencyand finance. He was a mathematicians not an economist and started writing books on economics insisting by marshal

The Economics Consequences of Peace, 1919

Keynes explicitly pointed out the relationship between governments printing money and inflation. Keynes also pointed out how government price controls discourage production. Keynes detailed the relationship between German government deficits and inflation.

General Theory of Employment, Interest and Money , 1936

Private economy cannot fulfil the employment. Governments contribution can fast the economy and can fill the gap as well.

How did economic decline turn into Great Depression ?

According to Keynes Recession is when your neighbour loses his job and Depression is when you loss your job.
From 1929 to 1933 in the United States, The invisible hand of the free market slapped prosperity in face. Unemployment rocketed from about 3 to 25 percent. National income plummeted by half. Residential construction stopped and many lost their homes and businesses. The stock market crashed. Workers scrambled for the few jobs available. Physiological depression accompanied economic depression.

Solution from classical economists to recover recession

According to classical economist,

1. Saving and investment

Households consume part of their income and save the remainder and put it in the bank. The Bank lend the money too merchants. Peoples saving increases the bank will lower the interest rate and borrowers or merchants will invest more. So, the main idea is, whenever consumers boost their savings and reduce their consumption merchant will be induced to boost their investment. The consumer provide the supply of saving while merchants provide the demand for those saving.

Cont.......
2. Flexible wages and prices
When consumer save more, wages and price would fall in response to fall in demand for goods and services. As wages fell, unemployed workers would be hired.

As prices fell, surplus goods would be sold the recession would be over quickly

Keyness arguments against classical theory

1. Keynes denied the automatic link between savings and investments

Households and businesses save & invest for completely different reasons. A family may save from habit or for a particular purpose such as old age or for an automobile. Businesses may change their investment plans based on politics, confidence, technology and foreign exchange rates. So, to expect interest rates to bring harmony is not acceptable. If household savings exceed business investment employers will fire employees and leading to even less consumption.

Cont.......
2 .Flexible wages and prices
During recession real wages should fall according to classical theory but workers usually refuse to accept lower nominal wages, Keynes thought.

3. Keynes argued that in a recession businesses slash investment savings eventually equal investment so investment might be increased but laid off employees can not afford to save 4. Wages and prices take a long time to adjust, prolonged recessions or depressions are possible.

The Keynesian solution

Households Family size

Income (Chief Determinant)

Demand of goods and services

Tastes

Does it rise ? Yes

Expectations
No

Consume less and save more

Marginal propensity to save Consume more and save less Marginal propensity to consume

The Keynesian solution

Businesses

Expectations Income
Confidence Demand of goods and services
Eg. Investing in equipment and inventories

Weather
Investment Politics

Interest Rates

According to Keynesian, to have a healthy economy with full employment, households must consume enough and business must invest enough that sales of goods is equal to the amount produced If people consume all of their income (MPC=1) would produce full employment. The problem is deficient demand for goods and services. The culprit in a recession in saving.

Keynesian Multiplier
The point of multiplier is that any change in spending by one person takes change in national spending. For eg. Maynard Inc. Decides to raise investment by building a new mens room. Total spending rises by $100, but Maynard, Inc. has to pay plumbers, architects, and interior decorators. Those workers spend some money and save the rest. The part they spend may go to grocers, television, salesman etc. These recipients now have more income, part of which they spend. The chain reaction continues. Although the initial injection was only $100 total income may rise by $300 if so, the multiplier is 3

Cont.......
Multiplier = 1/(1-MPC) or 1/MPS
The higher the degree of consumption the higher the multiplier. The chain reaction moves more quickly if people spend more money. Again saving slows the process. If people save one third of their additional income, the multiplier is three therefore, if business cuts investments by $50 million, national income plummets by $150 million. If we know the multiplier, we can inject spending into the economy which will multiply throughout and cure the recession by filling the original gap between output and sales.

Discretionary fiscal policy depend on politician

Scarce resources
Automatic stabilizers such as progressive taxes and unemployment insurance counteract downturn and inflationary acceleration. (economy become slow down than people income fall and their buying power will be down).

Keynes theory
He probably devoted a lower proportion of his time, on the other hand, he got highest return on investment. He did not look to economic theory for the same intellectual enrichment and fascination he found in practical application and in other disciplines.

The state of long term expectation is important for

Two reasons
1st mathematical precision in economics is folly 2nd initial investment

Keynes stressed that much investment is incited by animal spirits

Irrational forces impelling entrepreneurs and speculators forward. But forces are not consistent. We are merely reminded ourselves that human decisions affecting the future, whether personal or political or economic, can not depend on strict mathematical expectations, since the basis for making such calculations does not exist.

Future overview
Keynes gave his idea about future that Economics possibilities for our grandchildren.
In next hundred years man could solves economic scarcity. Because each generation stand on shoulders of its parents, perfecting their achievements and living standards. Our grandchildren and great grandchildren might climb high enough to satisfy all of their material desires and each luxuries.

Thank You