In 1936 John Keynes's book "The General Theory of Employment, Interest and Money" was published. The author interpreted in his own way the then popular thesis about the self-regulation of the market economy.
Government regulation needed
Keynes's theory states that the market economy does not have a natural mechanism for ensuring full employment and preventing a fall in production, and the state is obliged to regulate employment and aggregate demand.
A feature of the theory was the analysis of problems common to the entire economy - private consumption, capital investment, government spending, i.e. factors that determine the efficiency of aggregate demand.
In the middle of the 20th century, the Keynesian approach began to be used by many European states to justify their economic policy. The result was an acceleration in economic growth. With the crisis of the 70-80s. Keynesian theory was criticized, and preference was given to neoliberal theories, which professed the principle of state non-intervention in the economy.
Historical context
Keynes's book marked the beginning of "Keynesianism" - the doctrine that brought the Western economy out of a severe crisis, explaining the reasons for the declineproduction in the 30s of the 20th century and voicing the means to prevent it in the future.
John Keynes, an economist by education, at one time was an employee of the Department of Indian Affairs, the Commission on Finance and Currency, served in the Ministry of Finance. This helped him to revise the neoclassical theory of economics and create the foundations of a new one.
The fact that John Keynes and Alfred Marshall, the founder of neoclassical theory, crossed paths at King's College in Cambridge also had an effect. Keynes as a student, and Marshall as a teacher who highly appreciated the abilities of his student.
In his work, Keynes justifies government regulation of the economy.
Before this, economic theory solved the problems of the economy by microeconomic means. The analysis was limited to the scope of the enterprise, as well as its objectives to reduce costs and increase profits. Keynes's theory justified the regulation of the economy as a whole, which implies the participation of the state in the national economy.
A new approach to overcoming crises
At the beginning of his work, John Keynes criticizes the conclusions and arguments of modern theories based on Say's market law. The law consists in the sale by the manufacturer of his own product in order to purchase another. The seller turns into a buyer, supply creates demand, and this makes overproduction impossible. Probably only a rapidly liquidated overproduction of some goods in some industries. J. Keynes points out that, in addition to commodity exchange, there is a money exchange. Savingperform a cumulative function, reduce demand and lead to overproduction of goods.
In contrast to economists who considered the issue of demand to be insignificant and self-perpetuating, Keynes made it the central basis of macroeconomic analysis. Keynes's theory says: demand depends directly on employment.
Employment
Pre-Keynesian theories considered unemployment in its two varieties: frictional - a consequence of the lack of information of workers about the availability of jobs, lack of desire to move, and voluntary - a consequence of the lack of desire to work for a wage corresponding to the boundary product of work, in which the "burdensomeness" of labor exceeds wages. Keynes introduces the term "involuntary unemployment".
According to neoclassical theory, unemployment depends on the marginal productivity of labor, as well as its marginal “burden”, which corresponds to the wage that determines the supply of work. If jobseekers agree to low wages, then employment will increase. The consequence of this is the dependence of employment on workers.
What are John Maynard Keynes' thoughts on this? His theory denies this. Employment does not depend on the worker, it is determined by a change in effective demand equal to the totality of future consumption and capital investment. Demand is affected by expected profit. In other words, the problem of unemployment is related to entrepreneurship and its goals.
Unemployment and demand
At the beginning of the last century, unemployment in the US reached 25%. This explains why the economic theory of John Keynes gives it a central place. Keynes draws a parallel between employment and an aggregate demand crisis.
Income determines consumption. Insufficient consumption leads to lower employment. John Keynes explains this by a "psychological law": an increase in income leads to an increase in consumption by a proportion of its increase. The other part is piling up. Increasing income reduces the propensity to consume, but increases the propensity to save.
The ratio of consumption growth dC and savings dS to income increase dY Keynes calls the marginal desire to consume and accumulate:
- MPC=dC/dY;
- MPS=dS/dY.
Decrease in consumer demand is offset by an increase in investment demand. Otherwise, employment and the growth rate of national income will decrease.
Capital investment
The growth of capital investment is the main reason for effective demand, lower unemployment and higher social income. Therefore, the increasing size of savings should be compensated by the rise in demand for capital investment.
To ensure investments, you need to transfer savings into them. Hence the Keynesian formula: investment is equivalent to savings (I=S). But in reality this is not followed. J. Keynes notes that savings may not correspond to investments, since they depend on income, investments - on the rate of interest, profitability, taxation, risk, market conditions.
Interest rate
The author writes aboutprobable return on capital investment, its marginal efficiency (dP/dI, where P is profit, I is capital investment) and the interest rate. Investors invest money as long as the marginal efficiency of investing capital exceeds the interest rate. The equality of profits and interest rates will deprive investors of income and reduce the demand for investment.
The interest rate corresponds to the margin of profitability of capital investment. The lower the rate, the greater the investment.
According to Keynes, savings are made after satisfaction of needs, therefore, an increase in interest does not lead to their increase. Interest is the price of giving up liquidity. John Keynes comes to this conclusion on the basis of his second law: the propensity for liquidity is due to the desire to have the ability to turn money into investment.
Money market volatility increases the craving for liquidity, which a higher percentage can overcome. The stability of the money market, on the contrary, reduces this desire and the rate of interest.
The rate of interest is seen by Keynes as an intermediary of the influence of money on social income.
The increase in the amount of money increases the liquid supply, their purchasing power falls, the accumulation becomes unattractive. The rate of interest decreases, investments grow.
John Keynes advocated lower interest rates to inject savings into production needs and increase the money supply in circulation. This is where the idea of deficit finance comes from, which involves using inflation as a means of keeping business going.
Decrease in the rate of interest
The author proposes to increase investment through budgetary and monetary policy.
Monetary policy is to reduce the interest rate. This will reduce the marginal efficiency of the investment, making it more attractive. The government should put into circulation as much money as is necessary to reduce the interest rate.
Then John Keynes will come to the conclusion that such regulation is ineffective in a crisis of production - investments do not respond to a fall in the rate of interest.
Analysis of the marginal efficiency of capital in the cycle made it possible to connect it with the assessment of future benefits from capital and confidence among entrepreneurs. Restoring confidence by lowering the interest rate is impossible. As John Keynes believed, an economy could find itself in a "liquidity trap" when an increase in the money supply does not reduce the rate of interest.
Fiscal policy
Another method of increasing investment is the budget policy, which consists in increasing the financing of entrepreneurs at the expense of budgetary funds, since private investment during a crisis is significantly reduced due to investor pessimism.
The success of the state budget policy is the growth of solvent demand, even with seemingly useless spending of money. Government spending, which does not lead to an increase in the supply of goods, was considered by Keynes to be more preferable during the crisis of overproduction.
To increase the volume of resources for private investment, the organization of public procurement of goods is needed, although in general Keynesinsisted not on increasing state investment, but on state investment in current capital investments.
An important factor in stabilizing the crisis of overproduction is also an increase in consumption through civil servants, social work, the distribution of income into groups with maximum consumption: employees, the poor, according to the "psychological law" of increasing consumption with low income.
Multiplier effect
In Chapter 10, the Kanna multiplier theory is developed as applied to the marginal propensity to consume.
National income is directly dependent on capital investments, and in a volume much higher than them, which is a consequence of the multiplier effect. The investment of capital in the expansion of the production of one branch has a similar effect in adjacent branches, just as a stone causes circles in the water. Investing the economy increases income and reduces unemployment.
The state in a crisis should finance the construction of dams and road construction, which will ensure the development of related areas of production and increase consumer demand and demand for investment. Employment and income will increase.
Since income is partially accumulated, its multiplier has a border. The slowdown in consumption reduces capital investment - the main reason for the multiplier. Therefore, the multiplier is inversely proportional to the marginal propensity to save MPS:
M=1/MPS
Change in income dY from investment growth dIexceeds them by M times:
- dY=M dI;
- M=dY/dI.
The increase in social income depends on the volume of consumption growth - the marginal propensity to consume.
Implementation
The book had a positive impact on the formation of a mechanism for regulating the economy to prevent crisis phenomena.
It has become obvious that the market cannot provide maximum employment, and economic growth is possible thanks to the participation of the state.
The theory of John Keynes has the following methodological provisions:
- macroeconomic approach;
- justification of the impact of demand on unemployment and income;
- analysis of the impact of fiscal and monetary policies on increased investment;
- income growth multiplier.
Keynes' ideas were first implemented by US President Roosevelt in 1933-1941. The federal contract system has distributed up to a third of the country's budget every year since the 1970s.
Most of the world's countries have also used monetary, financial instruments to regulate demand in order to mitigate the cyclical fluctuations of their economies. Keynesianism has spread to he alth care, education, law.
With decentralization of government structures, Western countries are increasing the centralization of coordinating and governing bodies, which is expressed by an increase in the number of federal employees and governments.
