John Maynard Keynes

John Maynard Keynes (1883-1946) is regarded as the father of modern Macroeconomics. Keynes was the son of an eminent English economists, Jon Neville Keynes, ho was a lecturer in economics and logic at Cambridge University. John Maynard Keynes was born in Cambridge, England and educated at Eton College and Cambridge University. There Keynes was educated on mathematics and probability theory, but he chose the field of economics to pursue. He chose economics when he accepted a lectureship in economics at the University of Cambridge.

Keynes began his career at the India office of the British government. During this time in his career he wrote a book called Indian Currency and Finance in 1913. During World War I he worked in the treasury in which he represented at the Paris Peace Conference 1919. Keynes decided to resign his position in office because he disagreed with economic terms of the Treaty of Versailles. After resigning Keynes wrote another book called The Economic Consequences of the Peace in 1919.

In this book he predicted that the staggering reparations levied against Germany would goad that country into economic nationalism and resurgence of militarism. Keynes being a well-educated man, made some great investments in a decades time. Within that decade he made his two million fortune by speculating in international currencies, stocks and commodities. In addition to his newly made fortune Keynes served as a trustee of Kings College and built its endowment from 30,000 to 380,000 pounds. Keynes went on to write other books like Treaties on Probability in 1921 and The Treaties on Money in 1930. Lekachman/Miller).

Being that the depression was at hand during the time, people reviewed Keynes theories, which they discovered did not really explain the prolonging of the recession. Keynes began to study this problem thoroughly which appeared in his major work, The General Theory of Employment, Investment, and Money published in 1936. This piece of work that he did placed a convincing attack on the classical theory that capitalism would self-correct from a recession. Also, he proved the theoretical defense for programs that were already being tried in Great Britain and by President Franklin D. Roosevelt in the United States. Keynes based his model on the belief that increasing aggregate demand will achieve full employment, while prices and wages remain inflexible.

Moreover, his bold policy prescription was that the government raises its spending and/or reduces its taxes in order to increase the economys aggregate demand curve and put the unemployed back to work. As Great Britain entered World War II, Keynes went and published another book called, How to Pay for the War. In this book he talked about how people should automatically take out a portion of their income and invest it into government bonds.

Because of this idea he was made a baron. A little later he then headed the British delegation to the United Nations Monetary and Financial Conference, the Bretton Woods Conference. There he promoted establishment of the International Bank for Reconstruction and Development and the International Monetary Fund. Keynes ideas have profoundly influenced the economy since World War II and many consider his General Theory of Employment, Interest and Money one of the most significant theoretical works of the 20th century. (Lekachman).

Reversing back in time a little when Keynes had wrote his famous book on The General Theory of Employment, Interest and Money; he challenged the confused classical economics. The classical theory was used by the likes Smith, Say, Marshall, Marx and Mill during the business cycle that took an abrupt downturn on October 29, 1929, the most severe recession in United States had begun. Keynes would argue that theory by turning Says law upside down. Keynes believed that demand creates its own supply. Keynes made it a point to say that aggregate expenditures (demand) could be forever inadequate for an economy to achieve full employment.

Aggregate expenditures are the sum of consumption (C), Investment (I), government (G), and net exports (X-M). C, I, G, (X-M) are national accounting categories used to calculate GDP following the expenditures approach. According to Keynes he believed that the most important factor is the disposable of income which is the personal income to spend after taxes. Keynes focuses on the on the relationship between consumption and disposable income, which is represented by the consumption function. Keynes shows his thoughts on the relationship by using a graph.

In the consumption function graph a vertical axis is used to measure the level of planned real consumption per year and the horizontal axis measures the level of real disposable of income per year. At every point on the 45 degree line a vertical line drawn to the income axis is the same distance form the origin as a horizontal line drawn to the consumption axis. Where the consumption function crosses the 45 degree line at a point F (point F being the break even point) we know that consumption equals real disposable income and that there is no saving money.

The vertical distance between the 45-degree line and the consumption function measures the rate of saving or dissaving at any given income level. Where real disposable income is zero, but planned consumption is $2,000, is called autonomous consumption. The reason this is because the amount of planned consumption does not depend at all on actual disposable income. A change in real disposable income is the only cause of a movement along the consumption function. A shift or relocation in the consumption schedule occurs when a factor other than real disposable income changes.

Keynes also believes that as income grows so does consumption, but by less than income. This crucial concept proposed by Keynes is called the marginal propensity to consume (MPC). This is the change in consumption resulting from a given change in real disposable income. Keynes also talks about a marginal propensity to save (MPS). This just means that households, he believes, would save extra dollars of real disposable income if they do not spend it. Keynes believes that what causes this to change is that of the animal spirit.

In other words, people are more susceptible to mood of optimism and pessimism concerning economic conditions. Keynes also talks about aggregate expenditure function or what is also known as the Keynesian Cross. This is the relationship between real disposable income and the sum of C+I. Another factor in this model is government spending (G). The government spending will be considered autonomous, just like that investment and a certain component of consumption. There is also a foreign sector that is involved in all this, but it uses the label X.

Instead of showing symbols for imports and exports it uses the symbol X which stands for net exports. So for the equation it would look like this: C+I+G+X. Keynesian theory claims that the economy being unstable will need government intervention to control aggregate expenditures and to restore full employment. One of the key aspects to the Keynesian theory is the multiplier. The multiplier is a number by which a permanent change in autonomous consumption is multiplied to get the change in the equilibrium level of real national income.

Any permanent increase in autonomous investment or in any autonomous component of consumption will cause an even larger increase in the real national income. Any permanent decrease in autonomous spending will cause an even larger decrease in the equilibrium level of real national income per year. The multiplier is equal to the reciprocal of the marginal propensity to save. The smaller the marginal propensity to save, the larger the multiplier and the marginal propensity to consume. (Keynes/Miller). In conclusion, John Maynard Keynes was a well-respected man as well as an economist. After all he is know as the father of modern economics.

John lived a good life of 63 years, he accomplished a lot and he will always be remembered for what he did. His books that he wrote will enlighten some and confuse others, but either way you look at it he gave us his knowledge and we still use that knowledge today and which will probably use for a long time yet to come. The economy of every county is always changing and it is very hard to establish what will work and what wont. There are two theories used in the United States today and they are Classical economics and Keynesian economics and Keynes get to claim one of those theories.


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