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The Economic Theory and Constructs of John Maynard Keynes, Term Paper Example

Pages: 6

Words: 1643

Term Paper

Classic Economic Theory according to John Maynard Keynes was no way of ending depressions because the uncertainty present will drive individuals and businesses to stop spending and investing, and government will always intervene and spend money in order to get the economy back on track (Constitutional Rights Foundation , 2010). Keynes revolutionary statement is as applicable today as it was in the 20th century when he spoke to his audience which includes British and United States economists and political leaders.

In analyzing Keynes in Economic Possibilities for our Grandchildren, Ohanian (2008), remark that the implicit theoretical framework used by this classical economist to form his expectations about the 21st century is remarkably close to present economic growth models.

This it seems according to Ohanian (2008), was because it featured a steady stream of state growth paths driven by technological process, but at the same time Keynes forecast on employment during the same period was well off the mark possible as a result of his mistaken view that the income elasticity of leisure was higher than that of consumption. Keynes growth construct, according to Ohanian (2008), overall was way ahead of his time, perhaps by as much as 100 years. The modern economic theory of growth as presented by Solow (1956), Swan (1956 ), Cass (1965), Kopmans (1965) and Lucas (1988), according to Ohanian (2008) , had provided the foundation for long steady growth driven by technological change and the accumulation of capital, and had enabled standard competitive decentralization for global growth economies, even to the present .

Modern economists today with the benefit of a constant rate of technological progress and a plausible restricted one sector growth model as sell as advance understanding of long term economic behavior, can make reasonable long term prediction according to Ohanian (2008), and a typical example was Leamer (2004) who showed that real GDP forecast over the last 40 years had not exceeded the ± 3% range on the long run trend. However Keynes without the benefits of the economic tools of today such as empirical data was able to make economic projections that was still accurate after 100 years.

According to Ohanian (2008), Keynes forecasted that the per capita income would advance by a factor of four to eight between 1030 and2030, and this was realized with the growth rate across industrialized countries averaging between 1.4% and 2.1% per capita.

In Keynes book the General Theory, he defines the concept of traditional marginalism as the wage rate that is equal to the marginal product of labor, which means that the wage of an employed person is equal to the value that would be loss if employment was reduced by one unit, after making provision for other attendant accruals, according to Williams (2009).

However Keynes by postulating this theory held the view that the workers wage was equal to the marginal product of the workers labor condition under perfect competition, with no allowance for trade union interventions, health insurance expenses and the impact of minimum wage laws which are still prevalent today. This may be one of the reason why Keynes forecast on employment in the past was inaccurate and negatively impacted his reputation in some political circles.

In terms of aggregate demand or total spending in the economy, Keynes postulated that it was affected by a number of economic decision both in the public and private sectors, Government on their part develops monetary and fiscal policies to advance their economies in the past, but economist were at variance the power resident in both, with opponents saying they were powerless to affect the economy, while proponents argued that they were what was needed to grow the economy.

However according to Blinder (2008), in recent times there has been a coming together of opinions on both sides, and a consensus being arrived at that aggregate demands significantly affect the economy. This return to Keynes original take on the theory was proof of the importance of Keynes economic theory on the use of monetary and fiscal policies to grow an economy.

According to Blinder (2008), Keynesian theory state that changes in aggregate demand whether projected or unexpected will have the greatest short run effect on real output and employment and not in prices. This theory can be better appreciated by the examination of the Phillips Curve, where rising inflation rates is observe to changed when the rates for unemployment began falling. In economies therefore where prices are fixed and government introduce monetary and policies that affect spending, consumption or investment, real outputs are expected to rise by Keynes economic projections and economies experience growth in the short term.

Most economist in the 20th century like Keynes, believed that Great Britain high unemployment problem could be solved using monetary policy such as increasing the money supply and lowering interest rates, but when Bank of England implemented those polices, according to Constitutional Rights Foundation (2010), the country’s economy did not rise out of the rut it was in at the time.

Political leaders and economist today could use this experience and reject Keynesian economic theories regarding using monetary policies, to grow their economies out of economic depressions.

Keynes model of economic activity according to Blinder (2010), include the injection of monetary policies to achieve the multiplier effect, which infers that output within an economy will increase by a multiple of the original change in the spending that caused it.

Government and their economists of the Keynes era rejected the idea that the theory on employment multiplier which when applied would mean that newly employed public sector workers and suppliers would have cash to spend and this in turn will stimulate increase in the demands for goods and services as well as raise output levels.

Keynes went further to say that these workers as long as they stay employed would spend their pay checks and cause the multiplier to kick in and enable to economy to grow out of the slump it was increasing.

The scenario is the same today, as economists fight to determine whether the Keynesian economic theory and construct regarding the use of monetary policy to inject the multiplier effect into their respective economies. The Republican Party by their stance opposes this aspect of the Keynesian economic theory as a strategy to grow the country out of the present economic downturn, while the Democratic Party fully endorses the measure as the way forward.

Many economist of today also believe that once the multiplier equals or exceeds one, the economy will definitely experience multiple increases in output, while others share the views similar to Franklyn D. Roosevelt that government should borrow and spend far less and increase taxes at the same time during economic depressions.

History it seems has not taught today’s government leaders and economist proper economic lessons, or they failed to learn in that when the Federal Government in the economic depression of the 1930’s decided not to embrace the Keynesian economic prescription regarding the injection of additional spending into the economy, a crippling effect resulted even on investor demands.

The same result may be realized in present day economies that reject the importance and application of the Keynesian economic theory when facing downturns. Keynes importance on the economies of the world seems enduring even until today, because economies still face the same challenges that they faced in the past, and his theoretical concepts still have to be examined to see how viable they are with respect to the securing appropriate remedies for the various economic maladies.

However there seems no quick fix for economic depressions especially with the problem that unemployment presents bearing in mind that Keynes did not achieve great success in this area. It could be argued that he was not afforded the respect and access he deserved to make the impact he would have otherwise made.

The IMF, World Bank and other financial institution today are armed with many provisions of Keynes economic theory to deliver economic prescriptions globally, with mix results as a consequence of applying the same formula for all countries regarding of their unique cultural, financial and economic situations.

Conclusion

It is disappointing that this problem persist despite the emergence of technology and reliable empirical data to make growth projections beyond forty year period, as well as the possible impact of vital Keynesian policies, that countries are still fighting to remain economically viable in terms of constant growth, low inflation and unemployment rates.

The possibility exist that the  problem may lie in the ability to apply adequate moral suasions on the part of economist and political leaders to effect the policy changes desirable, especially in economic crises situations, when political advantages are more important that what is best for the economy.

Prime Minister Winston Churchill and President Delano Roosevelt were not swayed by the economic presentations of John Maynard Keynes and took actions that caused their respective economies to suffer. Today the same problem exist, as even Nobel laureate economists are having their theories rejected by those in authority, and this approach has been  causing severe hardship especially to those  in the economy seeking jobs.

In light of the fact that there are no quick fix for economies, economist would serve their countries more effectively if they embrace all the theories of Keynes in their monetary and fiscal policy strategies, as well as the current empirical data from all successful economic success and combine them with the unique geopolitical, economic, social, and cultural characteristics of each country, to design unique, relevant and workable economic policies that will facilitate growth and sustainability.

Reference

Blinder, A.S., (2010). Keynesian Economics 2nd edition The Concise Encyclopedia of Economics Library of Economics and Liberty www.econolib.org/library/enc/keynesianeconomics.html , 12/08/11

Constitution Rights Foundation (2011). BRIA253 John Maynard Keynes and the Revolution in Economic Thoughts Bill of Rights in Action Vol.25 No.3 www.crf-usa.org/bill-of-rights-in-action/bria-25-3-john-maynard-keynes-and-the-revolution-in-economic-1 , 12/08/11

Ohanian, L.E. (2008), Back to the  Future  with Keynes  Federal  Reserve Bank of Minneapolis Quarterly Review Vol.32 No.1 pp.10-16

Williams, S. (2009). A critique of Crisis Theory Ideas about John Maynard Keynes www.critiqueofcrisistheory.wordpress.com/the-ideas-about , 12.08/11

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