Was John Maynard Keynes Right? Applicable Concept: Aggregate Demand and Aggregat
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Question
Was John Maynard Keynes Right?
Applicable Concept: Aggregate Demand and Aggregate Supply Analysis
In The General Theory of Employment, Interest, and Money, Keynes wrote:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back…. There are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. Keynes (1883–1946) is regarded as the father of modern macroeconomics. He was the son of an eminent English economist, John Neville Keynes, who was a lecturer in economics and logic at Cambridge University. Keynes was educated at Eton and Cambridge in mathematics and probability theory, but ultimately he selected the field of economics and accepted a lectureship in economics at Cambridge.
Keynes was a many-faceted man who was an honored and supremely successful member of the British academic, financial, and political upper class. He amassed a $2 million personal fortune by speculating in stocks, international currencies, and commodities. (Use CPI index numbers to compute the equivalent amount in today’s dollars.) In addition to making a huge fortune for himself, Keynes served as a trustee of King’s College and increased its endowment over tenfold.Keynes was a prolific scholar who is best remembered for The General Theory, published in 1936. This work made a convincing attack on the classical theory that capitalism would self-correct from a severe recession. 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 for the government to raise its spending and/or reduce taxes in order to increase the economy’s aggregate demand curve and put the unemployed back to work.
Price Level, Real GDP, and Unemployment Rate, 1933–1941
Analyze the Issue
Was Keynes correct? Based on the above data, use the aggregate demand and aggregate supply model to explain Keynes’s theory that increases in aggregate demand propel an economy toward full employment.
Year CPI Real GDP (billions of 2009 dollars) Unemployment rate (percent) 1933 13.0 778 24.9 1939 13.9 1,163 17.2 1940 14.0 1,265 14.6 1941 14.7 1,489 9.9Explanation / Answer
Yes, Keynes looks at demand side of economy and envisages an important role for the state. According to keynes it is due to deficieny of demand that recession and depression attacks an economy. One of the key assumption of keynes theory was the prices are rigid and full employment always exist in economy . So if we increase aggregate demand in economy through incresed goverment expenditure or through reduction in income and personal taxes then it would mean incesed invesment by enterprenurs . Enterprenurs would be optimistic that incresed demand will bring profits to them. So they will undertake investment . Since there is always unemployment in economy wages will not rise and hence output, employment, income will increase taking us to full employment level.
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