Keynes Presentation - FINAL

7/31/2019 Keynes Presentation - FINAL

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John Maynard

Keynes


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Presentation Outline Section I

o Historical context, Keynes early life, career path

Section IIo Major WorksEconomic Consequences of the Peace, Treatise on Moneyo General Theory of Employment, Interest and Money

o Academic Influences

Section IIIo Critiques of Keynesianism and modern applications


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Section IWhat factors influenced Keynes General Theory?


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John Maynard Keynes

Ide

as shape the course of history.


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Early Life

Life: June 5, 1883April 21,1946

Born and raised in England

Family:

FatherRobert NevilleKeynes

MotherFlorence Ada

Keynes BrotherGeoffrey Keynes.

Knighted for work on bloodtransfusion, marriedgranddaughter of Charles

Darwin SisterMargaret Keynes.

Married Noble Prize winningPhysiologist


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Florence Ada Keynes Social Reformer and

Mayor of Cambridge

Ran numerous charities:o Provided pensions for elderly

living in poverty

o Provided services for

deserving poor

o Reintegrated inmates back into

society

Loving mother,devoted to Keynes


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John Neville Keynes Economist and Lecturer

in Moral Sciences atCambridge University

Positive Economy

Normative Economy

Art of Economics

Loving father, devotedto Keynes


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Keynes Life

Studied at Eton and KingsCollege, Cambridgeo In 1904, earned B.A. in

Mathematics

President of the CambridgeLiberal Clubo Promoted redistribution of

wealtho Favored government

involvement in the economy

Member of Cambridge Apostleso Creepy, secret-societyo Debating forum for members

that included many prominentmathematicians andphilosophers

Education


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Keynes Life

Clerk for India Office,1906-1908

Lecturer and Researcheron probability theory atCambridge, 1909-1913o Published a series of

articles on the Indian

economyo First book: Indian Currency

and Finance, 1913

Treasury, 1915o One of the negotiators forterms of Versailles PeaceTreaty

1906-1915


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World War I Treaty of Versailles

o Britain, France, and USAresponsible for negotiatingterms of treaty with Germany

o Keynes working behind thescenes

Terms of Treatyo Astronomical reparations

o Crippled German economy

Keynes Beliefso Reparations should be minimal

o Need to protect Germancitizens from starvation


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Unemployment in Great Britain (1900-1950)

Unemployment rates had an enormous amount ofinfluence on Keynes arguments

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Unemploymen

tRate(%)


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Keynes Life

Treatise on Probability, 1921o First, large mathematical work by

Keynes

Becomes an investor andcurrency speculatoro Very wealthy by the end of the

1920s

Advocates against the GoldStandardo Believes that, to decrease

unemployment, Churchill shoulddevalue the British Sterling

Continues to work as a lecturerat Cambridge University

1920-1930


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Great Depression

Keynes loses most of hisfortune after the GreatDepression

A Treatise on Money, 1930o Describes why

unemployment persists at

such high levels

Critical of British austeritymeasures during

Depression, advocates forincreased governmentspending


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Keynes Life

Britain abandons GoldStandard, 1931

Keynes re-earns fortunethrough sales of theGeneral Theory andcurrency speculation

Keynes health beginsto fail

Economic Adviser tothe British Government

1930s
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The General Theoryof Employment,

Interest and Money

Keynes Masterpiece

Hugely influential across

the world

Foundation of

Keynesianism


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Keynes Life

Keynes negotiates with USAto secure loans to Britainduring wartime

Argues that the taxes shouldbe increased and amandatory savings rateestablished to pay for theWaro Avoid inflation after Wars

end

Keynes, now a Baron, takesa seat in the House of Lordsamong the Liberal Party

Advocates new monetarysystem after the War

1940s, World War II


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Bretton Woods

Established IMF andpre-cursor to the

World Bank(International Bank forReconstruction andDevelopment)

Establishes a world

monetary system offixed exchange ratestied to the US dollar


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What factors influencedKeynes General Theory?

1. Family

2. Education at

Cambridge3. Government Service

4. World War I

5. Great Depression

[With Bretton Woods] we

have shown that a concourse

of forty-four nations areactually able to work together

at a constructive task in amity

and unbroken concord. Few

believed it possible. If we can

continue in a larger task as we

have begun in this limited

task, there is hope for the

world.

-John Maynard Keynes


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Section IIKeynes Major Works


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The Economic

Consequences ofthe Peace

If we aim deliberately at

the impoverishment

nothing can then delay forvery long that final war

between the forces of

Reaction and the despairing

convulsions of Revolution,

before which the horrors ofthe late German war will

fade into nothing.

- John Maynard Keynes


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The Economic


Franceo Wanted to set back German

progress 50 years

United Stateso Woodrow Wilson left Washington

enjoying a prestige and moralinfluence unequalled in history

o In fact, weak-minded and notknowledgeable of Europeanconditions

The French succeeded inachieving many of theirdemands

Versailles Conference

Overview


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The Economic


Treaty of Versailles, 1919,crippled German economy

Keynes proposals overlooked,

considered controversial

Wrote The EconomicConsequences of Peace in twomonths the following Summer of

1919

The Economic Consequences ofPeace was largely a critique ofthe Treaty of Versailles

The Treaty of Versailles

Overview


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The Economic


Europe cannot prosperwithout an equitable,integrated economic

system

The Allies violated theFourteen Points: acommitment fairnessregarding reparations,territorial adjustments, andeconomic matters


Criticism


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The Economic


Reparations were severe,exaggerated, andquestionable

Inflation hit Europe hard, withGermany experiencinghyperinflation

Keynes attributed thehyperinflation togovernments being tooshort-sighted to secure loansor taxes from resources they

acquired, (and instead)have printed notes for thebalance


Aftermath


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The Economic


Keynes claimed theTreaty did not include

a rehabilitation planto the Europeaneconomy

Three key problems1. Decline in Europes internal

productivity

2. Breakdown of transportationand infrastructure

3. Inability to import goods andsupplies from overseas

Europe after the War


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The Economic


Keynes suggested aplan to help remedy

the situation:

1. Revising the treaty andreparations

2. Abandonment of inter-ally

Indebtedness

3. An international loan

4. European relations with Russia

Solving Europes Problems


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The Economic


The EconomicConsequences of Peacebecame an immediatebestseller on both sides of

the Atlantic

Solidified Keynes reputationas a leading economist

Public perceived Germanywas being treated unfairly,resulting in public support forappeasement

Keynes predicted the nextwar would begin twentyyears from 1919

Success and Influence


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A Treatise onMoney


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A Treatise onMoney

Published in 1930,written during thebeginning stages of the

Great Depression

A Treatise on Moneyprofessed his views on

money, interest, andmonetary policy

Many of his views were

borrowed from hismentors, Alfred Marshalland Arthur Pigou

Background


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A Treatise onMoney

Keynes introduced his theorythat where saving exceedsinvestment, recession will occur

Keynes suggested that in orderto stabilize the economy, theprice level must first be stabilized

Government Central Banklower interest rates whenprices rise, raise interest rateswhen prices fall

Many of his ideas are furtherdeveloped in his future work,

General Theory

Monetary Policy


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A Treatise onMoney

Critically acclaimed as a hard toread, and many of the conceptswere a work-in-progress

Hayek wrote three reviews andcritiques onA Treatise on Money

Their debates / critiques largelyrevolved around discrepanciesin terminology, especially as itpertained to saving andinvestment models

Both were promising economistsaspiring to develop economic

models / theory

Reception


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A Treatise onMoney

A Treatise on Moneyserved as a prequel to

his greatestmasterpieceTheGeneral Theory ofEmployment, Interest,

and Money.

Many fundamentalconcepts within

General Theory weremore polished ideasfromA Treatise onMoney

Legacy


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The General Theory

of Employment,Interest and Money

It is astonishing what foolish

things one can temporarily

believe if one thinks too longalone, particularly in

economics

- John Maynard Keynes

Th G l


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The GeneralTheory on

Employment,

Money and InterestBook I

The General Theory was writtenduring the Great Depression,published in 1936

Keynes introduces the book withthe radical claim that TheGeneral Theory is meant tocontrast his arguments withthose of classical theory ofeconomics

Keynes claims that classicaleconomics are applicable toonly special cases, whichhappen not to be those of theeconomic society in which weactually live

Introduction

Th G l


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Employment,


Classical theory of employment saysthe labor market is determined bysupply & demand, whereunemployment strictly caused by

either frictional unemployment orvoluntary unemployment

Doesnt explain Great Depressiono People must simply work for less?

Classical Theorysupply creates itsown demand. If there are peoplewilling to work, jobs will be createdto use themo Unemployed is a result of refusal to work

Introduction

Th G l


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Employment,


1. The real wage is equalto the marginaldisutility of the existing

employment;

1. There is no such thing

as involuntaryunemployment in thestrict sense; and

1. Supply creates its owndemand (Says Law)

The Classical Assumptions

Th G l


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Employment,


1. Workers and unions willprotest nominal wagereductions, but not realwage reductions under theclassical schoolo Inflation a better solution than wage

cuts?

2. If wages decrease, cost of

production decreases, thenprices decrease realwages stay the same

Keynes uses this example tocriticize fundamentalassumptions of classicaleconomics

A Critique of Classical Labor

Model

Th G l


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Employment,


People earn money, thenspend some of itnot all ofit, resulting in insufficienteffective demand

Businesses hire based offhow much they expect to

sello Spending determines employment, supportingthe idea of unemployment

The existence of insufficienteffective demand will often resultin less-than optimal unemployment

levels, despite that marginalproduct of labor > marginal disutilityof employment

Effective Demand

Th G l


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Employment,


These two fundamentalconcepts left Keynes

baffled as to how classicalRicardian economics isconsidered completeand victorious

It may well be that theclassical theory representsthe way in which weshould like our economyto behave. But to assumethat it actually does so isto assume our difficultiesaway.

Criticism of Classical

Economics

Th G l


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Employment,

Money and InterestBook IV

Prospective yield: value ofexpected returnscost ofinputs and maintenance

Supply price: cost ofmanufacturer making newmachine (replacement

cost)

Marginal Efficiency ofCapital

=prospective yieldsupply

price

Marginal Efficiency of

Capital

The Ge e alI i i t t i it l


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Employment,


Increasing investment in capitalhas two effects:o Decreases prospective yield in

the long runo

Increases supply price in shortrun

Overall diminishing the marginalefficiency

Investment-demand schedule:how much investment mustincrease to lower ME to a givenlevel

Investment will be pushed untilME (general) = market interestrate


Capital

The Ge eralCh i l f


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Employment,


Changes in value of moneyaffect expected yield

Expect inflation yieldincreases attracting moreinvestment

And vice versa

No way to predict long-termexpected yields

Beat the gun in stockmarkets

Instability due to animalspirits


Capital

The GeneralI t t t th i


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Employment,

Money and InterestBook VI

Interest rates are the pricepeople demand for partingwith their money

Depends on:o liquidity preference (desire to

hold cash)

o money supply

Driven by bond marketspeculationo expected increase in r hold

cash now, buy bonds later

People believe saving lowersinterest rates when really itlowers demand andincreases unemployment

Interest Rates

I


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Increase MS

Decreases r

Increasesinvestment

Increasesemployment

Increasesprices

Increasesliquidity

preference

The GeneralCentral bank can lo er short


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Employment,


Central bank can lower short-term rates by printing moneybuying short-term governmentdebto US did this in Great Depression

To extend this to long-term rates,government should buy long-term bonds

Larger amount of cash they seekto create by purchasingbonds/debt, greater the fall of r

Monetary policy seen as

experimental will not deliverylong-term reduction of ro it will only increase

precautionary motive ofholding cash

Controlling the Interest Rate

The GeneralLi idit t


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Employment,


Liquidity traps

Rates fall so low that

everyone prefers holdingcash and authority losescontrol over the rates

Hyperinflationno onewants to hold cash

Crisescant get peopleto want to reasonably partwith their cash

Problems with Controlling

the Interest Rate

The GeneralFor full employment


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Employment,


For full employment,government keeps r downby printing money

More profitable to invest inthings with lower yields

ME zero (remember: ME= yieldsupply cost)

No one would invest inanything anymore

Accumulation but nogrowth

The rentier disappears

Problems with Controlling

the Interest Rate

The General


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Employment,

Money and InterestBook V

Changes in money-wages

The employment function

The theory of prices

The General


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Employment,


Classical argument: Areduction in wages

stimulates demand(due to reducedproduction costs)

Keynes rebuttal: Thiscould only be true if

aggregate demand isfixed

Money-wages, Chapter 19

The General


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Employment,


The profits realized byentrepreneurs as a

result of lowerproduction costs willbe disappointing, and

employment will fallback to its previousfigure

Keynes Analysis

Why the classical money-

wage theory doesnt work

The GeneralTh d ti f


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Employment,


The reduction ofmoney-wages will

have no lastingtendency to increaseemployment! Therefore

The GeneralP it t


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Employment,


Propensity to consume

Schedule of marginal

efficiencies of capital;(Expected income = Price of capitalasset)

Rate of interest

Why?

Demand

Investment

Then which factors are

related to increasing

employment?


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Employment,Money and Interest

Book V

A flexible money policyis preferred because it is

easier to implement

Flexible wage policieswould be unjust,wasteful, and disastrous

If laborwas in a position

to affect change, thenTrade Unions would rulemonetary policy

Flexible Wage Policy v.

Flexible Money Policy

Which is preferred?

The General


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Employment,


Short run:

o Stable prices

o Stable employment

Long run:

o Prices fall slowly as a

result of better

technology, while

wages remain stableoOR, wages rise slowly

as prices stay stable

Rigid Wage Policies

Why does Keynes believe

wages should be somewhatrigid?

The General


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Employment,


Quantity Theory ofMoney is not 100%

righto Emphasis on money

demand

Recent mathematicalmodels are mereconcoctions

Deceptive simplicity toassume A B.

The Theory of Prices

Chapter 21

The GeneralTh l


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Employment,


The long-runrelationship between

the national incomeand the quantity ofmoney will depend onliquidity preferenceso Psychology of the public

The very long-run

course of prices hasalways been upward

Theory of Prices: A

Generalization


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Section IIIModern application of Keynes & its critics

First coined by Milton


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Were allKeynesians

now

First coined by MiltonFriedman in 1965

Later repeated byRichard Nixon in 1971

I guess everyone is a

Keynesian in a foxholeRobert Lucas

Popular phrase

following the financialcrisis and subsequentbailouts

Were All Keynesians Now


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What do modern economists think of Keynes?

How Did PaulKrugman Get It SoWrong? by JohnCochrane

How Did EconomistsGet It So Wrong? byPaul Krugman

l h


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Saltwater v. Freshwater Efficient markets

hypothesis

Robert BarrosRicardian Equivalence

The solution is not to

rehabilitate an eightyyear old book

Irrational market

behavior, animal spirits

Boost consumption &effective demand

Return to Keynes. Fiscal

stimulus, re-regulatefinance


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Conclusion

Keynes Presentation - FINAL

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