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Thursday, November 7, 2013

Thought On John Keynes

Thoughts on Keynes
By Benjamin Bowman

I find it interesting that author highlighted the great success and large fortune amassed by Keynes. Although many other men and women we have read about have had successful careers, and I assume became wealthy, the author never really has made it a point to describe their fortunes. Maybe, the reason for this is the method by which Keynes amassed such a larges fortune. He did so by successful securities speculation to a level that is quite impressive. During the years he lived there were wild swings in the markets, and someone good at analyzing markets could have made a lot of money, and he did.
It is no surprise then that Keynes was fairly accurate at imagining the economic for his grandchildren as he wrote “Economics Possibilities for our Grandchildren” in 1930. He wrote at a time where many people believe that the rapid increase of quality of life, and rapid economic development was coming to an end. Many people believed that things were going to get worse, and not better. Keynes however, saw a bright future. He felt we were merely adjusting to a new economic climate. That the rapid changes in technology had simply led to some maladjustment that needed to be worked out, but the future was going to be great. He was right.
            Keynes was obviously successful as an economist. I find it interesting that again we see an example of scientific thought being influenced by the events of the time. We have seen this time and time again, that multiple people are discussing and developing similar principles of economics. My conclusion was that scientific thought is molded by current scientific and social conditions. In this case Keynes wrote and developed much of his monetary policy during the great depression. I wonder how his theories would have differed if he developed them without the influence of the great depression. Likely, he would be influenced by some other factor that helped to direct his thought.
            I also find it interesting that Keynes is an excellent example of how someone can be educated on the status quo and venture away from group thought. Though it is very difficult, it is possible. Keynes himself describes it as a “long struggle of escape.” Most notably was his inability to accept Say’s law. This was not without good reason. It seems that this dissent is what led him to his new theory. While trying to articulate why he thought that Say’s law was wrong, he ended up formulating his own solutions to aggregate demand.
            To me, Keynes drift from group thought not only demonstrates vision, but courage. A part of “Economics Possabilties for our Grandchildren” makes me think that Keynes, as many great men and women, really wanted to make the world a better place. He believed that within 100 years from 1930, all the economic problems of the world would be solved. Of course he realized that this was more of a wish than a prediction, but it also demonstrates his vision. Especially in a time of depression, he believed that greater days were to come. I believe that one day we may reach a solution, not to eliminate all woes from society because society has a way of self inflicting them, but a solution that helps self regulate economies so that they cannot get to far out of control. Of course politicians, wars, and evil will most assuredly screw up any perfect system. Maybe it’s just a dream, but I believe it is a good goal.
            Another way that Keynes differed from classical economist is in money theory. Classical economists believed that people held money for transactions and that the transaction demand for money was directly related to income. Keynes believed this as well, but said that people also held cash because of a preference for liquidity. He also said that the main determinant of investment was the interest rate, not the income. The higher the interest rate, the more likely people are to hold bonds instead of cash.
            A unique part of Keynes’ money theory is his liquidity trap.  He argued that the interest rate might fall so low that everyone would withdrawal from bonds. This would imply that there is a floor to interest rates, and that at some point lower interest rates would not induce further investments. The significance of this is that it means the affect of monetary policy was not so simple and predicable as the classics thought. Keynes concluded that monetary policy designed to work through interest rates is useless in the face of depression and widespread unemployment. For this reason Keynes recommended strong fiscal policy instead of interest rate manipulation only in order to stimulate the economy.
            Keynes did not accept that the private sector was a fail-safe guard against long-term unemployment. He argued that government should tax and spend in order to influence the business cycle. He believed that the government should stand ready to execute a planned effort to use all it’s tools available to stimulate the economy. This idea of government intervention eventually became a way of orthodox thought. It spread into almost all institutions of higher learning.
Keynes is a very interesting subject to study because it is the first economist that we have read about who’s thought and theories have not completely settled down into its place in economic thought. Most of the other economist have either been discredited or been accepted for their usefulness. Although there may be some persisting debate, I don’t think to the degree of the debate that lies around Keynes philosophies.
            Keynes’ conclusions rely heavily on empirical estimations of elasticity of his own theoretical functions. These estimations are extremely difficult to obtain, and some would argue impossible. There are a lot of difficulties involved in the price declines required for some of Keynes’ theories.  One of the first arguments that Keynes make in “Economic Possibilities for our Grandchildren” is that prices had not fallen enough. Nevertheless, my point is that many parts of Keynes philosophies are still debated to this day. Only time will tell how Keynes fairs in the history of economics.

Economics Possibilities for our Grandchildren – John Maynard Keynes

http://www.aspeninstitute.org/sites/default/files/content/upload/Intro_Session1.pdf
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