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The General Theory of Employment - Coggle Diagram
The General Theory of Employment
Introduction
Life of JM Keynes
British economist, born in June 5, 1883, Cambridge, United Kingdom
Known for his opus The General Theory of Employment, Interest and Money (pub. in 1936), which contradicted neoclassical economics, mainly in its view of the market's ability of self-balance.
Along with econometrics, Keynes' views are seen as one of the greatest responses to the 1929 crisis.
Brief description od the 1929 crisis.
Seen as an Anti-victorian and a bohemian, practical economist
Context Summary on the document
Neoclassical approach to the general theory of employment
Criticisms referred in the document
Mr. Robertson
- "I fully agree with the important point he makes (pp. 180-183) that the increased demand for money resulting from an increase in activity has a backwash which tends to raise the rate of interest; and this is, indeed, a significant element in my theory of why booms carry within them the seeds of their own destruction"
Professor Viner
- (Involuntary unemployment) "in modern monetary theory the propensity to hoard is generally dealt with, with results which in kind are substantially identical with Keynes', as a factor operating to reduce the 'velocity' of money."
Keynes' answer to each critique
Professor Viner
- It is precisely because the facilities for hoarding are strictly limited that liquidity preference mainly operates by increasing the rate of interest. The profitability of investment, on the other hand, is determined by the relation between the return available to capital and the interest rate. The economy needs to find its way to an equilibrium in which no more money is being saved than will be invested, and this can be accomplished by contraction of income and a consequent reduction in the level of employment. “he overlooks the emphasis I seek to place on the rate of interest as being the inducement not to hoard.”
Liquidity preferences
The rate of interest is an inducing factor not to hoard, according to keynes, In other words, an increase in the interest rate is a means to achieve increases in liquidity preferences
Keynes' approach (in sum)
The state must intervene in an economy in order to correct market failures
TGEIM
- Keynes denied that an economy would automatically adapt to provide full employment even in equilibrium, and believed that the volatile and ungovernable psychology of markets would lead to periodic booms and crises. The General Theory is a sustained attack on the classical economics orthodoxy of its time. It introduced the concepts of the consumption function, the principle of effective demand and liquidity preference, and gave new prominence to the multiplier and the marginal efficiency of capita
the level of employment is determined not by the price of labour, as in classical economics, but by the level of aggregate demand. If the total demand for goods at full employment is less than the total output, then the economy has to contract until equality is achieved.
which goes to show/explain one of the reasons for the 1929 crisis
Rejection of Say's Law
Say's Law depends on the operation of a market economy. If there is unemployment (and if there are no distortions preventing the employment market from adjusting to it) then there will be workers willing to offer their labour at less than the current wage levels, leading to downward pressure on wages and increased offers of jobs.
Keynes accepted the classical relation between wages and the marginal productivity of labour
however
unemployment may result from wages being fixed by legislation, collective bargaining, or 'mere human obstinacy'
relationship between saving and investment
Provided it is agreed that income is equal to the value of current output, that current investment is equal to the value of that part of current output which is not consumed, and that saving is equal to the excess of income over consumption... the equality of saving and investment necessarily follows.
Def of liquidity preferences
Body
Types of negative externalities
"Edgeworth and Professor Pigou and other later and contemporary writers have embroidered and improved this theory by considering how different peculiarities in the shapes of the supply functions of the factors of production would affect matters, what will happen in conditions of monopoly and imperfect competition, how far social and individual advantage coincide, what are the special problems of exchange in an open system and the like."
Uncertainty
Conclusion
Link between Keynes' views and nowadays economics
Idea to pursue - Public expenditure as a means for equilibrium in the short-run