The Legacy of Keynes - Essay Example

The Legacy of Keynes Introduction: The focus of this discussion relates to the five main issues of Post -War Keynesianism, Keynes' Method, Keynes &the state, Keynes and his Marxist critics and Keynes' general theory. The effect of neoclassical Keynesianism and the differences between Keynes and Marx and effects of Keynesianism in social theory and post war economy are also studied. We would examine several issues with regard to Keynes contributions to Economics. The main questions we would look at include the meaning of the term 'theoretical schizophrenia' in post war economics and its relation to Keynes' original contribution. We also examine the extent to which post-war boom can be attributed to Keynesianism. The main issues that we would elaborate on include Keynes' method and 'Keynesianism' as an account for the post-war boom. The Contributions and Influence of Keynes The influence of J.M. Keynes work is immense in the field of economics as he revolutionised economics with his classic book written in 1936, The General Theory of Employment, Interest and Money and changed the way we perceive the role of economy and governments in social life. With the introduction of the theory of income expenditure multiplier in 1931 by Richard Kahn, Keynes worked on the basis of his work which was to bring about revolutionary ideas to the field of economy giving rise to a new branch of economics known as the 'macroeconomics' (Keynes, 1936/1974). In a two volume Treatise on Money published in 1930 Keynes established the Wicksellian theory of the credit cycle in which the initial ideas of the liquidity preference theory of interest are suggested. This has been considered as one of the most important of Keynes contributions along with his ideas on marginal efficiency of investment. The impact of his 1936 book The General Theory of Employment, Interest and Money has been unprecedented not only because of the timing of its publications but also due to its unique approach that brought in a new brand of Keynesian economics (Coddington 1976; 1260; Trevithick 1992). This book was released during the period of the Great Depression and had major political, social and economic impact. Within the general theory, Keynes sought to develop a theory that can explain the formation of aggregate output and employment considering aggregate demand as the determining factor. He introduced certain revolutionary concepts in economics such as the concept of demand-determined equilibrium. He also suggested that price flexibility is generally ineffective as a cure to unemployment. Keynes also gave a unique theory of money based on "liquidity preference", and highlighted the role of radical expectations (Trevitihick 1992; Keynes 1936/1974). He worked on the marginal efficiency of investment schedule and taking a detour from Say's Law reversed the savings-investment causation relationship, and also suggested the possibility of government fiscal and monetary policy that can be used to counter the problems of recessions and control economic booms for a balanced and predictable economy.The Keynesian ideas were controversial as they were revolutionary and although Keynes had support of progressive economists he faced severe opposition from traditional ones. The "IS-LM" representation of Keynes's theory initiated the "Neoclassical-Keynesian Synthesis" and became the most popular and dominant form of macroeconomics by the 1960s (Chrystal et al, 1994; Snowdown et al.1994). The Keynesian synthesis however went through changes in the Post Keynesian era although Keynes' theories were retained in the original forms. Keynes influence was pronounced due to the combined factors of the Depression, post war economy and Keynes revolutionary ideas that changed the way economists perceived or interpreted the role of government and concepts of economic theories (Snowdown et al, 1994). The inflationary gap of the post war era as identified by Keynes led to his emphasis on compulsory savings and setting up of an international commodity reserve. In a later development following the post war depression and changes in the economic order, the American White Plan was accepted which suggested that countries should retain fixed exchange rates against the dollar that would be valued against gold. At this time, two worldwide organisations, the International Monetary Fund (IMF) and the World Bank, were created to oversee the new international monetary system. Keynes' General Theory Keynes general theory created the terminology for macroeconomics, and brought in the Keynesian revolution and changed the way in which the feasibility of public sector management of the aggregate level of demand in the economy are viewed. The "General Theory" argued that in a modern economy the level of aggregate demand is determined by several factors such as the tendency to consume (measured by changes in income and spending or consumption), the tendency to save (measured as a percentage of increase in incomes by saving), the worth or usefulness of fixed capital investment (dependent on anticipated rates of return) and interest rates (Keynes 1936/1974). Keynes argued that in a weak economy as in post war conditions, or in great depression. Where the economy is stagnant the government could have an important role to play and can increase aggregate demand by increasing its expenditures and also increase borrowing to finance such expenditures keeping in view that interest rates do not also increase significantly. Keynesianism is thus based on emphasizing on government role to affect demand through taxation, expenditure borrowing and monetary policy and this was especially relevant in the post war period (Sutcliff 1977; Keynes 1936/1974). Some policy analysts reacted that Keynesianism was not just shocking but could encourage inflation and undermine the advantageous aspects of sound and balanced financing policies suggesting that demand management can be challenging and ineffective. The new approaches to Keynesian economics have helped develop neo- Keynesianism and neo- Keynesian theories and approaches serve as a response to the shortcomings of the Keynesian policies and attempt to make Keynesianism more applicable and acceptable. Keynes suggested that whenever there is deficit financing, strict government control could eventually pay off. Government spending boosts economic activity as there is a 'multiplier effect' when workers spend their wages on consumer goods and consequently industries have increased income, output and employment and that raises tax with which the government could pay off initial debts and balance the budget (Sutcliff 1977). Keynes, State and Marxism Marx based predictions on the deteriorating working class on his basic law of capital accumulation by the bourgeois and suggested that an increase in capital accumulation leads to an increase in the industrial reserve or unemployment. However considering that Marx's predictions seem to have failed, Keynes ideas that capitalism was no longer self regulating seem to be correct although Keynes economics has its applicability from the perspective of the Depression and post war economic disorder and emphasizes exclusively on governmental and state control to tackle inflation. Despite these differences there have been attempts to blend Marxism with Keynesianism with Keynes seen as a economist who wanted to reform and improve capitalism. The idea of consumption according to increases in income may be just giving the same emphasis to capital accumulation and consumption as Marx's theory does. Both Marx and Keynes wanted to address problems of unemployment and economic stagnation (Mattick 1969; Karimzadi 2003). Whereas Marx's theory had strong social implications and focused on addressing social concerns and social character of production, Keynes emphasized on economic causes such as lack of incentives to invest in capital and the fundamental reasons of consumption (Mattick 1969m 76-83). Keynes theory cut down consumption by emphasizing on saving and thus was helpful in the period of inflation and economic disorder, Keynes theory had practical advantages although some thought it was inapplicable due to extreme measures it specifies. Marx's theory was however not so readily applicable and did not specify state control. Whereas Keynesianism aimed at social reform within the capitalist system Marx aimed at social changes with the complete abolition of the capitalist systems (Mattick 1969; Karimzadi, 2003, 65-70). Although the Marxian revolution has been validated with changes seen in the former Soviet Union and China, the Keynesian revolution has never been tested for practical validity. Keynes wishes to go against the foundations of Marxism but as is clear from the discussion this was far from achieved. Post-war Keynesianism and Neo- Keynesianism The "Neoclassical-Keynesian Synthesis" relates to the Keynesian revolution reinterpreted during the post war period. The primary feature of neoclassical Keynesianism is the IS-LM model which was however unable to attain the unemployment equilibrium and tended to yield full employment results. The IS-LM shows the interaction between the real and monetary markets and shows how income affects money demand and interest affects investment. The Neo-Keynesians appealed to rigid money wages, interest-inelastic investment demand, and income-inelastic money demand and although they were successful and dominated macroeconomics, they were under attack for not withholding the general theory of Keynes. With sudden inflation and unemployment in the 1970s the neo Keynesianism systems came under major attack. Returning to the initial question with which we began our analysis, i.e. what does the expression 'theoretical schizophrenia' in post war economics refer to and how does this relate to Keynes' original contribution, we reconsider the applicability of Keynes' contribution from a historical and social perspective. To answer the extent to which post-war boom can be attributed to Keynesianism, a more economic perspective should be taken. There has some degree of schizophrenia in the applicability of theories of economics and Keynes contribution has been largely relevant for post war economy. This would mean a general failure of theories to be applicable to post war conditions as Keynes emphasised the need for saving and measured consumption and urged considerable amount of state control. Keynes' original contributions have actually paved the way for overcoming the theoretical schizophrenia of post war economics which had limited applicability and needed a new and revolutionary theory that Keynes could offer for explaining the era of Depression and economic disorder. In order to understand how post war boom and control in inflation could be related to Keynesianism, we consider the direct effects of Keynes theory. Following the end of the Second World War, in advanced capitalist countries there was relatively full employment and an unprecedented increase in prosperity (Sutcliffe, 1977m ch.11). The working class in this region shared in this prosperity and it was a golden age for capitalism. Since most economists supported the ideas of Keynes, the golden age was put down as a contribution to Keynesian economic policies as Keynes worked within the framework of capitalism to bring suggested social reforms, this period however marked the inapplicability of Marxism as a social theory. Conclusion: The analysis has been based on Keynesianism not just as a social theory but a revolutionary economic perspective that could explain post war depression and resulting economic boom of the 1960s and 1970s within the capitalist economies. Unlike Marxism, Keynesianism is based on social reforms within capitalist economies and emphasizes on government control that can not only determine spending and consumption but can also overturn deficit budgets to regularize the economy. Keynesianism helped to overcome a theoretical schizophrenia by providing a radical view of economic change for the post war era. Keynes represented not just a change in economic theory but a change in social and political thought. Keynes influence has been immeasurable and unlike Marxian Keynes theory could be applied on a wide variety of post war situations that helped control economic disorder. Yet as Marx, Keynes was one of the most controversial economists of his time and the complete success of his theories may still remain to be charted out. Bibliography Coddington, A. C. (1976) 'Keynesian Economics: The search for First Principles', Journal of Economic Literature, 14 (1976), 4, 1258-73 Chrystal, A. and Price, S., Controversies in Macroeconomics, Hertfordshire: Harvester Wheatsheaf, 1994 Fine, B. and Harris, l., (1985) The peculiarities of the British Economy, London: Lawrence and Wishart, 1985, chapter 1:: 'The Peculiarities of the British Economy'. 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