John Keynes. "The general theory of employment, interest and money"

In 1936 John Keynes's book The General Theory of Employment, Interest and Money was published. The author interpreted in his own way a popular thesis about the self-regulation of a market economy.

State regulation is necessary

Keynes's theory asserts that the market economy does not have a mechanism of natural provision of full employment and prevention of a fall in production, but the state is obliged to regulate employment and aggregate demand.

A special feature of the theory was the analysis of problems common to the whole economy-private consumption, investment, state expenditures, that is, factors that determine the effectiveness of aggregate demand.

In the middle of the twentieth century, the Keynesian approach was used by many states of Europe to justify their economic policies. The consequence was the acceleration of economic growth. With the crisis of the 70-80-ies. Keynesian theory was criticized, and preference was given to neoliberal theories, which professed the principle of non-interference of the state in the economy.

Historical Context

Keynes's book marked the beginning of "Keynesianism," a doctrine that brought the economy of the West out of a severe crisis, explaining the reasons for the decline in production in the 1930s and voicing the means to prevent it in the future.

John Keynes, an economist by training, was once an employee of the Department of Indian Affairs, the Finance and Currency Commission, and served in the Ministry of Finance. This helped him to reconsider the neoclassical theory of economics and create the foundations of a new one.

The fact that John Keynes and Alfred Marshall , the founder of the neoclassical theory, crossed at the Cambridge Royal College also spoke. Keynes - as a student, and Marshall - in the role of a teacher who appreciated the abilities of his student.

In his work Keynes justifies the state regulation of the economy.

Before that, economic theory had solved economic problems with microeconomic means. The analysis was limited to the scope of the enterprise, as well as its tasks to reduce costs and increase profits. Keynes's theory substantiated the regulation of the economy as a whole, which implies the participation of the state in the national economy.

A new approach to overcoming crises

At the beginning of the work J. Keynes criticizes the conclusions and arguments of modern theories, based on Say's market law. The law consists in the sale by the producer of his own goods for the purchase of another. The seller turns into a buyer, the offer generates demand, and this makes overproduction impossible. Probably only quickly liquidated overproduction of some goods in some sectors. J. Keynes points out that, in addition to commodity exchange, there is a monetary exchange. Savings fulfill the accumulative function, reduce demand and lead to overproduction of goods.

In contrast to economists who considered the issue of demand to be insignificant and self-enforceable, Keynes made it the central basis of macroeconomic analysis. The theory of Keynes says: demand depends directly on employment.

Employment

The Doque's theories considered unemployment in two of its varieties: friction - the result of uninformed workers about the existence of jobs, the lack of desire to move, and voluntary - a consequence of the lack of willingness to work for the corresponding marginal product of work payment in which the "pain" of labor exceeds wages. Keynes introduces the term "forced unemployment".

According to the neoclassical theory, unemployment depends on the marginal productivity of labor, as well as its marginal "burden", which corresponds to the salary that determines the job offer. If applicants agree to a low salary, then employment will go up. The consequence of this is the dependence of employment on workers.

What are the thoughts on this subject for John Maynard Keynes? His theory denies this. Employment from the employee does not depend, it is determined by the change in effective demand, equal to the aggregate of future consumption and investment of capital. The demand is affected by the expected profit. In other words, the problem of unemployment is related to entrepreneurship and its goals.

Unemployment and demand

At the beginning of the last century, unemployment in the United States reached 25%. This explains why the economic theory of John Keynes places it at the center. Keynes draws a parallel between employment and the crisis of aggregate demand.

The level of income determines consumption. Insufficient consumption leads to a decrease in employment. John Keynes explains this by "psychological law": the growth of income leads to an increase in consumption by the share of its growth. The other part is accumulating. Increasing income reduces the propensity to consume, and to accumulation - increases.

The ratio of consumption growth dC and dS saving to an increase in income dY Keynes calls the marginal desire for consumption and accumulation:

• MPC = dC / dY;
• MPS = dS / dY.

The decrease in consumer demand is offset by an increase in investment demand. Otherwise, the employment and rate of growth of the national income decrease.

Investments

The growth of capital investments is the main reason for effective demand, reducing unemployment and raising public incomes. Therefore, the increasing amount of savings should be compensated for by the rise in demand for capital investment.

To ensure investment, you need to translate into them savings. Hence the Keynesian formula: capital investments are equivalent to accumulations (I = S). But in reality this is not observed. J. Keynes notes that savings may not correspond to investments, since they depend on income, investment - on the rate of interest, profitability, taxation, risk, conjuncture.

Interest rate

The author writes about the probable income from capital investment, its marginal efficiency (dP / dI, where P is the profit, I is the investment of capital) and interest rate. Investors invest money, while the marginal efficiency of investing capital exceeds the interest rate. Equality of profit and interest rate will deprive investors of income and reduce the demand for investment.

The interest rate corresponds to the margin of profitability of capital investment. The lower the norm, the greater the investment.

According to Keynes, the savings are made after the satisfaction of the needs, so the increase in interest does not lead to an increase. The interest is the price of non-liquidity. To this conclusion, John Keynes comes on the basis of his second law: the propensity to liquidity is conditioned by the desire to have the ability to turn money into investment.

The volatility of the money market increases the craving for liquidity, which can be overcome by a greater percentage. The stability of the money market, on the contrary, reduces this desire and the rate of interest.

The rate of interest is seen by Keynes as a mediator of the effect of money on public revenue.

The increase in the amount of money raises the liquid supply, their purchasing power decreases , the accumulation becomes unattractive. The rate of interest decreases, and investment grows.

John Keynes advocated a decline in interest to inject savings into production needs and increase the money supply in circulation. Hence the idea of scarce funding, which implies the use of inflation as a means of maintaining business activity.

Reduction of the rate of interest

The author proposes to increase investment through budgetary and monetary policy.

Monetary policy is to reduce the interest rate. This will reduce the marginal efficiency of investment, making them more attractive. The government should release as much money as it needs to reduce the interest rate.

Then John Keynes will come to a conclusion about the ineffectiveness of such regulation in the crisis of production - investments do not respond to a fall in the rate of interest.

The analysis of the marginal efficiency of capital in the cycle made it possible to relate it to an assessment of future benefits from capital and confidence among entrepreneurs. Restoration of confidence by lowering the interest rate is impossible. According to John Keynes, the economy may find itself in a "liquid trap", when the growth of the money supply does not reduce the rate of interest.

Budget policy

Another method of increasing investment is the budget policy, which consists in increasing the financing of entrepreneurs at the expense of budgetary funds, since private investments during the crisis are significantly reduced because of the pessimism of investors.

The success of the budget policy of the state is the growth of effective demand, even with useless with the waste of money. State spending, which does not lead to an increase in the supply of goods, in the crisis of overproduction Keynes considered more preferable.

To increase the volume of resources for private investment, it is necessary to organize public procurement of goods, although in general Keynes insisted not on increasing the investments of the state, but on investing the state in current capex.

Also, an important factor in stabilizing the crisis of overproduction is the increase in consumption through state employees, social labor, the distribution of income in groups with maximum consumption: wage earners, the poor, according to the "psychological law" of increasing consumption with low income.

The multiplier effect

In Chapter 10, the theory of the multiplier Canna develops as applied to the marginal propensity to consume.

The national income directly depends on the investment, and in a volume significantly higher than that, which is a consequence of the multiplier effect. Investments in the expansion of production of one industry have the consequence of a similar effect in related industries, just as a stone causes circles on the water. Investing in the economy increases incomes and reduces unemployment.

The state in the crisis should finance the construction of dams and road construction, which will ensure the development of related areas of production and increase consumer demand and demand for investment. Employment and income will increase.

Since the income is partially accumulated, then its animation has a boundary. Slowing consumption reduces investment - the main reason for the animation. Consequently, the multiplier is inversely proportional to the marginal propensity to save the MPS:

• M = 1 / MPS.

The change in income dY from the increase in investments dI exceeds them by M times:

• DY = M dI;
• M = dY / dI.

The increase in social income depends on the volume of consumption growth - the marginal propensity to consume.

Implementation

The book positively influenced the formation of a mechanism for regulating the economy to prevent crises.

It became obvious that the market can not provide the maximum employment, and economic growth is possible due to the participation of the state in it.

The theory of John Keynes has the following methodological provisions:

• The macroeconomic approach;
• Justification of the impact of the demand for unemployment and income;
• Analysis of the impact of fiscal and monetary policies on increased investment;
• Income growth multiplier.

Keynes's ideas were first realized by President Roosevelt in 1933-1941. The federal contract system has been distributing up to a third of the country's budget since the 1970s.

Most countries of the world also used monetary and financial instruments to regulate demand in order to mitigate the cyclical fluctuations of their economies. Keynesianism has spread to health care, education, and jurisprudence.

With the decentralization of the governance structure, the countries of the West intensify the centralization of the coordinating and governing bodies, which is expressed by an increase in the number of federal employees and government bodies.