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Friday, 18 November 2011

Keynes - 'The General Theory...'

John Maynard Keynes wasn't a socialist, he came to save capitalism.
'The General Theory of Employment, Interest and Money' my be considered a conservative book by some people.
Keynes wrote during a time of mass unemployment and this greatly effected his writing.

Many had concluded that capitalism had failed (capitalism being the economical/political system in which a countrys trade industrys are controlled by private owners for profit.
Keynes argued that these failures had narrow, technical causes.

Keynesian economics in general argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses bu the public sector.

According to Keynes - 'Wages regulate demand'.
The state must inject money into the economy in order to boost consumption.
If wages go up, the demand will grow, and therefore production restarts which creates new jobs.

Aggregate deman will increase if:-
- Wages go up
- and/or savings go down
- and/or imports are down
- and/or intrest is down

A lack of aggregate demand can cause unemployment.

Generally, people won't be willing to accept lower wages (known as 'sticky wages'). A way to raise aggregate demand can be to increase exports and government spending.

Some of the key ways that the British government spends money is on things such as the Military (most likely the most expensive public sector), as well as the NHS, education and public transport.

Flickr: Gwydion M. Williams
Their are two main economists - Keynesianism and Monetarism.

- Inject money into everything.
- Like to plan the economic growth.
- Support a mixed economy.
Mainly private sector, but with a significant role of government and private sector.

- Think people accurately work out what they want.
- Are followers of Adam Smith.

Keynes had a solution to the great depression
- Reduction in interest rates.
This would encourage people to stop saving their money, and to spend it instead.
- Government investment
This would keep people employed, and therefore spending would continue.

Keynes was opposed to excessive saving, which was usually due to pessimistic speculation on the economy.
It would result in a climate of financial uncertainty and the consumption would be affected.

Classic economists tend to think that unemployment is impossible, and without government interference this could be true. As those without jobs can be paid by others too for example clean their house. But they could just get paid £3 an hour(below minimum wage).
That way everyone would stay employed, and it can be argued that a small amount of pay would be better than no money.
This would mean that money is constantly circulating and dropping down from the highest earners, to those at the bottom.
They would be recieving just enough pay to survive as  prices would drop because otherwise sellers wouldn't be able to sell anything as their customers are too poor. That way, a balance remains.
However, minimum wage (government intervention) prevents national balance.

The multiplier effect - this is a circular flow of money. Where one person spends a chunk of their wage on (for example) a sandwich each day at work. The business that sells the sandwiches then spend that money on a drink at the pub, then those that run the pub spend their money at a restaurant. And it goes on as the money is passed down through a number of different people and business, and continues to spread.
But also the value shrinks as the government continues to claim money each time through tax etc...


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