New Ideas from Dead Economists: Maynard Keynes

Posted: January 25, 2009

Keyenes most significant work, The General Theory of Employment, Interest, and Money, .

Samuelson who introduced generations to Keynesian Economics said, it was, “a work of genius (p 214).”

It was very critical of his economic predecessors and colleagues. He directly attacks Say’s Law which states that producing goods provides workers with enough income for all goods to be purchased. Therefore resulting in zero surplus. If income was saved and not spent on goods then the savings would be utilized for business investment which would make up the difference. In the instance that investment didn’t make up the difference a recession would ensue but, the resulting drop in prices and wages would soon end it. This is the classical school of economics. Keynes did not believe that saving equaled investment. He argued that savers and investors do so for various reasons. He also argued that in a recession workers who are laid off are unable to save and businesses are reluctant to invest.

Keynes provided an alternate school of thought and a solution. Keynes introduced the idea of marginal propensity to consume; a number that indicates a persons likeliness to spend an extra dollar. He used this to develop a formula for his keynesian multiplier. His idea was that any increase or reduction in production will produce a multiplier effect that magnifies the change by a factor of the multiplier which is based on the aggregate MPC. His solution was for government to spend public resources so as to fill the gap left by consumption and investment.

He created an entirely separate school of thought. People who identify with this school are considered Keynesian. This theory is characterized by a belief that private economy may not reach full employment and that public spending by the government can fill the void. (p. 207)