1 (of 7 overheads)
 JOHN MAYNARD KEYNES: MOST INFLUENTIAL ECONOMIST
   OF 20TH CENTURY

þ IN 1936, ECONOMICS TRANSFORMED BY JMK'S THE
GENERAL THEORY OF EMPLOYMENT, INTEREST, AND MONEY
 

þ IN MIDST OF GREATEST DEPRESSION IN WORLD HISTORY.
  KEYNES BOOK OFFERED HOPE.

     þ IT DIAGNOSED THE PATIENT AS SERIOUSLY ILL,
          BUT NOT BEYOND HOPE.

     þ IT PRESCRIBED REMEDIES TO RESTORE ITS
          HEALTH.
 

þ IT WAS ONE OF THE THREE KEY BOOKS IN THE HISTORY
OF ECONOMICS:

     þ ADAM SMITH'S WEALTH OF NATIONS.
     þ KARL MARX'S DAS CAPITAL.
     þ J.M. KEYNES THE GENERAL THEORY OF
          EMPLOYMENT, INTEREST, AND MONEY.
 

þ BORN IN CAMBRIDGE, ENGLAND IN 1883, SON OF
PROMINENT ECONOMIST --> EDUCATED AT ETON &
CAMBRIDGE --> STUDIED ECONOMICS & PHILOSOPHY.
 

þ BRILLIANT SNOB, ENGAGING PERSONALITY, MIND THAT
COULD PENETRATE TO ESSENTIALS OF A PROBLEM.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

 JOHN MAYNARD KEYNES: MOST INFLUENTIAL ECONOMIST
   OF 20TH CENTURY [2]
 

þ KEYNES WAS BRITISH TREASURY'S REP TO VERSAILLES
  PEACE CONF IN 1919.

     þ BELIEVED STABLE PEACE DEPENDED ON
       MAGNANIMOUS SETTLEMENT & REALISTIC
       REPARATIONS FOR GERMANY.

     þ ALLIES DEMANDED HUGE REPARATIONS PAYMENTS
       FROM GERMANY, IGNORED ECONOMIC REALITIES.

     þ KEYNES RESIGNED, WROTE THE ECONOMIC
       CONSEQUENCES OF THE PEACE.

          þ FORECAST BREAKDOWN OF AGREEMENT.

          þ FORECAST RESULTING ECONOMIC TURMOIL.
 

þ KEYNES DISTINGUISHED BETWEEN SAVINGS &
INVESTMENT, THE DIFFERENT GOALS THAT MOTIVATED
THEM.

     þ SAY'S LAW SAID: SAVINGS = INVESTMENT

     þ JMK: THE TWO NOT ALWAYS EQUAL.

     þ IF SAVINGS > INVESTMENT --> ECON ACTIVITY
       DOWN.

     þ IF INVESTMENT > SAVINGS --> ECON ACTIVITY
       UP.

     þ JMK ADVOCATED A MANAGED MONETARY SYSTEM TO
       MAINTAIN EQUALITY BETWEEN SAVINGS &
       INVESTMENT.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3
 JOHN MAYNARD KEYNES: MOST INFLUENTIAL ECONOMIST
   OF 20TH CENTURY [2]
 

þ REGULAR FLOW OF SAVINGS ENTERS CAPITAL MKTS FROM
  CONSUMERS WITH FIXED INCOMES.

þ BUT PRIVATE CAPITAL INVESTMENT IS HIGHLY
  VOLATILE.

þ THE DISPARITIES BETWEEN FLOW OF SAVINGS & FLOW OF
  INVESTMENT ARE AT THE ROOT OF THE BUSINESS CYCLE.

 
þ PROFITS & SAVINGS MUST BE SPEND IMMEDIATELY OR
  THE CIRCULAR FLOW OF MONEY IN THE ECONOMY WOULD
  BE INTERRUPTED --> OUTPUT FALLS --> UNEMPLOYMENT
  RISES.
 

þ KEYNES ARGUED THAT CONSUMPTION MUST BE STIMULATED
  TO KEEP PACE WITH PRODUCTION.

     þ WAS CONTRARY TO ORTHODOX VIEW THAT
       PRODUCTION CREATED ITS OWN DEMAND.
 

þ CHANGE TAKING PLACE IN ECONOMY. AFTER 100 YRS OF
  INDUSTRIALIZATION, CENTER OF GRAVITY SHIFTING
  FROM INVESTOR TO CONSUMER.

     þ IN EARLY INDUSTRIALIZATION, MOST IMPORTANT
       SOURCE OF GROWTH = CAPITAL INVESTMENT IN
       INDUSTRIES THAT SUPPORTED OTHER INDUSTRIES -
       - E.G. STEEL, COAL, MACHINERY, RAILROADS.

     þ BUT AS INDUSTRIALIZATION ADVANCED, INCOME
       ROSE, & SPENDING & SAVING PATTERNS OF
       CONSUMERS BECAME MORE IMPORTANT. HIGHER
       INCOMES ENABLED CONSUMERS TO SPEND GREATER
       SUMS ON DURABLE GOODS LIKE HOUSES & HOME
       FURNISHINGS, AUTOS, ELEC APPLIANCES.
 
 
 
 
 
 
 
 
 
 
 
 

4
 JOHN MAYNARD KEYNES: MOST INFLUENTIAL ECONOMIST
   OF 20TH CENTURY [2]
 

þ CONSUMER-ORIENTED INDUSTRIES BECAME BELLWETHERS
  OF PROSPERITY.

þ DEPRESSION --> INCOME FELL --> SPENDING DECLINED.

þ SOLUTION? A LARGE INCREASE IN SPENDING --> THIS
  COMMON SENSE VIEW LED TO LARGE GOVN EXPENDITURES
  ON PUBLIC WORKS, FINANCED BY BORROWING.
 

þ KEYNES: UNLESS SAVINGS CHANNELED BACK INTO STREAM
  OF SPENDING --> TOTAL SPENDING FALL -->
  UNEMPLOYMENT & STAGNATION --> REDUCE INCOMES -->
  SAVINGS DECLINES --> SAVINGS & INVESTMENT COME
  INTO BALANCE, HALTING FURTHER DECLINE IN TOTAL
  SPENDING.
 

þ BUT THIS NEW EQUILIBRIUM MIGHT BE ESTABLISHED AT
  A DEPRESSION LEVEL --> ECONOMY COULD STAGNATE
  INDEFINITELY.

þ MULTIPLIER = RELATIONSHIP BETWEEN ANY CHANGE IN
  CONSUMPTION OR INVESTMENT AND THE LEVEL OF TOTAL
  SPENDING.
 

þ KEYNES: INVESTMENT EXPENDITURE DEPENDS ON
  EXPECTED RATE OF RETURN ON INVESTMENT & INTEREST
  RATE.

     þ IF BUSINESS FIRM EXPECTS 10 % RETURN ON A
       NEW INVESTMENT AND IS ABLE TO BORROW AT 8 %
       INTEREST, INVESTMENT SPENDING WILL INCREASE.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5
 JOHN MAYNARD KEYNES: MOST INFLUENTIAL ECONOMIST
   OF 20TH CENTURY [2]
 

þ KEYNES DID NOT THING MONETARY POLICY ALONE WAS
  ENOUGH. FELT THAT MID 1930S NEEDED LARGE PROGRAM
  OF PUBLIC WORKS FINANCED BY BORROWING:

     þ WOULD ADD TO EMPLOYMENT

     þ MULTIPLIER EFFECT OF INCREASED GOVN SPENDING

     þ WOULD INCREASE INCOMES, SPENDING, EMPLOYMENT
       STILL FURTHER.
 

þ KEYNES DEVELOPED HIS EMPHASIS ON DEFICIT
  FINANCING IN OPEN LETTER TO FDR IN NY TIMES IN
  1933:

     þ BECAME A MAJOR ELEMENT IN KEYNESIAN
       PRESCRIPTION FOR ENDING THE DEPRESSION.
 
 

þ KEYNES WORRIED ABOUT ABILITY OF MATURE ECONOMY ,
  WHICH GENERATED MUCH SAVINGS, TO SUSTAIN HIGH
  LEVEL OF INVESTMENT NECESSARY FOR FULL
  EMPLOYMENT.

     þ NEED TO STIMULATE MORE SPENDING. hOW?

     þ ADVOCATED MORE EGALITARIAN DISTRIBUTION OF
       INCOME TO ACHIEVE BETTER ECONOMIC HEALTH
       OVER LONG RUN.
 

þ KEYNES DEVELOPED ECON POLICIES FOR 2ND HALF OF
20TH C., TO PROMOTE STABILITY & ECON. GROWTH:

     þ MONETARY MANAGEMENT.

     þ ACTIVE FISCAL POLICY [I.E. GOVN SPENDING &
       TAXING POLICIES].
 
 
 
 
 
 

6

 WHAT IS KEYNESIAN ECONOMICS?
 

þ KEYNESIAN ECONOMICS IS THE USE OF FISCAL [FEDERAL
GOVERNMENT SPENDING & TAXATION] AND MONETARY POLICY
TO SMOOTH OUT THE FLUCUATIONS IN THE BUSINESS
CYCLE.

þ SAID MORE BLUNTLY, KEYNESIANS WANT TO MESS AROUND
WITH FEDERAL GOVERNMENT SPENDING, THE LEVEL OF
FEDERAL TAXATION (INCREASE OR DECREASE THE FEDERAL
INCOME TAX), & THE MONEY SUPPLY TO EITHER SPEED UP
OR SLOW DOWN ECONOMIC ACTIVITY.

þ IN A RECESSION OR A DEPRESSION, KEYNESIANS WANT
TO ACTIVELY INTERVENE IN THE ECONOMY TO STIMULATE
BUSINESS ACTIVITY.  SPECIFICALLY, THEY WOULD WANT
TO:

     þ SIGNIFICANTLY STEP UP FEDERAL GOVN. SPENDING
       ON PUBLIC-WORKS CONSTRUCTION PROJECTS;

     þ CUT THE FEDERAL INCOME TAX RATE, SO PEOPLE
       HAVE MORE MONEY IN THEIR POCKET TO SPEND ON
       CONSUMER GOODS.

     þ EXPAND THE MONEY SUPPLY, WHICH WOULD ACT AS
       A STIMULOUS TO BUSINESS ACTIVITY. SUCH WOULD
       ALSO LOWER INTEREST RATES, MAKING IT EASIER
       FOR BUSINESSES AND HOUSEHOLDS TO BORROW
       MONEY.
 

þ AND IN A BOOM PERIOD, THE KEYNESIANS WOULD ONCE
AGAIN WANT TO ACTIVELY INTERVENE IN THE ECONOMY TO
PREVENT IT FROM OVERHEATING [I.E. IF UNEMPLOYMENT
FALLS BELOW 4 %, SUCH COULD CREATE UPWARD PRESSURE
ON WAGE LEVELS, LEADING TO INFLATION].
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

7

 WHAT IS KEYNESIAN ECONOMICS? [C]
 

þ THUS, IN BOOM PERIODS, THE KEYNESIANS WOULD:

     þ SLASH FEDERAL SPENDING ON PUBLIC-WORKS
       PROJECTS;

     þ INCREASE THE FEDERAL INCOME TAX RATES;

     þ CONTRACT THE MONEY SUPPLY, FORCING UP
       INTEREST RATES, ETC.
 

þ THESE KEYNESIAN ECONOMIC POLICIES HAVE BEEN USED
BY MANY COUNTRIES SINCE 1936. AFTER THAT TIME,
KEYNESIAN ECONOMICS BECAME THE RAGE.
 

þ BUT KEYNESIAN ECONOMICS CAME UNDER SEVERE ATTACK
IN THE 1960S AND 1970S BY MILTON FRIEDMAN AND HIS
MONETARIST FOLLOWERS.

þ KEYNESIAN ECONOMICS IS GOOD ON PAPER, FRIEDMAN
FELT, BUT IN PRACTICE KEYNESIAN ACTIONS
[CONSTRUCTION SPENDING, TAX CUTS] ARE VERY
DIFFICULT TO TIME. THE END RESULT OF INTERVENTION
MAY BE THE REVERSE OF WHAT WAS INTENDED.

þ FOR INSTANCE, BY THE TIME A GOVN FIRES UP A
PUBLIC-WORKS CONSTRUCTION PROGRAM, THE RECESSION
MAY BE OVER AND THAT CONSTRUCTION MAY CAUSE AN
OVERHEATING OF THE ECONOMY. MEDICINE IS GOOD ONLY
IF IT IS ADMINISTERED AT THE PROPER TIME.

þ FRIEDMAN WANTS ONLY TO REGULATE THE MONEY SUPPLY.
EVEN THEN, HE DOESN'T WANT TO MAKE FINE
ADJUSTMENTS, BUT MERELY TO GROW THE MONEY SUPPLY AT
A STEADY AND LONGTERM RATE OF 3 TO 5 %/YR.

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