HIDAYATULLAH NATIONAL LAW UNIVERSITYRAIPUR (C.G)

ECONOMICS PROJECT

ON

KEYNES AND HIS THEORIES

SUBMITTED

TO

MISS KIRAN BALA DAS

BY

ABHISHEK BANSAL

SEMESTER 1

SECTION- B

ROLL NO.8

1

TABLE OF CONTENTS

CONTENTS PAGE NUMBER

Declaration………………………………………………………………………..3

Acknowledgement………………………………………………………………...4

Introduction…………………………………………………………………….…5

Research methodology…………………………………………………............7

Biography of J.M.Keynes……………………………………………………....8

Keynes’ Theory Of Employment………………………………………….....10

Keynes’ Theory Of Money……………………………………………….......12

Keynes’ Theory Of Interest……………………………………………….....16

Relevance Of Keynes’ Theories In The Present Economic Scenario….19

Graphs and flowcharts……………………………………………………….21

Conclusion…………………………………………………………………….23

Bibliography………………………………………………………...………..24

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DECLARATION

I hereby declare that the project work entitled “KEYNES AND HIS THEORIES” submitted to

HNLU, Raipur, is a record of an original work done by me under the guidance of Miss Kiran

Bala Das, Faculty Member, HNLU, Raipur.

Abhishek Bansal

Roll No: 8

Section- B

3

ACKNOWLEDGEMENT

I would like to sincerely thank the Faculty of Economics Miss Kiran Bala Das for giving me

this project on the topic, “KEYNES AND HIS THEORIES”. This has widened my

knowledge on the relevant topic. Her guidance and support has been instrumental in the

completion of this project. Thank you Ma’am indeed.

I’d also like to thank all the authors, writers, social workers, for their outstanding and

remarkable works, views, ideas, and articles that I have used for the completion of my

project.

My heartfelt gratitude also goes out to the staff and administration of HNLU for the

infrastructure in the form of our library and IT lab that was a source of great help in the

completion of this project.

I also thank my friends for their precious inputs which have been very helpful in the

completion of this project.

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INTRODUCTIONWith the recent economic crisis, there has been much talk of John Maynard Keynes and his

economics. Keynes, the story goes, figured out the causes of the Great Depression and in

doing so revolutionized the field of economics. Some conservative economists have forgotten

or ignored his work, but society as a whole remembers his basic discovery: you get out of

downturns by spending money. Keynes in his The General Theory of Employment, Money

and Interest talks about the ways by which the problems which prevailed during The Great

Depression can be curbed. Perhaps a large part of the impact of the General Theory had to do

with the timeliness of its message. Written during the height of the depression, it offered a

new explanation of the depression and the unemployment that plagued it. In addition to its

timing, however, Keynes’ new theory probably also appealed to economists because it

provided an alternative to the traditionally held view that unemployment can and should be

eliminated by a drop in wage rates.

Keynes alternative was politically and socially much more palatable to the intelligentsia,

because the majority of the intelligentsia held the conclusion, claimed by the Marxist

exploitation theory, that wages tend toward the minimum level required to maintain the

subsistence of the workers. Thus, for economists to advocate that wages fall yet lower placed

them in a seemingly morally indefensible position. Keynes new theory, on the other hand,

conveyed a politically much more palatable solution to unemployment: according to Keynes,

the solution to unemployment was a growth in government spending. The particular form of

government spending advocated by Keynes was for the government to purposely adopt a

policy of budget deficits; this he called “fiscal policy.” To arrive at this seemingly simple

conclusion, however, Keynes developed a highly complex argumentation brimming with new

economic terms and concepts of his own devising, such as “multipliers,” “consumption and

saving functions,” “the marginal efficiency of capital,” “liquidity preference,” “I-S curve,”

and many others.

The influence of Keynes on subsequent economists has been enormous, largely because one

of his top students, Paul Samuelson, wrote what has become the standard college text on

economics in the United States for the past several generations. Equally great, though, was

the direct influence of his ideas on the policies of various governments. For example, in 1944

the British White Paper on Employment Policy stated that “the government accept as one of

their primary aims and responsibilities the maintenance of a high and stable level of

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employment after the war.” In the United States, the Employment Act of 1946 stated: “The

Congress hereby declares that it is the continuing policy and responsibility of the Federal

Government to promote maximum employment, production and purchasing power.” The

Employment Act also created a council of economic advisers to report to the president at

each regular session of congress on the state of the economy, and required the president to

present a program showing “ways and means of promoting a high level of employment and

production.” Similar programs were adopted in Sweden in 1944 by the Social Democrats, and

in Canada and Australia.

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RESEARCH METHODOLOGY

The research project is descriptive and analytic in nature. The research project is mainly

based on secondary sources which include books and web pages. I’ve used empirical methods

in making this project by referring to various books kept in the library. These methods do not

include field work and mainly depend on electronic resources. I owe my chief source of

inspiration to our respected faculty. The data base referred is not copied from any other

source and is purely authentic and genuine.

OBJECTIVES:

1. To study the biography of John Maynard Keynes.

2. To study his theory of employment.

3. To study his theory of interest.

4. To study his theory of money.

5. To study the relevance of his theories in the present economic scenario.

SOURCES OF DATA

This Project is made on the basis of secondary sources of information, which include:

1) Books, and

2) Information from the World Wide Web.

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1- BIOGRAPHY OF J.M.KEYNES

John Maynard Keynes was born on June 5, 1883, Cambridge, Cambridgeshire and died on

April 21, 1946, Firle, Sussex, was an English economist, journalist, and financier. Although

prominent in politics, he achieved his greatest fame as a the author of “The General Theory

of Employment, Interest and Money” (1935-36), and as a result of the influence of this work,

became the most influential economist of the twentieth century. John Maynard Keynes was

born in Cambridge, Cambridgeshire, England, to an upper-middle-class family. His father,

John Neville Keynes, was an economist and a lecturer in moral sciences at the University of

Cambridge and his mother Florence Ada Keynes a local social reformer. Keynes was the first

born, and was followed by two more children – Margaret Neville Keynes in 1885 and

Geoffrey Keynes in 1887.

In the 1930s, Keynes spearheaded a revolution in economic thinking, overturning the older

ideas of neoclassical economics that held that free markets would, in the short to medium

term, automatically provide full employment, as long as workers were flexible in their wage

demands. Keynes instead argued that aggregate demand determined the overall level of

economic activity, and that inadequate aggregate demand could lead to prolonged periods of

high unemployment. According to Keynesian economics, state intervention was necessary to

moderate "boom and bust" cycles of economic activity. He advocated the use of fiscal and

monetary measures to mitigate the adverse effects of economic recessions and depressions.

Following the outbreak of the Second World War, Keynes's ideas concerning economic

policy were adopted by leading Western economies. In 1942, Keynes was awarded a

hereditary peerage as Baron Keynes of Tilton in the County of Sussex. Keynes died in 1946,

but during the 1950s and 1960s the success of Keynesian economics resulted in almost all

capitalist governments adopting its policy recommendations.

Keynes's influence waned in the 1970s, partly as a result of problems that began to afflict the

Anglo-American economies from the start of the decade, and partly because of critiques from

Milton Friedman and other economists who were pessimistic about the ability of

governments to regulate the business cycle with fiscal policy. However, the advent of the

global financial crisis in 2007 caused a resurgence in Keynesian thought. Keynesian

economics provided the theoretical underpinning for economic policies undertaken in

response to the crisis by President George W. Bush of the United States, Prime Minister

Gordon Brown of the United Kingdom, and other heads of governments.

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In 1999, Time magazine included Keynes in their list of the 100 most important and

influential people of the 20th century, commenting that: "His radical idea that governments

should spend money they don't have may have saved capitalism." He has been described by

The Economist as "Britain’s most famous 20th-century economist." In addition to being an

economist, Keynes was also a civil servant, a director of the British Eugenics Society, a

director of the Bank of England, a patron of the arts and an art collector, a part of the

Bloomsbury Group of intellectuals, an advisor to several charitable trusts, a writer, a

philosopher, a private investor, and a farmer.

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2- KEYNE’S THEORY OF EMPLOYMENT

Keynes has strongly criticised the classical theory in his book ‘General Theory of

Employment, Interest and Money’. His theory of employment is widely accepted by modern

economists. Keynesian economics is also known as ‘new economics’ and ‘economic

revolution’. Keynes has invented new tools and techniques of economic analysis such as

consumption function, multiplier, marginal efficiency of capital, liquidity preference,

effective demand, etc. In the short run, it is assumed by Keynes that capital equipment,

population, technical knowledge, and labour efficiency remain constant. That is why,

according to Keynesian theory, volume of employment depends on the level of national

income and output. Increase in national income would mean increase in employment. The

larger the national income the larger the employment level and vice versa. That is why, the

theory of Keynes is known as ‘theory of employment’ and ‘theory of income’.

Theory of Effective Demand:

According to Keynes, the level of employment in the short run depends on aggregate

effective demand for goods in the country. Greater the aggregate effective demand, the

greater will be the volume of employment and vice versa. According to Keynes, the

unemployment is the result of deficiency of effective demand. Effective demand represents

the total money spent on consumption and investment. The equation is:

Effective demand = National Income (Y) = National Output (O)

The deficiency of effective demand is due to the gap between income and consumption. The

gap can be filled up by increasing investment and hence effective demand, in order to

maintain employment at a high level.

According to Keynes, the level of employment in effective demand depends on two factors:

Aggregate supply function, and

Aggregate demand function.

(a) Aggregate supply function:

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According to Dillard, the minimum price or proceeds which will induce employment on a

given scale, is called the ‘aggregate supply price’ of that amount of employment. If the output

does not fetch sufficient price so as to cover the cost, the entrepreneurs will employ less

number of workers. Therefore, different numbers of workers will be employed at different

supply prices. Thus, the aggregate supply price is a schedule of the minimum amount of

proceeds required to induce varying quantities of employment. We can have a corresponding

aggregate supply price curve or aggregate supply function, which slopes upward to right.

(b) Aggregate demand function:

The essence of aggregate demand function is that the greater the number of workers

employed, the larger the output. That is, the aggregate demand price increases as the amount

of employment increases, and vice versa. The aggregate demand is different from the demand

for a product. The aggregate demand price represents the expected receipts when a given

volume of employment is offered to workers. The aggregate demand curve or aggregate

demand function represents a schedule of the proceeds of the output produced by different

methods of employment.

Determination of equilibrium level of employment:

It is not necessary that the equilibrium level of employment is always at full employment

level. Equality between AD (aggregate demand) and AS (aggregate supply) does not

necessarily indicate the full employment level. It can be in equilibrium at less than full

employment or under-employment equilibrium. Actually there is always some unemployment

in the economy, even in economically advanced countries.

According to Keynes, full employment is the level of employment beyond which further

increases in effective demand do not increase output and employment. At the point of

intersection of AS and AD, the entrepreneurs are maximising their profits. The profit will be

reduced if volume of employment is more or less than this point. Even if the point does not

represent full employment. AD and AS will be equal at full employment only if the

investment demand is sufficient to cover the gap between the AS price and consumption

expenditure. The typical investment falls short of this gap. Hence the AD curve and AS

curve will intersect at a point less than full employment, unless there is some external change.

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3- KEYNE’S THEORY OF MONEY

The traditional quantity theory of money and the quantity equations do not show how a

change in the quantity of money reacts upon the price level. Keynes tries to tackle this aspect

of the problem in his General Theory by a restatement of the quantity theory. In doing so, he

tried to integrate the theory of money with the theory of employment. To Keynes, the effect

of changes in the quantity of money on the price level (in turn, the value of money) should be

visualised through the inter-related effect on the wage rate, income, investment, employment,

etc. Thus, an increase in the quantity of money will have no affect whatsoever on prices, so

long as there is any unemployment, and that employment will increase in exact proportion to

any increase in effective demand brought about by the increase in the quantity of

money.While, as soon as full employment is reached, wage rate and price will increase in

exact proportion to the increase in effective demand.

Hence, Keynes enunciated the quantity theory of money as follows: "So long as there is

unemployment, employment will change in the same proportion as the quantity of money."

To elucidate this point, Keynes first considers the effect of changes in the quantity of money

on the quantum of effective demand; the increase in effective demand is supposed to be spent

partly in increasing the quantity of employment and partly in raising the level of prices. Thus,

Keynes conceived a condition where prices rise gradually as employment increases, instead

of prices rising in proportion to the quantity of money, which is true in a condition of full

employment, as assumed by the classical theorists. Keynes stressed that there is no direct link

between money supply and price level, but there is a series of causal links between the two.

Changes in the quantity of money first affect the rate of interest, which in turn, affects the

investment function and the level of effective demand and consequently the volume of

employment and output.

Say, if money supply increases with a given demand for money, the rate of interest will fall.

Given the marginal efficiency of capital, a fall in interest rate will induce an increase in

investment. With an increase in investment expenditure the level of effective demand will go

up. Increased investment leads to an increase in the level of employment, output and income.

There is a multiplier effect involved in the process of income propagation, based on the

phenomenon of marginal propensity to consume and consequent changes in the flow of

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consumption expenditure. So long as there is enough of unemployed labour and capital

resources, an increase in the quantity of money would, in this way, lead to increase in real

income or output (that is, T in terms of Fisher's equation of exchange) rather than price level.

In short, the general level of prices will not rise as output increases on account of increase in

money supply, so long as there are efficient unemployed resources of every type available.

But, as output increases, a series of bottlenecks will be successively reached, where the

supply of particular commodities ceases to be elastic and their prices tend to rise sharply.

After a full employment stage is reached, an increase in the quantity of money spends itself

entirely in raising the price level because, an increase in effective level caused by the

increased quantity of money would not be to increase the volume of employment and output.

Hence, its full effect will be on raising the level of prices. Thus, every increase in the quantity

of money is associated with an exactly proportionate increase in the price level and vice versa

under full employment conditions.

Keynes further stressed that Fisher's quantity theory of money, in terms of the equation of

exchange (MV = PT, where, M= supply of money, V= velocity of circulation, P= some

measure of the price level, T= the total volume of the monetary transactions that take place in

the economy in the course of the same year), holds well only in a state of full employment.

Keynes' restatement of the quantity theory marks a great improvement over the Fisherian

version, in the sense that he views the role of money in the causal process via consumption,

investment, liquidity preference, and the rate of interest. By formulating the quantity theory

of money, he maintains that there is an extreme complexity of the relationship between prices

and the quantity of money, in contrast to the simple immediate relationship exposed in the

quantity equations given by Fisher and by the Cambridge economists. Keynes holds the old

fallacy that prices are determined directly by the quantity of money. He shows that prices are

determined directly by the quantity of money and are influenced indirectly through the effect

of changes in the quantity of money upon the rate of interest, which is one of the three

strategic variables determining the level of output and employment. (The original efficiency

of capital and the propensity to consume are the other two variables).

Keynes, in short, viewed that changes in P do not affect M directly but they do so indirectly

through a host of strategic factors, such as the rate of interest, level of investment,

employment, income and output. According to Keynes, the quantity theory of money would

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be valid if the elasticity of money prices is unity. However, no such direct relationship could

exist between the quantity of money and the price level, except in a full-employment

phenomenon. So long as there is unemployment, employment will change in the same

proportion as the quantity of money; when there is full employment, prices will change in the

same proportion as the quantity of money. That means, so long as there is any

unemployment, a sufficient increase in M can always bring about full employment; a further

increase in M will be reflected in the rise of P. This is illustrated. M rises from zero to OM,

real output rises up to OF, at full employment level of the given resources. A further rise in M

leads to a proportionate rise in P as depicted by FP the price curve.

Though a price rise is considered a post full-employment phenomenon, during the transition

period, however, before full employment is reached, with an increase in M, P may rise,

though not proportionately due to the following reasons: (i) increased bargaining power of

workers leading to a rise in wages and a high cost of production; (ii) operation of the law of

diminishing returns, causing increasing costs; (iii) bottlenecks in production, such as shortage

of raw materials, power cuts, lack of adequate transport, and immobility of factors; and (iv)

heterogeneity of factors, especially labour units which differ in skill and efficiency.

In this reformulation, Keynes' great merit lies in integrating the theory of money with the

theory of value. He showed that prices rise because of a rise in the cost of production, and the

cost of production rises due to the inelasticity of supply of output and employment in the

short period. Again, Keynes successfully integrated the theory of money with the theory of

output. He pointed out that, in fact, the theories of value and money are juxtaposed, through

the theory of output or employment. This happens because changes in the quantity of money,

through reacting on the effective demand for investment, via the changes in the rate of

interest, change the level of employment and output and, through reacting on the cost of

production, affect the prices or the value of money. Thus, Keynes, in his restatement of the

theory, provided the missing link in the old quantity theory of money. The traditional theory

missed the point that the quantity of money exerts an influence on the rate of interest, which,

in turn, reacts upon output and employment. They viewed a direct relationship between the

quantity of money and the price level with the omission of a factor, such as the rate of

interest. Keynes has, by reformulating the quantity theory, corrected this grave error of the

traditional quantity theorists.

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In short, Keynes' theory of money and prices has the merit of providing the process of

causation and identifying factors determining the price level or the value of money, giving

due respect to the role played by the rate of interest which was neglected by the traditional

economists. He integrates the theory of money with the theory of value, which were wrongly

separated by traditional theorists. We may conclude that Keynes formulated quantity theory

is at once superior and a better guide to practical policies than the old theory. For it stresses

the truth that an increase in money supply is inflationary only after full employment is

reached; thus, inflation should not be feared at all under conditions of large-scale

unemployment as is usually found during a depression. The theory suggests cheap money

policy to be followed to overcome a depression.

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4- KEYNE’S THEORY OF INTEREST

LIQUIDITY PREFERENCE THEORY OF INTEREST

Interest is regarded by Keynes as a purely monetary phenomenon in the sense that the rate of

interest is determined by the interaction of the demand for and supply of money. The demand

for liquidity together with supply of money determines the interest rate. Interest is the reward

paid for parting with liquidity, i.e., giving up the cash balances held. Thus, the rate of interest

according to Keynes is determined by the intersection of the supply schedule of money (the

total quantity of money) and the demand schedule for money (the liquidity preference).

The demand for money is a demand for liquidity in the liquidity preference schedule. The

concept of liquidity preference implies the preference of the people to hold wealth in the form

of liquid cash rather than in other non-liquid forms like bonds, securities, bills of exchange,

land, gold, etc. The demand for money, according to Keynes, is thus demand to hold money -

cash balances. The composite demand for money is divided into two principal demands,

namely (i) demand for money as a medium of exchange (active cash balance), and (ii)

demand for money as a store of wealth (idle cash balance).

Now the demand for money as a medium of exchange is motivated by the necessities of

transactions and precaution, while the demand for money as a store of wealth is prompted by

speculation.Thus, there are three motives which lead to liquidity preference: (1) the

transactions motive, (2) the speculative motive, (3) the precautionary motive.

In the liquidity function, however, it is postulated by Keynes that the demand for money is

positively correlated with income an increase in the level of incomes implies a rise in the

demand for money, and vice versa. On the other hand, it is negatively correlated with the rate

of interest a rise in the rate of interest reduces the demand for money or, in other words, an

increase in the demand for money leads to a rise in the rate of interest, and vice versa.

To express in symbolic terms:

Let, L stand for the total demand for money. Liquidity preference arising from speculative

motives may symbolically be expressed as L 2 , as distinguished from L 1 , i.e., demand for

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money under transactions plus precautionary motives. L is income-determined and interest-

inelastic, whereas L 2 is interest-elastic and income-determining.

L = L 1 + L 2

Now, let M be the total supply of money, M 1 the total quantity of money held by people for

transactions and precautionary motives. M 2 the quantity of money held for speculative

purposes, Y be the level of income and r be the rate of interest. Then we have:

M 1 = L 1 (y) (1) (Liquidity function relating to transactions and precautions demand for

money).

M 2 = L 2 (r) (2) (Liquidity function relating to speculative demand).

The complete liquidity function is:

M = M 1 + M 2 = L 1 (y) + L 2 (r) or if

L = L 1 + L 2,

M = L(r,y) then,

M = L(r,y) tells us that the total quantity of money in existence at any time equals the

quantity of money held which depends on the rate of interest and the level of income.

The equation, M = M 1 + M 2 is a convenient reminder that the total demand for money is in

fact subdivided into a partial demand for "active" money and a partial demand for "idle"

money or what is the same thing, into the demand for money as a "medium of exchange" and

the demand for money as a "store of wealth." [M = L (r,y)].

Liquidity Preference Schedule:

The liquidity preference schedule expresses the financial relation between the amount of

money demanded for all liquidity motives and the rate of interest. The demand for money or

the liquidity function can be conveniently explained diagrammatically. In the liquidity

function is generally downward sloping; indicating that the amount of money demanded for

liquidity purposes is a decreasing function of the rate of interest. For, the community is

ordinarily willing to hold more money at a low rate of interest than at a high rate of interest.

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It shows that when there is an upward shift in the entire liquidity function as (LP 1, LP 2, LP

3 ) owing to change in the level of income affecting the community's expectations regarding

the advantages of holding liquid assets, the amount of money demanded for liquidity

purposes increases from OQ 1 to OQ 2 at the prevailing rate of interest OR.

Determination of Interest Rate:

According to the liquidity preference theory, the equilibrium rate of interest is determined by

the interaction between the liquidity preference function (the demand for money) and the

supply of money, as represented. In the OR is the equilibrium rate of interest. The theory

further states that any change in the liquidity preference function (LP) or change in money

supply or change in both respectively cause changes in the rate of interest.

If given the money supply, the liquidity preference curve (LP) shifts from LP 1 to LP 2

implying thereby an increase in demand for money; the equilibrium rate of interest also rises

from R 1 to R 2.

Similarly, assuming a given liquidity preference function (LP), when the money supply

increases from M 1 to M 2 , the rate of interest falls from R1 to R2.

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5- RELEVANCE OF KEYNE’S THEORIES IN THE

PRESENT ECONOMIC SCENARIO

Economic theory has long explained why unfettered markets were not self-correcting, why

regulation was needed, why there was an important role for government to play in the

economy. But many, especially people working in the financial markets, pushed a type of

"market fundamentalism". The misguided policies that resulted had earlier inflicted enormous

costs on developing countries. The moment of enlightenment came only when those policies

also began inflicting costs on the US and other advanced industrial countries.

Keynes argued not only that markets are not self-correcting, but that in a severe downturn,

monetary policy was likely to be ineffective. Fiscal policy was required. But not all fiscal

policies are equivalent. In America today, with an overhang of household debt and high

uncertainty, tax cuts are likely to be ineffective (as they were in Japan in the 1990s). With the

huge debt left behind by the Bush administration, the US should be especially motivated to

get the largest possible stimulation from each dollar spent. The legacy of under-investment in

technology and infrastructure, especially of the green kind, and the growing divide between

the rich and the poor, requires congruence between short-run spending and a long-term

vision. That necessitates restructuring both tax and expenditure programmes. Lowering taxes

on the poor and raising unemployment benefits while simultaneously increasing taxes on the

rich can stimulate the economy reduce the deficit and reduce inequality. Cutting expenditures

on the Iraq war and increasing expenditures on education can simultaneously increase output

in the short- and long-run and reduce the deficit.

Keynes was worried about a liquidity trap – the inability of monetary authorities to induce an

increase in the supply of credit in order to raise the level of economic activity. US Federal

Reserve Chairman Ben Bernanke has tried hard to avoid having the blame fall on the Fed for

deepening this downturn in the way that it is blamed for the Great Depression, famously

associated with a contraction of the money supply and the collapse of banks. And yet one

should read history and theory carefully: preserving financial institutions is not an end in

itself, but a means to an end. It is the flow of credit that is important, and the reason that the

failure of banks during the Great Depression was important is that they were involved in

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determining creditworthiness; they were the repositories of information necessary for the

maintenance of the flow of credit.

But America's financial system has changed dramatically since the 1930s. Many of America's

big banks moved out of the "lending" business and into the "moving business". They focused

on buying assets, repackaging them and selling them, while establishing a record of

incompetence in assessing risk and screening for creditworthiness. Hundreds of billions have

been spent to preserve these dysfunctional institutions. Nothing has been done even to

address their perverse incentive structures, which encourage short-sighted behaviour and

excessive risk taking. With private rewards so markedly different from social returns, it is no

surprise that the pursuit of self-interest (greed) led to such socially destructive consequences.

Not even the interests of their own shareholders have been served well. Meanwhile, too little

is being done to help banks that actually do what banks are supposed to do – lend money and

assess creditworthiness. The federal government has assumed trillions of dollars of liabilities

and risks. In rescuing the financial system, no less than in fiscal policy, we need to worry

about the "bang for the buck". Otherwise, the deficit – which has doubled in eight years –

will soar even more. The neo-liberal push for deregulation served some interests well.

Financial markets did well through capital market liberalisation. Enabling America to sell its

risky financial products and engage in speculation all over the world may have served its

firms well, even if they imposed large costs on others. Today, the risk is that the new

Keynesian doctrines will be used and abused to serve some of the same interests. Have those

who pushed deregulation 10 years ago learned their lesson? Or will they simply push for

cosmetic reforms – the minimum required to justify the mega-trillion dollar bail-outs? Has

there been a change of heart, or only a change in strategy? After all, in today's context, the

pursuit of Keynesian policies looks even more profitable than the pursuit of market

fundamentalism! A decade ago, at the time of the Asian financial crisis, there was much

discussion of the need to reform the global financial architecture. Little was done. It is

imperative that we not just respond adequately to the current crisis, but that we undertake the

long-run reforms that will be necessary if we are to create a more stable, more prosperous and

equitable global economy.

From the above observations we can conclude that the theories of Keyne’s are still relevant in

the present economic scenario of the modern world. Moreover, it has helped many a

government to come out of the economic crisis which plagued the country’s growth and

development.

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GRAPHS AND FLOWCHARTS

FLOWCHART FOR KEYNES LEVEL OF EMPLOYMENT AND

INCOME:

21

AGGREGATE DEMAND CURVE

AGGREGATE SUPPLY CURVE

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CONCLUSION

"The ideas of economists and political philosophers, both when they are right and when they

are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by

little else. Practical men, who believe themselves to be quite exempt from any intellectual

influences, are usually the slaves of some defunct economist. Madmen in authority, who hear

voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

I am sure that the power of vested interests is vastly exaggerated compared with the gradual

encroachment of ideas…. But, soon or late, it is ideas, not vested interests, which are

dangerous for good or evil…”.

- John Maynard Keynes

In his main work The General Theory of Employment, Interest, and Money, Keynes wrote

about his thoughts on employment, monetary theory, and the trade cycle among others. His

work on employment went against everything that the Classical economists had taught.

Keynes said that the real cause of unemployment was insufficient investment expenditure. He

believed that the amount of labour supplied is different when the decrease in real wages (the

marginal product of labour) is due to a decrease in the money wage, than when it is due to an

increase in the price level, assuming money wages stay constant.

In his Theory of Money, Keynes said that savings and investment were independently

determined. The amount saved had little to do with variations in interest rates which in turn

had little to do with how much was invested. Keynes thought that changes in saving

depended on the changes in the predisposition to consume which resulted from marginal,

incremental changes to income. Therefore, investment was determined by the relationship

between expected rates of return on investment and the rate of interest. Keynes theories were

so influential, even when disputed, that a subfield of Macroeconomics called Keynesian

economics is further developing and discussing his theories and their applications.

John Maynard Keynes had several cultural interests and was a central figure in the so-called

Bloomsbury group, consisting of prominent artists and authors in Great Britain. His

autobiographical essays Two Memoirs appeared in 1949.

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BIBLIOGRAPHY

1. M.L.Jhingan, Macro-Economic Theory, 11th edition, 2003.

2. D.K.Sethi, U.Andrews, ISC Economics, 13th edition, 2013, Frank Bros. & Co. Ltd.

3. T.R.Jain and V.K.Ohri, Introductory Microeconomics and Macroeconomics, 2011,

V.K.Global Publications Pvt. Ltd.

WEBLIOGRAPHY

1. http://www.preserve articles.com/20120203..keynes theory of money and prices.html

2. http://www.preserve articles.com/20120203..brief notes on keynes theory of liquidity preference.html

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