JOHN MAYNARD KEYNES

“FATHER OF MACRO ECONOMICS”

1st Baron Keynes CB FBA, was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments.

Born: June5,1883, Cambridge, United KingdomDied: April 21, 1946, TiltonInfluenced by: Friedrich Hayek, Adam Smith, Karl MarxInfluenced: John Kenneth Galbraith, Paul Samuelson

• John Maynard Keynes was probably the most influential economist of the first half of the twentieth century.

• The son of a professor of economics, John Neville Keynes, and destined by family connection to be influential in the narrow British university world. 

• He studied at Cambridge

Born: August 31,1852, Salisbury, United Kingdom

Died: November 15, 1949, Cambridge, United Kingdom

Spouse: Florence Ada Keynes

Children: John Maynard Keynes, Geoffrey Keynes, Margaret Keynes

JOHN NEVILLE KEYNES

UNIVERSITY OF CAMBRIDGE

The University of Cambridge is a collegiate public research university in Cambridge, England. Founded in 1209, Cambridge is the second-oldest university in the English-speaking world and the world's fourth-oldest surviving university.

At Cambridge he was influenced by economist Alfred Marshall, who prompted Keynes to shift his academic interests from mathematics and the classics to politics and economics. Cambridge also introduced Keynes to an important group of writers and artists.

ALFRED MARSHALL

THE APOSTLES

The Apostles is a secret society of Cambridge University members that meets to discuss and debate such topics as truth, God, and ethics. The group, also known as the Cambridge Conversazione Society, was founded in 1820 by George Tomlinson. Tomlinson went on to become the first Bishop of Gibraltar.Most Apostles came from the colleges of St John's, Trinity and King's. Since the 1970s the Apostles have invited select women to join the group. The origin of the Apostles' nickname dates from the original membership of 12.

BLOOMSBURY GROUP

The Bloomsbury Group—or Bloomsbury Set—was an influential group of associated English writers, intellectuals, philosophers and artists, the best known members of which included Virginia Woolf, John Maynard Keynes, E. M. Forster and Lytton Strachey. This loose collective of friends and relatives lived, worked or studied together near Bloomsbury, London, during the first half of the 20th century.

Clive Bell, art critic

Vanessa Bell, post-impressionist painter

E.M. Forster, fiction writer

Roger Fry, art critic and post-impressionist painter

Duncan Grant, post-impressionist painter

John Maynard Keynes, economist

Desmond MacCarthy, literary Journalist

Lytton Strachey, biographer

Leonard Woolf, essayist and non-fiction writer

Virginia Woolf, fiction writer and essayist

• Between the wars he worked with the British treasury and increase the wealth of the treasury by performing brilliant international transactions.

 • He was an economist who

made important contributions to probability theory and mathematical economics. He became a lecturer in economics at Cambridge, where he was educated, until the start of World War I when he worked for the government.

• Keynes was on the staff of the British delegation that negotiated peace after World War I, but he regarded the terms as the seeds of disaster, resigned in protest, and wrote his criticisms in The Economic Consequences of the Peace (1919), "...bursting" (as Schumpeter wrote) "into international fame when men of equal insight but less courage and men of equal courage but less insight kept silent."

Keynes believed the economic consequences of the Treaty for Europe would be disastrous, and create conditions leading to a general collapse of European economies and, eventually, another general war. He turned out to be completely correct.

KEY THEORIES

AND PRINCIPLES

ROLE OF THE GOVERNMENT

“KEYNESIAN THEORY”

• The role of government is to stimulate demand through spending in times of economic slack.

• Policy makers should manipulate government expenditures to achieve a desirable level of aggregate demand.

• In times of economic downturn, this can be achieved either through lowering tax rates or increasing government expenditures.

• According to Keynes, governments should incur deficits and borrow money in times of downturn; these debts can be repaid through higher taxation in times of economic growth.

THE GENERAL THEORY

1. If the consumer is an economic optimizer, he/she must be unable to buy the goods they planned to buy because of some kind of constraint—risk, convention, social institutions, cash, or ...?

a) According to the classical model, the consumer has insatiable wants.

b) The consumer sells his/her labor in exchange for enough income to buy the goods.

c) The money value of the incomes received must be equal to the value of the output produced.

2. (“Supply creates its own demand.”)

a) If spending constraints are in effect, then there will be a difference between (unlimited) demand and “effective demand”.

b) Actual (effective) demand will usually be “deficient” to purchase total output.

3. Microeconomics and macroeconomics do not operate on the same basis. One cannot assume that what is true for the economic agent at the level of the individual consumer or firm is true in aggregate. This amounts to the fallacy of composition.– In microeconomics, relative price effects

dominate. This is not true in macroeconomics. In macroeconomics, income effects dominate, making income more important in determining aggregate economic behavior.

4. Therefore, consumption depends primarily upon income, not interest rates.– C C(r), but rather C

= C(Y)– “People don’t change

their standard of living simply because the interest rate changes a few points.”

5. Saving occurs as the result of a habit, convention, or social norm. People on average set aside a certain percentage of their income. Saving is not a function of interest rates.

S S(r), but rather S = S(Y)

6. Investment is related to interest rates, but also to businessmen’s expectations for the future.

That is, I = I(r,E).

7. If S = S(Y) and I = I(r,E), then there is no coordinating variable to bring supply and demand together in the loan able funds (capital) market.– There is no reason to assume

that supply equals demand in this market.

– There is no reason to believe that there will be adequate funds available to provide adequate investment demand.

– Since AD = C + I + G + NX, if investment demand is deficient, then AD < AS, and inventories may pile up, with unemployment a natural outcome.

– Without the coordinating variable, this will be the normal outcome, with AD = AS only happening accidentally.

8. Investment is a large and long-term commitment, and is based on weakly supported expectations about the future. This makes investment very different from consumption. Investment decisions will be erratic and emotional, and the risks associated with investment are very high. As a result, business decision makers will tend to under-invest, further worsening the problem of deficient investment.

9. It may be a natural outcome of the organization and institutions of modern economies that prices and wages may not be fully flexible. This would result in markets (like the labor and goods markets) being unable to clear, leading to unemployment and aggregate supply exceeding demand.

10. Money plays a key role in the economy. The use of money leads to uncertainty, and makes “piercing the veil” impossible. A money economy is fundamentally different from a barter economy. The classical dichotomy cannot hold.

Interest rates are established in the money market.

People may rationally hoard money, holding money for purposes other then making transactions.

11. Equilibrium is not

11. AD = AS. It is a state that persists.

QUOTESBY

KEYNES

• The day isn't far off when the economic problem will take the back seat where it belongs, and the heart and head will be occupied or reoccupied, by our real problems of life and of human relations, of creation and behavior and religion.

• The difficulty lies, not in the new ideas, but in escaping from the old ones which ratify . . . into every corner of our minds.• It is ideas, not vested

interests, which are dangerous for good or evil.

• Most men love money and security more, and creation and construction less, as they get older.

• I do not know which makes a man more conservative --to know nothing but the present, or nothing but the past.

PREPARED BY:

JURIELYN T. LOQUEZ