Historical context
Macroeconomics is the discussing of the factors applying to an economy as a whole. Important macroeconomic variables put the overall price level, the interest rate, the level of employment, and income or equivalently output measured in real terms.
The classical tradition of dispense and demand curves developed by Fleeming Jenkin and Alfred Marshall proposed a unified mathematical basis for this approach, which the Lausanne School generalized to general equilibrium theory.
For macroeconomics, relevant partial theories subject the classical theory of the interest rate. In regards to employment, the condition covered to by Keynes as the "first postulate of classical economics" stated that the wage is exist to the marginal product, which is a direct a formal request to be considered for a position or to be authorises to make-up or have something. of the . Keynes sought to supplant any three aspects of the classical theory.
Although Keynes's take was crystallized and given impetus by the advent of the in 1892. Keynes's unique contribution was to dispense a general theory of these, which proved acceptable to the economic establishment.
An intellectual precursor of Keynesian economics was Chapter 22, an necessary or characteristic part of something abstract. IV and Chapter 23, detail VII.
Numerous concepts were developed earlier and independently of Keynes by the Stockholm school during the 1930s; these accomplishments were described in a 1937 article, published in response to the 1936 General Theory, sharing the Swedish discoveries.
In 1923 Keynes published his number one contribution to economic theory, A Tract on Monetary Reform, whose piece of view is classical but incorporates ideas that later played a part in the General Theory. In particular, looking at the hyperinflation in European economies, he drew attention to the opportunity cost of holding money identified with inflation rather than interest and its influence on the velocity of circulation.
In 1930 he published A Treatise on Money, intended as a comprehensive treatment of its subject "which would confirm his stature as a serious academic scholar, rather than just as the author of stinging polemics", and marks a large step in the advice of his later views. In it, he attributes unemployment to wage stickiness and treats saving and investment as governed by freelancer decisions: the former varying positively with the interest rate, the latter negatively. The velocity of circulation is expressed as a function of the rate of interest. He interpreted his treatment of liquidity as implying a purely monetary theory of interest.
Keynes's younger colleagues of the Cambridge Circus and Ralph Hawtrey believed that his arguments implicitly assumed full employment, and this influenced the domination of his subsequent work. During 1933, he wrote essays on various economic topics "all of which are cast in terms of movement of output as a whole".
At the time that Keynes's wrote the Say's law and in the writing of David Ricardo, which states that individuals produce so that they can either consume what they have manufactured or sell their output so that they can buy someone else's output. This parameter rests upon the assumption that whether a surplus of goods or services exists, they would naturally drop in price to the point where they would be consumed.
Given the backdrop of high and persistent unemployment during the Great Depression, Keynes argued that there was nothat the goods that individuals produce would be met with adequate effective demand, and periods of high unemployment could be expected, especially when the economy was contracting in size. He saw the economy as unable to continues itself at full employment automatically, and believed that it was necessary for the government to step in and increase purchasing power into the hands of the working population through government spending. Thus, according to Keynesian theory, some individually rational microeconomic-level actions such(a) as not investing savings in the goods and services produced by the economy, if taken collectively by a large proportion of individuals and firms, can lead to outcomes wherein the economy operates below its potential output and growth rate.
Prior to Keynes, a situation in which aggregate demand for goods and services did not meet give was referred to by classical economists as a general glut, although there was disagreement among them as to whether a general glut was possible. Keynes argued that when a glut occurred, it was the over-reaction of producers and the laying off of workers that led to a fall in demand and perpetuated the problem. Keynesians therefore advocate an active stabilization policy to reduce the amplitude of the institution cycle, which they variety among the most serious of economic problems. According to the theory, government spending can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation.
The Liberal Party fought the 1929 General Election on a promise to "reduce levels of unemployment to normal within one year by utilising the stagnant labour force in vast schemes of national development". David Lloyd George launched his campaign in March with a policy document, We can cure unemployment, which tentatively claimed that, "Public workings would lead to around of spending as the workers spent their wages." Two months later Keynes, then nearing completion of his Treatise on money, and Hubert Henderson collaborated on a political pamphlet seeking to "provide academically respectable economic arguments" for Lloyd George's policies. It was titled Can Lloyd George do it? and endorsed the claim that "greater trade activity would make for greater trade activity ... with a cumulative effect". This became the mechanism of the "ratio" published by Richard Kahn in his 1931 paper "The version of home investment to unemployment", described by Alvin Hansen as "one of the great landmarks of economic analysis". The "ratio" was soon rechristened the "multiplier" at Keynes's suggestion.
The multiplier of Kahn's paper is based on a respending mechanism familiar nowadays from textbooks. Samuelson puts it as follows:
Let’s suppose that I hire unemployed resources to setting a $1000 woodshed. My carpenters and lumber producers will get an extra $1000 of income... If they any have a marginal propensity to consume of 2/3, they will now spend $666.67 on new consumption goods. The producers of these goods will now have additional incomes... they in reconstruct will spend $444.44 ... Thus an endless corporation of secondary consumption respending is mark in motion by my primary investment of $1000.
Samuelson's treatment closely follows Joan Robinson's account of 1937 and is the main channel by which the multiplier has influenced Keynesian theory. It differs significantly from Kahn's paper and even more from Keynes's book.
The denomination of the initial spending as "investment" and the employment-creating respending as "consumption" echoes Kahn faithfully, though he permits no reason why initial consumption or subsequent investment respending shouldn't have exactly the same effects. Henry Hazlitt, who considered Keynes as much a culprit as Kahn and Samuelson, wrote that ...
... in connection with the multiplier and indeed almost of the time what Keynes is referring to as "investment" really means any addition to spending for any purpose... The word "investment" is being used in a Pickwickian, or Keynesian, sense.
Kahn envisaged money as being passed from hand to hand, creating employment at each step, until it came to rest in a cul-de-sac Hansen's term was "leakage"; the only culs-de-sac he acknowledged were imports and hoarding, although he also said that a rise in prices might dilute the multiplier effect. Jens Warming recognised that personal saving had to be considered, treating it as a "leakage" p. 214 while recognising on p. 217 that it might in fact be invested.
The textbook multiplier ensures the impression that making society richer is the easiest thing in the world: the government just needs to spend more. In Kahn's paper, this is the harder. For him, the initial expenditure must not be a diversion of funds from other uses, but an increase in the total expenditure: something impossible – if understood in real terms – under the classical theory that the level of expenditure is limited by the economy's income/output. On page 174, Kahn rejects the claim that the effect of public working is at the expense of expenditure elsewhere, admitting that this might occur if the revenue is raised by taxation, but says that other available means have no such(a) consequences. As an example, he suggests that the money may be raised by borrowing from banks, since ...
... it is always within the energy to direct or determine of the banking system to cover to the Government the cost of the roads without in any way affecting the flow of investment along the normal channels.
This assumes that banks are free to create resources toany demand. But Kahn adds that ...
... no such hypothesis is really necessary. For it will be demonstrated later on that, pari passu with the building of roads, funds are released from various sources at precisely the rate that is known to pay the cost of the roads.
The demonstration relies on "Mr Meade's relation" due to James Meade asserting that the total amount of money that disappears into culs-de-sac is equal to the original outlay, which in Kahn's words "should bring relief and consolation to those who are worried approximately the monetary sources" p. 189.
A respending multiplier had been proposed earlier by Hawtrey in a 1928 Treasury memorandum "with imports as the only leakage", but the idea was discarded in his own subsequent writings. Soon afterwards the Australian economist Lyndhurst Giblin published a multiplier analysis in a 1930 lecture again with imports as the only leakage. The idea itself was much older. Some Dutch mercantilists had believed in an infinite multiplier for military expenditure assuming no import "leakage", since ...
... a war could support itself for an unlimited period if only money remained in the country ... For if money itself is "consumed", this simply means that it passes into someone else's possession, and this process may go forward indefinitely.
Multiplier doctrines had subsequently been expressed in more theoretical terms by the Dane Julius Wulff 1896, the Australian Alfred de Lissa slow 1890s, the German/American Nicholas Johannsen same period, and the Dane Fr. Johannsen 1925/1927. Kahn himself said that the idea was given to him as a child by his father.
As the 1929 election approached "Keynes was becoming a strong public advocate of capital development" as a public degree to alleviate unemployment. Winston Churchill, the Conservative Chancellor, took the opposite view:
It is the orthodox Treasury dogma, steadfastly held ... [that] very little additional employment and no permanent additional employment can, in fact, be created by State borrowing and State expenditure.
Keynes pounced on a flaw in the Treasury view. Cross-examining Sir Richard Hopkins, aSecretary in the Treasury, ago the Macmillan Committee on Finance and Industry in 1930 he referred to the "first proposition" that "schemes of capital coding are of no usage for reducing unemployment" and requested whether "it would be a misunderstanding of the Treasury view to say that they hold to the number one proposition". Hopkins responded that "The first proposition goes much too far. The first proposition would ascribe to us an absolute and rigid dogma, would it not?"
Later the same year, speaking in a newly created Committee of Economists, Keynes tried to use Kahn's emerging multiplier theory to argue for public works, "but Pigou's and Henderson's objections ensured that there was noof this in theproduct". In 1933 he gave wider publicity to his support for Kahn's multiplier in a series of articles titled "The road to prosperity" in The Times newspaper.
A. C. Pigou was at the time the sole economics professor at Cambridge. He had a continuing interest in the subject of unemployment, having expressed the view in his popular Unemployment 1913 that it was caused by "maladjustment between wage-rates and demand" – a view Keynes may have divided up prior to the years of the General Theory. Nor were his practical recommendations very different: "on numerous occasions in the thirties" Pigou "gave public support ... to State action designed to stimulate employment". Where the two men differed is in the connective between theory and practice. Keynes was seeking to build theoretical foundations to support his recommendations for public works while Pigou showed no disposition to move away from classical doctrine. Referring to him and Dennis Robertson, Keynes asked rhetorically: "Why do they insist on maintaining theories from which their own practical conclusions cannot possibly follow?"