http://en.wikipedia.org/wiki/History_of_economic_thought - Bretton Woods level, increased intra-governmental management of continental con feren ce. coal production and a free trade union through the League of [65] second, an arrangement to set off debt repayments Nations; [66] third, complete reform of international currency exchange between the Allied countries; [67] and fourth, a reconciliation of trade relations with Russia and an international loan fund; [68] and Eastern Europe. The book was an enormous success, and though it was criticised for false predictions by a [69] without the changes he advocated, Keynes' dark forecasts matched number of people, the world's experience through the Great Depression which ensued in 1929, and the descent into a new outbreak of war in 1939. World War One had been the "war to end all wars", and the absolute failure of the peace settlement generated an even greater determination to not repeat the same mistakes. With the defeat of fascism, the Bretton Woods conference was held to establish a new economic order. Keynes was again to play a leading role. The General Theory During the Great Depression, Keynes had published his most important work, The General Theory of Employment, Interest, and Money (1936). The depression had been sparked by the Wall Street Crash of 1929, leading to massive rises in unemployment in the United States, leading to debts being recalled from European borrowers, and an economic domino effect across the world. Orthodox economics called for a tightening of spending, until business confidence and profit levels could be restored. Keynes by contrast, had argued in A Tract on Monetary Reform (1923) that a variety of factors determined economic activity, and that it was not enough to wait for the long run market equilibrium to restore itself. As Keynes famously remarked, "...this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."[ 70] On top of the supply of money, Keynes identi* **ed the propensity to consume, inducement to invest, the marginal e***ciency of capital, liquidity preference and the multiplier e* **ect as variables which determine the level of the economy***s output, employment and level of prices. Much of this esoteric terminology was invented by Keynes especially for his General Theory, though some simple ideas lay behind. Keynes argued that if savings were being kept away from investment through ***nancial markets, total spending falls. Falling spending leads to reduced incomes and unemployment, which reduces savings again. This continues until the desire to save becomes equal to the desire to invest, which means a new ***equilibrium* ** is reached and the spending decline halts. This new ***equilibrium* ** is a depression, where people are investing less, have less to save and less to spend. Keynes argued that employment depends on total spending, which is composed of consumer spending and business investment in the private sector. Consumers only spend ***passively* **, or according to their income ***uctuations. Businesses, on the other hand are induced to invest by the expected rate of return on new investments (the bene***t) and the rate of interest paid (the cost). So, said Keynes, if business expectations remained the same, and government reduces interest rates (the costs of borrowing) , investment would increase, and would have a multiplied e***ect on total spending. Interest rates, in turn, depend on the quantity of money and the desire to hold money in bank accounts (as opposed to investing). If not enough money is available to match how much people want to hold, interest rates rise until enough people are put o***. So if the quantity of money were increased, while the desire to hold money remained stable, interest rates would fall, leading to increased investment, output and employment. For both these reasons, Keynes therefore advocated low interest rates and easy credit, to combat unemployment. However, low interest rates are not the prevailing condition to induce investment: if investers' expectations are pessimistic, i.e. if they forecast that effective demand will not grow sufficiently, they will not invest. This is why a lasting situation of unemployment is possible for Keynes. And a situation of recession or deflation can last for a long time, because prices are not flexible: employers prefer to fire employees and reduce their output than reduce prices, because the circulation of the information is unperfect, so that employers cannot know if the price fixed by other investors will also increase. According to Keynes, the only solution to prevent a recssion is the government to
<< Back to article
