In this article we will discuss about the inspirations and economic ideas of John Maynard Keynes.
Inspirations of John Maynard Keynes:
Keynes’ writings reveal the impact of the influences of the mercantilists, the physiocrats, Marshall and his own colleagues at Cambridge. His thought was also influenced by the writings of Lauderdale, Sismondi and Malthus.
Keynes adopted the notion of Hobson of under employment caused by undue exercise of the habit of saving; and by giving a lengthy quotation from “The Physiology of Industry” by A.F. Mummery and J. A. Hobson. He tried to show that their criticism of classical theories and institutions were very significant and well-founded. Keynes’ thought was influenced by Proudhon and Karl Marx also.
The German economic thinkers like Lederer and A. Hahn and Fisher, Hawtrey, Macleod had been emphatic in explaining that there was lack of co-relation between saving and investment and this fact was later elaborated by Keynes. The writings and ideas of his teacher Dr. Alfred Marshall and other contemporaries considerably influenced his thought.
Marshall suggested gap between income and spending, laid emphasis on the rate of interest and equality between saving and investment. His treatment of time element and money was of considerable help to Keynes. His thought was also influenced by the ideas of D.H. Robertson, R.F. Harrod, Mrs. Joan Robinson, R.F. Kahn and R.G. Hawtrey.
Keynesian economics or Macroeconomics is based on broad national aggregates like national income, consumption, saving, investment, full employment etc., which have a strong bearing on the economic prosperity of a country.
Rejecting the classical approach Keynes held that mal-adjustment in the economic system of a country was a normal feature which might lead the national economy to the ravages of trade cycles. His approach was fundamentally different from that of the classicists. For the smooth and uninterrupted functioning of the national economy he suggested the policy of state intervention.
Economic Ideas of John Maynard Keynes:
The General Theory of Employment, Interest and Money of the late Lord Keynes appeared in the year 1933. The purpose of the book was in the words of the author himself “primarily a study of the forces which determine changes in the scale of output and employment as a whole”.
The book is called the General Theory in order to distinguish the approach from the earlier partial equilibrium theories which examined the economies of particular commodities and industries on the assumption that all other things remain equal.
They also dealt with mainly the problems of pricing in the short run excepting perhaps Adam Smith who had attempted a systematic study of the working of the economy as a whole. It was taken for granted that the economy would automatically work at the level of full employment and produce the full employment level of output under the guidance of the “invisible hand” which was no more than the demand conditions in the market. Spontaneous market forces constituted a sort of unplanned plan to guide production and allocation of resources as between different industries.
Everything would be in its own right place. Those goods would be produced that were in the highest demand. Resources would shift in favour of the highest of earnings. There would be nothing like involuntary unemployment. Everything would be in its own right demand. Every man would get his due. There would be a virtual paradise on earth if only the government allowed the principle of laissez faire to work uninterrupted.
Disturbances that come periodically by way of business cycles were either completely ignored as of little importance or were assumed to be corrected automatically very much like a healthy man coming back to his health after a temporary period of illness. No remedies were thought to be necessary. “Normally everything goes well on its own” was the assumption of the pre-Keynesian school of thought.
What Lord Keynes did was to blow up the complacency. He exploded the blissful assumptions of spontaneous full employment and full employment levels of production. He sharply pointed out the fallacies in the reasoning and the premises of the classical school of thought. The depression of the thirties was too much to be bypassed Laisse faire had let loose terrific disturbances in the economy.
The total national income had sunk considerably because of the depression. A large number of workers were out of job. The Keynesian revolution conceived of the working of the economy as a whole even the secular period as distinguished from the study of fluctuations in connection with the business cycles.
That is the reason why the general theory deals with investment, employment and output and studies in particular the role of monetary institutions in dermining employment and output. The study of the aggregate output of an economy, is nothing but the study of economic growth especially, when attention is paid to the problems of long term growth. That is how Keynesian revolution is taken as the precursor to the recent models of growth.
In the backward countries of the world a close attention is being paid to the study of the problem of extremely low level of output per head which makes it possible for the bulk of the people to gain access to even the barest necessities of life. These so called under developed economies languish in the most appalling conditions of poverty because of their current inability to raise the aggregate output as fast as is desirable to provide the fundamental means of life to the community.
The growth models study the causes for the low aggregate output in the backward economies and present certain hypotheses as to how these economies would fare on certain assumptions about the rate of growth of population, the rate of savings, investment, the capital, output ratio etc., and try to explain how best to achieve these goals. The growth models endeavour to find out what the net national output would be at certain future date, if the economy works on certain assumed lines.
The growth models very much like the Keynesian model are concerned with the long term growth of an economy as measured by the changes in the other important variables. In order to illustrate what a growth model tries to do we might take an equation given by Prof. Mahalanobis which gives a formula to study the growth of income over time.
The equation is as follows:
nt = no (l+ab-p)t
in which ‘n’ stands for income after a period of time t, no the initial income, ‘a’ the rate of investment, b the capital-output ratio and p the rate of growth of population. The growth model of Mahalanobis holds that the income after a certain period of time depends on three variables namely, the initial income, the proportion of that income which is saved and invested and thirdly, the rate of growth of population which acts as a denominator in determining the net income per head.
This is very much similar to Harrods model of growth which hinges on two crucial variables namely the rate of investment and the capital output ratio. Whatever the growth model that we wish to study the purpose is to study the long term rate of the economy in terms of saving, investment and the fruitfulness of investment in terms of the capital output ratio.
In the economic circumstances of backwardness, with the existing low levels of income, low levels of savings and therefore, of the low levels of investment, how to raise the aggregate output as fast as possible is the problem dealt with by the growth models.