This document discusses the economic theories of John Maynard Keynes. It summarizes that Keynes believed economies were unpredictable due to human behavior being driven by emotions and confidence rather than rational calculations. He argued that during economic downturns, the government should increase spending to boost confidence and demand, and that "beggar-thy-neighbor" policies where countries attempt to improve their own economies at the expense of others will not solve global economic problems and cooperation is needed.
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Masters of money
1.
2. John Maynard Keynes
• “Participants’ expectations are in fact highly unstable because they depend
on their confidence as well as the likelihood of future events that uncertainty
prevents to evaluate mathematically” (Keynes, 1921, A Treatise on
Probability)
• “You will never be able to make ends meet with measures that reduce
national income[…] it is the burden of unemployment and the fall in national
income that are jumbling the budget. Look after unemployment and the
budget will look after itself (Keynes, The collected writing of John Maynard
Keynes, Vol. XXI)
• “In an interconnected world when you’re begging your neighbours you might
as well be begging yourself” (Stephanie Flanders on Keynes’ idea about
“beggar-thy-neighbour” policies)
3. Uncertainty and Expectations
• Keynes saw that economies were fundamentally unpredictable – because
people were unpredictable. Economy is made up of people, human nature,
not numbers.
• Decision making is affected by “animal spirits” (emotions which
influence human behaviour and can be measured in terms of consumer
confidence; trust is also included or produced by animal spirits) and not by
the outcome of a weighted average of quantitative benefits multiplied by
quantitative probabilities impossibility to predict the future
• In fact the times when economics look most predictable, are usually the
times when things are about to go disastrously wrong. He explained how
investment bubbles occur – because of the herd mentality that takes over is
self-propagating. At some point the bubbles always burst “Great
Moderation”
4. The role of the State during crises
• Markets are unpredictable and the way to recovery could be blocked by
pessimism or low animal spirit
• In normal times Keynes thought that monetary policy was the best way to
help the economy: you cut interest rate to encourage people to borrow and
spend more and companies to invest, but when animal spirits are really low
that might not be enough, companies might not see the point of making new
investments, people might not borrow no matter how cheap it is, that’s what
Keynes thought the government do need to make up the gap with more
public spending
• Cut government spending in a situation such as recession or depression
cause demands goes down, unemployment goes up and it’s a vicious circle.
Confidence isn’t restored when unemployment goes up and business
goes down, rather it is eroded
5. • When individuals stop spending, when businesses stop spending money,
if the government also stops spending money at the same time, then what
happens is that economy basically crashes
• Keynes realization that an economy could stay sunk indefinitely was a
radical break with the conventional thinking
• He suggested the government should hire people to “demolish south
London and then rebuild it”; he wasn’t serious but he was making a
serious point: if government borrows to create jobs, people would spend
more, confidence would rise, the economy would recover. If you pick the
right moment, he insisted the extra spending would pay for itself by
producing higher tax revenues the aim was to boost confidence or animal
spirit
• There are times when governments need to intervene to make capitalism
work better, even when that means spending money it doesn’t have. He
tried to persuade the treasury to borrow at the bottom of the business cycle.
In economic terms, what you need is more demand in the economy
6. “Beggar-Thy-Neighbor” Policies
• It is an economic policy through which one country attempts to remedy its
economic problems by means that tend to worsen the economic problems
of other countries. The term was originally devised to characterize policies
of trying to cure domestic depression and unemployment by shifting
effective demand away from imports onto domestically produced goods,
either through tariffs and quotas on imports, or by competitive devaluation
• Recognition that states need to cooperate for the economic development,
need to work together to resolve macroeconomic problems global
economy cooperation
• Keynes thought for the global economy to work it had to be a “two-way
street”: the weak countries that run up a lot of debt with the rest of the
world they have to become more competitive to pay their way, but the rich
exporters, they have to do their best as well spending more in other
countries goods and exporting less becoming a bit less competitive
7. “Beggar-Thy-Neighbor” in the Euro Zone
• Ministers in Berlin wanted to impose tough measures to the euro zone
countries to get their economies into shape Austerity
• The stronger countries have been willing to help by offering massive loans
but Keynes wouldn’t have thought that was enough
• “Two-way street” economy: Germany should export less, spend more in
other countries goods, become less competitive
• 2 problems: Germany’s export-led-growth model, weak increase in
Germans wages during the past years
Keynes’ idea of the necessity of multinational cooperation through
multinational institutions