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John maynard keynes
John Maynard Keynes was a 20th century British economist whose ideas helped shape policy responses to the Great Depression. His 1936 work, The General Theory of Employment, Interest and Money, challenged classical economic theories that markets would naturally reach full employment. Keynes argued that government needs to stimulate aggregate demand through spending, especially during economic downturns, in order to boost employment. His ideas helped justify New Deal programs in the US and influenced the establishment of institutions and policies aimed at preventing future depressions, including automatic stabilizers, the FDIC, SEC and Federal Reserve reforms. While later challenged, Keynesian economics remain influential in macroeconomic theory and policy.
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John maynard keynes
- 1. John Maynard Keynes: Depression Destroyer A Look at the Contributions of the 20th Century‟s Most Influential Economist Presented by: Jeff Keele, Ph.D.
- 2. Economics in the 1930s Great Depression Dust Bowl New Deal Policies Keynesian Economics John Maynard Keynes 1936
- 3. The Context: Business Cyclesand Depressions Business Cycles Recurring booms and busts in economic performance All economies face them Deep, long “busts” are called Depressions
- 4. Depression Cycles In America U.S. Depressions 1819 1836 1857 1873 1893 1921 (brief) 1929 GREAT DEPRESSION None Since … WHY???
- 5. Causes of the GREAT DEPRESSION Boom of the “Roaring Twenties” Coolidge era policies favor business and wealthy Concentration of Wealth increases Gap between rich and poor expands National economy overly dependant on conspicuous consumption
- 6. Causes of the GREAT DEPRESSION Speculative run in the Stock Market Margin trading Leveraged purchases stocks bought with borrowed money Rampant, undisciplined speculation Stock prices unrealistically high
- 7. Poor Business Practices Hugeland speculation wave in Florida Resort developments multiply Shares hawked to cash-flush banks, corporations, and wealthy individuals
- 8. Florida Land Bubble Manybought on credit, most for speculation. Land prices quadrupled Huge paper profits for speculators THEN… Slowing economy led to a sell-off Falling prices created a credit crisis Credit crisis created a panic and collapse of the whole Florida land market. Large investors lost enormous paper assets
- 9. Slowing Economy + FloridaLand Bubble Collapse = Stock Market Crisis Stock market crash destroys paper wealth Stock values plummet Stock no longer covers collateral requirements Margin calls issued Depositors try to withdraw cash to cover margin calls on their stock
- 10. Stock Market Crisis Banking crisis Banks unable to pay depositors Panic Runs on banks Large-scale bank failures Deposits uninsured Depositors lose
- 11. Depression Cycles Downward Newly wealthy now find themselves newly poor Consumer spending plummets – especially for consumer luxuries New orders dry up for producers Producers lay off workers Working classes lose income and decrease spending
- 12. Depression Cycles Downward Congress passes Smoot-Hawley Tariff Act Shuts off imports in an attempt to protect domestic producers Foreign nations respond by shutting off American imports Efficiency and wealth gained from world trade evaporates
- 13. Government Response President Herbert Hoover and US Government…?? Wait for the market to correct itself “Pump priming?” well, maybe, but didn‟t DO it. Dominant economic paradigm: Laissez Faire Government will just mess it up worse. Let it fix itself.
- 14. Classical Economic Theory Adam Smith and the Invisible Hand Competition and profit motive are core Economies tend toward efficient equilibrium when left alone Governments should not meddle
- 15. Classical Economic Theory David Ricardo Systematized Smith‟s work Ricardian Equivalence: Government spending can not stimulate economic performance Stimulation will be exactly counterbalanced: By offsetting taxes – if paid for by tax increases By offsetting savings – if paid for by government debt
- 16. Enter: JohnMaynard Keynes By 1930: Already the most influential British economist Prep School at Eton Gifted in math, classics and history BA 1905, MA in 1909 at Kings College, Cambridge Math first Economics – motivated by interest in politics
- 17. Keynes‟ Bio Lectureship atCambridge WWI: Worked for the Adviser to the Chancellor of the Exchequer and Treasury Financial representative for the Treasury to the 1919 Paris Peace Conference
- 18. Keynes‟ Bio Representative ofFinance Department at the Versailles Peace Conference in 1919 Argued against reparations They would crush Germany & cause more conflict Published: The Economic Consequences of the Peace in 1919 A Tract on Monetary Reform in 1923 Treatise on Money in 1930
- 19. Keynes Bio Published his magnum opus, The General Theory of Employment, Interest and Money, in 1936Classical Economics Challenged core paradigm of Markets may not always tend toward an equilibrium at full employment Government has a role in stimulating economic performance – by stimulating demand
- 20. Keynes‟ Thesis Depression couldbecome a long-term equilibrium outcome Financial shocks and gloomy expectations could permanently suppress aggregate expenditures (demand) Large-scale unemployment - both human and capital - could result
- 21. Keynes‟ Thesis Solution: StimulateAggregate Expenditures Only the government is capable of sufficiently massive stimulation Governments should SPEND their way out of a depression Counter-cyclical Fiscal Policy: Cut taxes and increase spending in recession/depression Increase taxes and cut spending in times of inflationary expansion
- 22. Keynes‟ Open Letterto President Roosevelt New York Times: December 31, 1933 “Broadly speaking, therefore, an increase of output can occur only by the operation of one or other of three factors.” … •Individuals are induced to spend more (but they don’t have it) •Business are induced to spend more by increasing their capital and employment (but they have excess capacity and don’t have existing orders to justify expansion) or •Government must “create additional current incomes through the expenditure of borrowed or printed money.”
- 23. Keynes‟ Open Letter to President Roosevelt … “Thus, as the prime mover in the first stage of the technique of recovery, I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by loans and is not merely a transfer through taxation from existing incomes.”
- 24. Keynes‟ Open Letter to President Roosevelt … "The setback American recovery experienced this past autumn was the predictable consequence of the failure of your administration to organize any material increase in new loan expenditures during your first six months of office. The position six months hence will depend entirely on whether you have been laying the foundations for larger expenditures in the future."
- 25. Roosevelt’s New Deal policiesfit Keynes’ Suggestions: Works Progress Administration Civilian Conservation Corps
- 26. New Deal Programs Resettlement Administration Relocate families to new, planned communities Farm Security Administration Rural rehabilitation Rural Electrification Administration Charged to bring electricity to farms, etc. Tennessee Valley Authority Flood control, electrification, fertilizers in Tennessee Valley
- 27. New Deal & Keynesian Theory Keynes‟ model Provided: Scientific justification for New Deal Theoretical guide for New Deal expansion Confidence that short-term deficits were OK Fresno Auditorium Oakland-Alameda Bridge Imperial Canal, CA
- 28. More Keynes-compliant Policiesof the 30‟s Unemployment benefits Social Security Insurance Progressive income taxes All of theses are “automatic stabilizers”
- 29. More 1930s Safeguards against Economic Depression Federal Reserve Building,1937 FED: Federal Reserve Board strengthened Regulates banking practices and money supply Guards against bank failures and maintains a stable money supply FDIC: Federal Deposit Insurance Corporation Created to guarantee depositors money if banks fail Works to maintain confidence and avoid financial panics
- 30. More 1930s Safeguards against Economic Depression SEC: Securities and Exchange Commission strengthened to guard against stock market collapse Tighter accounting and reporting practices imposed on publicly traded corporations Limits placed on margin trading Strengthened controls on insider trading
- 31. More 1930s Safeguards against EconomicDepression Strengthened Labor laws Protect workers rights Improve distribution of income Avoid some of the income inequality that made the „20s boom so volatile Maintain laborer income to maintain private sector demand
- 32. Keynesian model‟s successes Less volatile business cycles No major depression since implementation Greater economic security for working classes Political stability in advanced world economies where Keynesian policies are practiced
- 33. Keynesian model‟s weaknesses Inflationary tendency Government stimulation may cause inflation Keynes discounted this possibility for times of deep recession/depression Deficit spending Tax cuts and increased services are easy to sell to voters in recessions Tax increases and reduced services are a hard political sell for elected officials even in inflationary expansions
- 34. Keynesian model‟s weaknesses Government deficits compete with private investment for investment money Crowding out effect May reduce net private investment Growing government sector Inconsistent with Lockean view of minimalist government Government may become more intrusive
- 35. Contemporary Macroeconomic Theory and Practice Dr. Ben Bernake, FED Keynesian Base: Chairman Automatic stabilizers well entrenched to mellow out wide swings in the business cycle Monetarist Anti-inflation Program: Greenspan and now Bernake guarding against inflation through cautious Monetary policy
- 36. Contemporary Dr. Milton Macroeconomic Friedman Theory and Practice Supply Side theory focusing on tax incentives for investment -- a la Milton Friedman Reduced tax burden -- to be balanced partially by promised economic growth and partially by reduced government spending Claimed as model for Reagan and G.W. Bush administrations, but not really implemented Both cut taxes but failed to balance with reduced spending – leading to large deficits that counteract the expected benefits
- 37. Keynes Is StillKey Despite important later developments in theory and practice … Monetarist theories Supply Side and Neo-Classical theories Contemporary Macroeconomic theory and contemporary policy are firmly grounded in Keynes‟ ideas from the 1930s.