John Maynard Keynes ( ) Week 6

Bloomsbury Group Artists & writers including Virginia Wolff, Lytton Strachey, Duncan Grant. Movie link: Carrington (1995)

Keynes on Marx "How can I accept the [Communist] doctrine, which sets up as its bible, above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? Even if we need a religion, how can we find it in the turbid rubbish of the red bookshop? It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process of conversion which has changed all his values."

The Economic Consequences of the Peace (1919) Keynes argued that the terms of the Versailles Treaty would be economically disastrous. A “Carthaginian Peace”

Alfred Marshall … … encouraged Keynes to take up economics.

Say’s Law Keynes expressed it as the law that supply creates its own demand. It implies that general gluts are impossible. It based on the assumption that the economy will reach a general equilibrium.

Paradox of Thrift Bernard Mandeville Fable of the Bees (1732) The idea that saving may not be good for the economy.

Savings and Investment The classical theory assumes savings all flow into investment so that the economy naturally runs at full-employment. What mechanism keeps the balance?

Determinants of Investment Real interest rate “Animal spirits” Relative of importance of fiscal policy versus monetary policy.

Liquidity Trap Monetary policy can become ineffective when the interest rate gets too low.

Keynes of Hayek’s Road to Serfdom "In my opinion it is a grand book...Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement.... "What we need therefore, in my opinion, is not a change in our economic programmes, which would only lead in practice to disillusion with the results of your philosophy; but perhaps even the contrary, namely, an enlargement of them. Your greatest danger is the probable practical failure of the application of your philosophy in the United States."