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69-614: The Depression had hit the UK in 1931, and had led to a run on the Bank of England in which foreign investors were withdrawing £2.5 million a day in gold. As most of the Labour party was opposed to the Keynesian ideas proposed by Oswald Mosley , the government was looking for some way to cut public sector spending. The Liberal MP Sir Donald Maclean proposed a House of Commons resolution under which

138-469: A National Government headed by MacDonald came into being, a consequence of which was to split the Labour Party. Keynesian Heterodox Keynesian economics ( / ˈ k eɪ n z i ə n / KAYN -zee-ən ; sometimes Keynesianism , named after British economist John Maynard Keynes ) are the various macroeconomic theories and models of how aggregate demand (total spending in

207-400: A cul-de-sac (Hansen's term was "leakage"); the only culs-de-sac he acknowledged were imports and hoarding, although he also said that a rise in prices might dilute the multiplier effect. Jens Warming recognised that personal saving had to be considered, treating it as a "leakage" (p. 214) while recognising on p. 217 that it might in fact be invested. The textbook multiplier gives

276-409: A market economy often experiences inefficient macroeconomic outcomes, including recessions when demand is too low and inflation when demand is too high. Further, they argue that these economic fluctuations can be mitigated by economic policy responses coordinated between government and central bank . In particular, fiscal policy actions taken by the government and monetary policy actions taken by

345-411: A 10% cut to the unemployment benefit. Which the Labour cabinet voted to accept by 11 to 9, on August 28, 1931. The two Labour nominees wrote their own Report which blamed the economic difficulties on deflationary policies and accepted limited wage cuts but believed that the "equitable" solution would be to raise taxes on holders of National Debt and other investments with fixed interests. In response to

414-507: A 1928 Treasury memorandum ("with imports as the only leakage"), but the idea was discarded in his own subsequent writings. Soon afterwards the Australian economist Lyndhurst Giblin published a multiplier analysis in a 1930 lecture (again with imports as the only leakage). The idea itself was much older. Some Dutch mercantilists had believed in an infinite multiplier for military expenditure (assuming no import "leakage"), since ... ...

483-412: A culprit as Kahn and Samuelson, wrote that ... ... in connection with the multiplier (and indeed most of the time) what Keynes is referring to as "investment" really means any addition to spending for any purpose ... The word "investment" is being used in a Pickwickian, or Keynesian, sense. Kahn envisaged money as being passed from hand to hand, creating employment at each step, until it came to rest in

552-482: A demand to hoard, is not admitted by the simplified liquidity preference model of the General Theory . Once he rejects the classical theory that unemployment is due to excessive wages, Keynes proposes an alternative based on the relationship between saving and investment. In his view, unemployment arises whenever entrepreneurs' incentive to invest fails to keep pace with society's propensity to save ( propensity

621-447: A free market policy would. Under the classical theory, the wage rate is determined by the marginal productivity of labour , and as many people are employed as are willing to work at that rate. Unemployment may arise through friction or may be "voluntary", in the sense that it arises from a refusal to accept employment owing to "legislation or social practices ... or mere human obstinacy", but "...the classical postulates do not admit of

690-554: A general glut was possible. Keynes argued that when a glut occurred, it was the over-reaction of producers and the laying off of workers that led to a fall in demand and perpetuated the problem. Keynesians therefore advocate an active stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems. According to the theory, government spending can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation . The Liberal Party fought

759-412: A marginal propensity to consume of 2/3, they will now spend $ 666.67 on new consumption goods. The producers of these goods will now have extra incomes... they in turn will spend $ 444.44 ... Thus an endless chain of secondary consumption respending is set in motion by my primary investment of $ 1000. Samuelson's treatment closely follows Joan Robinson 's account of 1937 and is the main channel by which

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828-455: A newly created Committee of Economists, Keynes tried to use Kahn's emerging multiplier theory to argue for public works, "but Pigou's and Henderson's objections ensured that there was no sign of this in the final product". In 1933 he gave wider publicity to his support for Kahn's multiplier in a series of articles titled "The road to prosperity" in The Times newspaper. A. C. Pigou was at

897-406: A pessimistic view of supply-side capabilities during the recession of 2012. Cambridge economist Bill Martin reported on productivity pessimism in 2012, noting that there was an established debate about whether there had been a permanent loss of productive capacity, which was reflected as a continuing level of "uncertainty ... related to the prospects for labour productivity and effective supply" as

966-508: A political pamphlet seeking to "provide academically respectable economic arguments" for Lloyd George's policies. It was titled Can Lloyd George do it? and endorsed the claim that "greater trade activity would make for greater trade activity ... with a cumulative effect". This became the mechanism of the "ratio" published by Richard Kahn in his 1931 paper "The relation of home investment to unemployment", described by Alvin Hansen as "one of

1035-428: A somewhat lesser extent. Keynes adds that "this psychological law was of the utmost importance in the development of my own thought". Keynes viewed the money supply as one of the main determinants of the state of the real economy. The significance he attributed to it is one of the innovative features of his work, and was influential on the politically hostile monetarist school . Money supply comes into play through

1104-536: A war could support itself for an unlimited period if only money remained in the country ... For if money itself is "consumed", this simply means that it passes into someone else's possession, and this process may continue indefinitely. Multiplier doctrines had subsequently been expressed in more theoretical terms by the Dane Julius Wulff (1896), the Australian Alfred de Lissa (late 1890s),

1173-405: Is one of Keynes's synonyms for "demand"). The levels of saving and investment are necessarily equal, and income is therefore held down to a level where the desire to save is no greater than the incentive to invest. The incentive to invest arises from the interplay between the physical circumstances of production and psychological anticipations of future profitability; but once these things are given

1242-586: Is the orthodox Treasury dogma, steadfastly held ... [that] very little additional employment and no permanent additional employment can, in fact, be created by State borrowing and State expenditure. Keynes pounced on a flaw in the Treasury view . Cross-examining Sir Richard Hopkins , a Second Secretary in the Treasury, before the Macmillan Committee on Finance and Industry in 1930 he referred to

1311-487: The liquidity preference function, which is the demand function that corresponds to money supply. It specifies the amount of money people will seek to hold according to the state of the economy. In Keynes's first (and simplest) account – that of Chapter 13 – liquidity preference is determined solely by the interest rates r —which is seen as the earnings forgone by holding wealth in liquid form: hence liquidity preference can be written L ( r ) and in equilibrium must equal

1380-513: The AD–AS model . There are two main reasons why the amount of aggregate output supplied might rise as price level P rises, i.e., why the AS curve is upward sloping: There are generally three alternative degrees of price-level responsiveness of aggregate supply. They are: In the standard aggregate supply–aggregate demand model , real output (Y) is plotted on the horizontal axis and the price level (P) on

1449-539: The Autumn Statement of 17 November 2022 , although a limited number of initiatives relating to "supply side growth" were included in the latter statement. Within the UK government, HM Treasury's work on "the supply side" is led by the Enterprise and Growth Unit, working in conjunction with other government departments and public bodies. Sir John Kingman , a former civil servant who has been described as

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1518-605: The Growth Plan announced on 23 September 2022, and further supply side growth measures promised for October and early November, including measures affecting the planning system , business regulation, childcare, immigration, agricultural productivity and digital infrastructure. However, Larry Elliott in The Guardian has described this combination of reforms, reduced regulation and tax cuts as "one huge gamble". The September Growth Plan commitments were mostly reversed by

1587-506: The Quantity theory of money determining the price level and the classical theory of the interest rate . In regards to employment, the condition referred to by Keynes as the "first postulate of classical economics" stated that the wage is equal to the marginal product, which is a direct application of the marginalist principles developed during the nineteenth century (see The General Theory ). Keynes sought to supplant all three aspects of

1656-471: The economy ) strongly influences economic output and inflation . In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy . It is influenced by a host of factors that sometimes behave erratically and impact production, employment, and inflation . Keynesian economists generally argue that aggregate demand is volatile and unstable and that, consequently,

1725-451: The financial crisis of 2007–2008 sparked renewed interest in Keynesian policies by governments around the world. Macroeconomics is the study of the factors applying to an economy as a whole. Important macroeconomic variables include the overall price level, the interest rate , the level of employment, and income (or equivalently output) measured in real terms . The classical tradition of partial equilibrium theory had been to split

1794-547: The opportunity cost of holding money (identified with inflation rather than interest) and its influence on the velocity of circulation . In 1930, he published A Treatise on Money , intended as a comprehensive treatment of its subject "which would confirm his stature as a serious academic scholar, rather than just as the author of stinging polemics", and marks a large step in the direction of his later views. In it, he attributes unemployment to wage stickiness and treats saving and investment as governed by independent decisions:

1863-525: The post-war economic expansion (1945–1973). It was developed in part to attempt to explain the Great Depression and to help economists understand future crises. It lost some influence following the oil shock and resulting stagflation of the 1970s . Keynesian economics was later redeveloped as New Keynesian economics , becoming part of the contemporary new neoclassical synthesis , that forms current-day mainstream macroeconomics . The advent of

1932-413: The quantity theory of money protects the classical school from the conclusion Keynes expected from it. Saving is that part of income not devoted to consumption , and consumption is that part of expenditure not allocated to investment , i.e., to durable goods. Hence saving encompasses hoarding (the accumulation of income as cash) and the purchase of durable goods. The existence of net hoarding, or of

2001-493: The "champion of HM Treasury's supply-side activism", has referred to concern with "the supply side" as the "third mission" of the Treasury, presenting former Chancellor of the Exchequer Nigel Lawson as a notable example of "those who believe in the importance of supply-side reform". "Supply-side pessimism" reflects a concern that productive capacity is lost when unused (e.g. during a recession ), so that

2070-408: The "first proposition" that "schemes of capital development are of no use for reducing unemployment" and asked whether "it would be a misunderstanding of the Treasury view to say that they hold to the first proposition". Hopkins responded that "The first proposition goes much too far. The first proposition would ascribe to us an absolute and rigid dogma, would it not?" Later the same year, speaking in

2139-576: The 1929 General Election on a promise to "reduce levels of unemployment to normal within one year by utilising the stagnant labour force in vast schemes of national development". David Lloyd George launched his campaign in March with a policy document, We can cure unemployment, which tentatively claimed that, "Public works would lead to a second round of spending as the workers spent their wages." Two months later Keynes, then nearing completion of his Treatise on money , and Hubert Henderson collaborated on

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2208-561: The 1930s; these accomplishments were described in a 1937 article, published in response to the 1936 General Theory, sharing the Swedish discoveries. In 1923, Keynes published his first contribution to economic theory, A Tract on Monetary Reform , whose point of view is classical but incorporates ideas that later played a part in the General Theory . In particular, looking at the hyperinflation in European economies, he drew attention to

2277-623: The German/American Nicholas Johannsen (same period), and the Dane Fr. Johannsen (1925/1927). Kahn himself said that the idea was given to him as a child by his father. As the 1929 election approached "Keynes was becoming a strong public advocate of capital development" as a public measure to alleviate unemployment. Winston Churchill, the Conservative Chancellor, took the opposite view: It

2346-665: The Report the Cabinet appointed an economy committee with the Prime Minister Ramsay MacDonald , Snowden, Foreign Secretary Arthur Henderson , Lord Privy Seal James Henry Thomas and President of the Board of Trade William Graham as its members. Although the first meeting of this committee was due to meet on 25 August, MacDonald's holiday was interrupted on 11 August by a message from bankers that there

2415-400: The Report. The Report calculated that the deficit for 1932-3 would be £120 million. They believed that taxation already consumed "an unduly large proportion of the national income" and therefore the deficit could only be cured by retrenchment in public expenditure, because such expenditure which was "definitely restrictive of industrial enterprise and employment". They put forward wage cuts for

2484-478: The United Kingdom's 2011 Autumn Statement incorporated a series of supply-side measures which the government was undertaking "to rebalance and strengthen the economy in the medium term", which included extensive infrastructure investment and development of a more educated workforce. Supply-side reforms in the 2015 Budget addressed the nation's digital communications infrastructure, transport, energy and

2553-420: The assumption that if a surplus of goods or services exists, they would naturally drop in price to the point where they would be consumed. Given the backdrop of high and persistent unemployment during the Great Depression, Keynes argued that there was no guarantee that the goods that individuals produce would be met with adequate effective demand, and periods of high unemployment could be expected, especially when

2622-476: The capacity of the producers to satisfy those needs, everything that is produced would eventually be consumed once the appropriate price was found for it. This perception is reflected in Say's law and in the writing of David Ricardo , which states that individuals produce so that they can either consume what they have manufactured or sell their output so that they can buy someone else's output. This argument rests upon

2691-567: The central bank, can help stabilize economic output, inflation, and unemployment over the business cycle . Keynesian economists generally advocate a regulated market economy – predominantly private sector , but with an active role for government intervention during recessions and depressions . Keynesian economics developed during and after the Great Depression from the ideas presented by Keynes in his 1936 book, The General Theory of Employment, Interest and Money . Keynes' approach

2760-467: The claim that the effect of public works is at the expense of expenditure elsewhere, admitting that this might arise if the revenue is raised by taxation, but says that other available means have no such consequences. As an example, he suggests that the money may be raised by borrowing from banks, since ... ... it is always within the power of the banking system to advance to the Government the cost of

2829-401: The classical theory. Although Keynes's work was crystallized and given impetus by the advent of the Great Depression , it was part of a long-running debate within economics over the existence and nature of general gluts . A number of the policies Keynes advocated to address the Great Depression (notably government deficit spending at times of low private investment or consumption), and many of

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2898-848: The committee would be appointed. This was accepted by the Labour Chancellor of the Exchequer Philip Snowden , who set up the Committee in February 1931. The Report was the conclusions of the majority of the Committee, the Liberal nominees Sir Mark Jenkinson and Lord Plender , and the Conservatives' nominees Sir Thomas Royden and Cooper, all with experience in finance. The two Labour nominees, trade unionists Arthur Pugh and Charles Latham , dissented from

2967-450: The cost of the roads. The demonstration relies on "Mr Meade's relation" (due to James Meade ) asserting that the total amount of money that disappears into culs-de-sac is equal to the original outlay, which in Kahn's words "should bring relief and consolation to those who are worried about the monetary sources" (p. 189). A respending multiplier had been proposed earlier by Hawtrey in

3036-513: The demand side), rather than " overproduction " (which would focus on the supply side), and advocating economic interventionism . Keynes specifically discussed underconsumption (which he wrote "under-consumption") in the General Theory, in Chapter 22, Section IV and Chapter 23, Section VII . Numerous concepts were developed earlier and independently of Keynes by the Stockholm school during

3105-427: The direction of his subsequent work. During 1933, he wrote essays on various economic topics "all of which are cast in terms of movement of output as a whole". At the time that Keynes wrote the General Theory , it had been a tenet of mainstream economic thought that the economy would automatically revert to a state of general equilibrium: it had been assumed that, because the needs of consumers are always greater than

3174-499: The economy into separate markets, each of whose equilibrium conditions could be stated as a single equation determining a single variable. The theoretical apparatus of supply and demand curves developed by Fleeming Jenkin and Alfred Marshall provided a unified mathematical basis for this approach, which the Lausanne School generalized to general equilibrium theory. For macroeconomics, relevant partial theories included

3243-464: The economy loses the ability to recover aggregate supply when demand recovers. For example, unused factories are not kept in a state of readiness to be used when an economic upturn begins, or workers miss out on the skills and training which they would normally acquire whilst in work. Spencer Dale , a British economist who sat on the Bank of England 's Monetary Policy Committee between 2008 and 2014, took

3312-405: The economy was contracting in size. He saw the economy as unable to maintain itself at full employment automatically, and believed that it was necessary for the government to step in and put purchasing power into the hands of the working population through government spending. Thus, according to Keynesian theory, some individually rational microeconomic-level actions such as not investing savings in

3381-479: The environment. In a speech to the G20 in February 2016, Mark Carney , Governor of the Bank of England , urged G20 members "to develop a coherent and urgent approach to supply-side policies". Continuing "supply-side reforms" were proposed by Liz Truss and Chancellor Kwasi Kwarteng as part of their 2022 economic programme, with reference to "a comprehensive package of supply-side reform and tax cuts" being made in

3450-478: The externally fixed money supply M̂ . Aggregate supply Heterodox In economics , aggregate supply ( AS ) or domestic final supply ( DFS ) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing and able to sell at a given price level in an economy. Together with aggregate demand it serves as one of two components for

3519-480: The former varying positively with the interest rate, the latter negatively. The velocity of circulation is expressed as a function of the rate of interest. He interpreted his treatment of liquidity as implying a purely monetary theory of interest. Keynes's younger colleagues of the Cambridge Circus and Ralph Hawtrey believed that his arguments implicitly assumed full employment , and this influenced

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3588-437: The goods and services produced by the economy, if taken collectively by a large proportion of individuals and firms, can lead to outcomes wherein the economy operates below its potential output and growth rate. Prior to Keynes, a situation in which aggregate demand for goods and services did not meet supply was referred to by classical economists as a general glut , although there was disagreement among them as to whether

3657-418: The great landmarks of economic analysis". The "ratio" was soon rechristened the "multiplier" at Keynes's suggestion. The multiplier of Kahn's paper is based on a respending mechanism familiar nowadays from textbooks. Samuelson puts it as follows: Let's suppose that I hire unemployed resources to build a $ 1000 woodshed. My carpenters and lumber producers will get an extra $ 1000 of income... If they all have

3726-505: The ideas that became the basis for Keynesian economics in his main work, The General Theory of Employment, Interest and Money (1936). It was written during the Great Depression , when unemployment rose to 25% in the United States and as high as 33% in some countries. It is almost wholly theoretical, enlivened by occasional passages of satire and social commentary. The book had a profound impact on economic thought, and ever since it

3795-452: The impression that making society richer is the easiest thing in the world: the government just needs to spend more. In Kahn's paper, it is harder. For him, the initial expenditure must not be a diversion of funds from other uses, but an increase in the total expenditure: something impossible – if understood in real terms – under the classical theory that the level of expenditure is limited by the economy's income/output. On page 174, Kahn rejects

3864-457: The incentive is independent of income and depends solely on the rate of interest r . Keynes designates its value as a function of r as the "schedule of the marginal efficiency of capital ". The propensity to save behaves quite differently. Saving is simply that part of income not devoted to consumption, and: ... the prevailing psychological law seems to be that when aggregate income increases, consumption expenditure will also increase but to

3933-437: The multiplier has influenced Keynesian theory. It differs significantly from Kahn's paper and even more from Keynes's book. The designation of the initial spending as "investment" and the employment-creating respending as "consumption" echoes Kahn faithfully, though he gives no reason why initial consumption or subsequent investment respending should not have exactly the same effects. Henry Hazlitt , who considered Keynes as much

4002-421: The police, teachers and pre-1925 entrants to the armed forces. Most economies were recommended to be made in the social services and public work schemes because, the Report argued, if the country survived without them a few years previously then they "cannot be essential". The total economies they proposed amounted to £96.5 million, with the largest economy being unemployment insurance at £66.5 million. This included

4071-408: The possibility of the third category," which Keynes defines as involuntary unemployment . Keynes raises two objections to the classical theory's assumption that "wage bargains ... determine the real wage". The first lies in the fact that "labour stipulates (within limits) for a money-wage rather than a real wage". The second is that classical theory assumes that, "The real wages of labour depend on

4140-403: The roads without in any way affecting the flow of investment along the normal channels. This assumes that banks are free to create resources to answer any demand. But Kahn adds that ... ... no such hypothesis is really necessary. For it will be demonstrated later on that, pari passu with the building of roads, funds are released from various sources at precisely the rate that is required to pay

4209-407: The theoretical ideas he proposed (effective demand, the multiplier, the paradox of thrift ), had been advanced by authors in the 19th and early 20th centuries. (E.g. J. M. Robertson raised the paradox of thrift in 1892 . ) Keynes's unique contribution was to provide a general theory of these, which proved acceptable to the economic establishment. An intellectual precursor of Keynesian economics

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4278-502: The time the sole economics professor at Cambridge. He had a continuing interest in the subject of unemployment, having expressed the view in his popular Unemployment (1913) that it was caused by "maladjustment between wage-rates and demand" – a view Keynes may have shared prior to the years of the General Theory . Nor were his practical recommendations very different: "on many occasions in the thirties" Pigou "gave public support [...] to State action designed to stimulate employment". Where

4347-438: The two men differed is in the link between theory and practice. Keynes was seeking to build theoretical foundations to support his recommendations for public works while Pigou showed no disposition to move away from classical doctrine. Referring to him and Dennis Robertson , Keynes asked rhetorically: "Why do they insist on maintaining theories from which their own practical conclusions cannot possibly follow?" Keynes set forward

4416-810: The vertical axis. The levels of output and the price level are determined by the intersection of the aggregate supply curve with the downward-sloping aggregate demand curve. In the United Kingdom, aggregate supply data is published in the Office for National Statistics ' Input–output supply and use tables . Aggregate supply is targeted by government "supply-side policies", which are intended to increase productive efficiency and hence national output. Some examples of supply-side policies include education and training, research and development , supporting small/medium entreprise , reducing business taxes , undertaking labour market reforms to diminish frictions that may hold down output, and investment in infrastructure. For example,

4485-426: The wage bargains which labour makes with the entrepreneurs," whereas, "If money wages change, one would have expected the classical school to argue that prices would change in almost the same proportion, leaving the real wage and the level of unemployment practically the same as before." Keynes considers his second objection the more fundamental, but most commentators concentrate on his first one: it has been argued that

4554-538: Was underconsumption theories associated with John Law , Thomas Malthus , the Birmingham School of Thomas Attwood , and the American economists William Trufant Foster and Waddill Catchings , who were influential in the 1920s and 1930s. Underconsumptionists were, like Keynes after them, concerned with failure of aggregate demand to attain potential output, calling this "underconsumption" (focusing on

4623-545: Was a run on the pound. The whole Cabinet discussed what to do from 20 August until on 24 August they could not reach a consensus on whether to cut unemployment benefits to ensure a balanced budget. Nine Cabinet members would resign if this was carried through, with the rest (11) not dissenting. The acting leader of the Liberals, Herbert Samuel , suggested a National Coalition Government headed by MacDonald, with Conservative leader Stanley Baldwin agreeing. Therefore, on 24 August

4692-414: Was a stark contrast to the aggregate supply -focused classical economics that preceded his book. Interpreting Keynes's work is a contentious topic, and several schools of economic thought claim his legacy. Keynesian economics, as part of the neoclassical synthesis , served as the standard macroeconomic model in the developed nations during the later part of the Great Depression , World War II , and

4761-463: Was published there has been debate over its meaning. Keynes begins the General Theory with a summary of the classical theory of employment, which he encapsulates in his formulation of Say's Law as the dictum " Supply creates its own demand ". He also wrote that although his theory was explained in terms of an Anglo-Saxon laissez faire economy, his theory was also more general in the sense that it would be easier to adapt to "totalitarian states" than

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