John Maynard Keynes 1st Baron Keynes CB (born John Maynard Keynes, 1st Baron Keynes, June 5, 1883, Cambridge - April 21, 1946, Tilton Manor, Sussex) - English economist, founder of the Keynesian trend in economic theory. Knight of the Order of the Bath.
In addition, Keynes created an original theory of probability, not related to the axiomatics of Laplace, von Mises or Kolmogorov, based on the assumption that probability is a logical, not a numerical ratio.
The economic movement that arose under the influence of the ideas of John Maynard Keynes was later called Keynesianism. Considered one of the founders of macroeconomics as an independent science.
Keynes was born in the family of John Nevil Keynes, a well-known economist, professor of economics and philosophy at the University of Cambridge, and Florence Ada Brown, a successful writer who was also engaged in social activities. His younger brother, Geoffrey Keynes (1887-1982), was a surgeon and bibliophile, his younger sister Margaret (1890-1974) was married to the Nobel Prize-winning psychologist Archibald Hill. The economist's niece, Polly Hill, is also a well-known economist.
Keynes was very tall, about 198 cm tall. Biographers report his homosexuality. Serious relationship had with the artist Duncan Grant between 1908 and 1915.
Keynes, John Maynard
Keynes continued to help Grant financially throughout his life. In October 1918, Keynes met the Russian ballerina of the Diaghilev company Lidia Lopukhova, who in 1925 became his wife. In the same year, he made his first trip to the USSR to celebrate the 200th anniversary of the Academy of Sciences, and also became a ballet patron and even composed ballet librettos. In addition, Keynes was in the USSR back in 1928 and 1936 with private visits. Keynes's marriage appears to have been a happy one, although medical problems prevented the couple from having children.
Keynes was a successful investor and managed to make a good fortune. After the stock market crash of 1929, Keynes was on the verge of bankruptcy, but soon managed to restore his wealth.
He was fond of collecting books and managed to acquire many of the original works of Isaac Newton (Keynes called him the Last Alchemist (eng. "the last alchemist") and dedicated the lecture "Newton, the Man" to him. In the preface to Hideki Yukawa's Lectures on Physics, a biographical Keynes's book on Newton, but it means the printed edition of this lecture or a more extensive work, it is not clear from the context.
He was interested in literature and drama, and provided financial assistance to the Cambridge Arts Theatre, which allowed this theater to become, although only for a while, the most significant British theater located outside London.
Keynes studied at Eton, at King's College, Cambridge, and at the university he studied with Alfred Marshall, who had a high opinion of the student's abilities. At Cambridge, Keynes hosted Active participation in the work of the scientific circle, which was led by the philosopher George Moore, popular among young people, he was a member of the philosophical club "Apostles", where he made acquaintance with many of his future friends, who later became members of the Bloomsbury Circle of Intellectuals, created in 1905-1906. For example, the members of this circle were the philosopher Bertrand Russell, the literary critic and publisher Cleve Bell and his wife Vanessa, the writer Leonard Woolf and his wife the writer Virginia Woolf, the writer Layton Strachey.
From 1906 to 1914, Keynes worked in the Department of Indian Affairs, at the Royal Commission on Indian Finance and Currency. During this period, he wrote his first book - "Money circulation and finances of India" (1913), as well as a dissertation on the problems of probability, the main results of which were published in 1921 in the work "Treatise on Probability". After defending his dissertation, Keynes began teaching at King's College.
From 1915 to 1919, Keynes served in the Treasury. In 1919, as a representative of the Treasury, Keynes participates in the Paris Peace Talks and proposes his plan for the post-war restoration of the European economy, which was not accepted, but served as the basis for the work "Economic Consequences of the World." In this work, in particular, he objected to the economic oppression of Germany: the imposition of huge indemnities, which, in the end, according to Keynes, could (and, as is known, did) lead to an increase in revanchist sentiment. On the contrary, Keynes proposed a number of measures to restore the German economy, realizing that the country is one of the most important links in the world economic system.
In 1919, Keynes returned to Cambridge, but spent most of his time in London, being on the board of several financial companies, the editorial board of a number of journals (he was the owner of the Nation weekly, and also the editor (from 1911 to 1945) of the Economic Journal, advising the government Keynes is also known as a successful stock market player.
In the 1920s, Keynes was concerned with the future of the world economy and finance. The crisis of 1921 and the depression that followed it drew the attention of the scientist to the problem of price stability and the level of production and employment. In 1923, Keynes published "Treatise on Monetary Reform", where he analyzes the causes and consequences of changes in the value of money, while paying attention to such important points as the effect of inflation on the distribution of income, the role of expectations, the relationship between expectations in price changes and interest rates, etc. The correct monetary policy, according to Keynes, should proceed from the priority of maintaining the stability of domestic prices, and not aim at maintaining an overvalued exchange rate, as the British government did at that time. Keynes criticized the policy in his pamphlet The Economic Consequences of Mr. Churchill (1925).
In the second half of the 1920s, Keynes devoted himself to A Treatise on Money (1930), where he continued to explore issues related to exchange rates and the gold standard. In this work, for the first time, the idea appears that there is no automatic balancing between expected savings and expected investment, that is, their equality at the level of full employment.
In the late 1920s and early 1930s, the US economy was hit by a deep crisis - the Great Depression, which engulfed not only the American economy - European countries were also subject to crisis, and in Europe this crisis began even earlier than in the USA. The leaders and economists of the leading countries of the world were feverishly looking for ways out of the crisis.
As a predictor, Keynes proved to be colossally unlucky. Two weeks before the start of the Great Depression, he makes a prediction that the world economy has entered a sustainable growth trend and that there will never be recessions. As you know, the Great Depression was predicted by Friedrich Hayek and Ludwig Mises one month before it began. Not understanding the essence of economic cycles, Keynes loses all his savings during a depression.
Keynes was appointed to the Royal Commission on Finance and Industry and to the Economic Advisory Council. In February 1936, the scientist publishes his main work - "The General Theory of Employment, Interest and Money", in which, for example, he introduces the concept of the accumulation multiplier (Keynes's multiplier), and also formulates the basic psychological law. After the General Theory of Employment, Interest and Money, Keynes established the status of a leader in economic science and economic policy of his time.
In 1940, Keynes became a member of the Treasury Treasury's Advisory Committee on War Matters, then an adviser to the minister. In the same year, he published the work "How to pay for the war?". The plan outlined in it involves the compulsory depositing of all funds remaining with people after paying taxes and exceeding a certain level to special accounts in the Postal Savings Bank with their subsequent release. Such a plan allowed us to solve two problems at once: to weaken demand-pull inflation and to reduce the post-war recession.
In 1942, Keynes was granted a hereditary peerage (baron). He was president of the Econometric Society (1944-1945).
During World War II, Keynes devoted himself to questions of international finance and the post-war organization of the world financial system. He took part in the development of the concept of the Bretton Woods system, and in 1945 he negotiated American loans to Great Britain. Keynes came up with the idea of creating a system for regulating exchange rates, which would be combined with the principle of their de facto stability in the long term. His plan called for the creation of a Clearing Union, the mechanism of which would allow countries with a passive balance of payments to access the reserves accumulated by other countries.
In March 1946, Keynes participated in the opening of the International Monetary Fund.
Scientific achievements
Keynes gained a reputation as a talented participant various kinds debate, and Friedrich von Hayek several times refused to discuss economics with him. Hayek once sharply criticized the ideas of Keynes, and the disputes between them reflected the confrontation between the Anglo-Saxon and Austrian traditions in economic theory. After the publication of Treatise on Money (1930), Hayek accused Keynes of not having a theory of capital and interest and of misdiagnosing the causes of crises. It must be said that, to some extent, Keynes was forced to admit the validity of the reproaches.
Also widely known is the discussion (often called the Debate on Method) by Keynes with the future laureate nobel prize in economics by Jan Tinbergen, who introduced regression methods into economics. This discussion began with Keynes's article "Professor Tinbergen's Method" in the Economic Journal and continued in a series of articles by various authors (by the way, the young Milton Friedman also took part in it). However, many believe that a more interesting presentation of this discussion (because of greater frankness) was in the private correspondence between Keynes and Tinbergen, now published in the Cambridge edition of Keynes's writings. The meaning of the discussion was to discuss the philosophy and methodology of econometrics, as well as economics in general. In his writings, Keynes sees economics less as "the science of thinking in terms of models" than as "the art of selecting appropriate models" (models to fit an ever-changing world). This discussion became in many ways decisive for the development of econometrics.
Scientific works
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12.1. The essence and contradictions of the financial concept of J. M. Keynes
The theory of the English bourgeois economist J. M. Keynes (1883-1946) had a tremendous influence on the formation of the financial concept and the development of fiscal policy in almost all capitalist countries during the 40s and the first half of the 70s. In his book "The General Theory of Employment, Interest and Money" there is no term "public finance", only a few pages are devoted to tax policy, the so-called " social investment"and "loan-financed spending." But his main idea of the need for government intervention to achieve "effective demand" is directly related to public finance and fiscal policy. This direction of study of capitalist economics determined the development of bourgeois financial science for many years.
The financial concept of J. M. Keynes is based on the following main provisions of his general theory:
1. All the most important problems of capitalist expanded reproduction should be solved not from the standpoint of studying the supply of resources, as his predecessors did, but from the standpoint of demand, which ensures the realization of resources.
2. The capitalist economy cannot self-regulate. In conditions of enormous socialization of capital and labor, state intervention is inevitable. State regulation should replace (or significantly supplement) the mechanism of automatic regulation of the economy with the help of prices.
3. Crises of overproduction appear on the surface of phenomena as a disadvantage consumer demand, so the problem of equilibrium in the economy should be solved from the point of view of demand. To do this, John. Keynes introduces the term "effective demand", which expresses the balance between consumption and production, income and employment.
4. The introduction of the term "effective demand" into economic circulation made it possible to return to the analysis of macroeconomic indicators (total social product and national income), which, in essence, were abandoned by all post-Ricardian schools. The return to macroeconomic indicators made it possible to find out how the economic system as a whole functions, to set a number of tasks related to the movement of the entire flow of produced, distributed and consumed value.
5. The main instrument for regulating the economy is budgetary policy. The state budget and financial policy as a whole were entrusted with the task of providing employment for the labor force and production equipment. Monetary regulation J.
What did the English economist Keynes suggest?
Keynes played a smaller role.
Based on the idea of "efficient demand", the entire financial concept was revised. The theory of public finance came to be regarded as an integral part of the theory of employment and income, and financial policy as an integral part of economic policy. The place and role of certain categories of public finances in the capitalist economy were determined. J. Keynes considers government spending as the main instrument of government intervention in the cyclical development of the economy and overcoming the crisis. Therefore, he considered their formation, structure and growth to be a very important and integral factor in achieving "effective demand". The growth of public spending, in his opinion, should contribute to the realization of national income and, ultimately, the achievement of full employment, for this the state must influence the main components of demand: personal and investment consumption. The propensity to spend money, that is, to create demand, J. Keynes considers as a psychological need. If aggregate demand is lower than supply, the entrepreneur cannot cover production costs and make a profit, so he will reduce investment and lay off workers. Conversely, if demand is higher than supply, the entrepreneur will increase investment and hire more workers.
Government demand, backed by taxes and loans, should revitalize entrepreneurial activity and lead to an increase in national income and employment. J. Keynes criticizes the principle of classical political economy about "non-intervention" of the state in economic development. “Pyramid building,” writes John Keynes with great irony, “earthquakes, even wars, can serve to increase wealth if the education of our statesmen on the principles of classical economy closes the way to something better”1. Just like government spending, J. Keynes "inscribes" taxes in the movement of macro indicators, believing that changes in tax policy can affect the "propensity to consume."
A new provision introduced into scientific circulation by J. Keynes was the concept of "taxes - built-in stabilizers". It is based on the functional relationship between national income and taxes. This means that the amount of taxes withdrawn (ceteris paribus) depends on the size of the national income. The higher the level of national income, the greater the amount of taxes will go to the budget. And vice versa, when the national income decreases during a crisis in production, the amount of taxes is reduced. This nature of taxes, from his point of view, provides a certain automatic flexibility of the economic system. He relates this provision primarily to income tax. Its collection at progressive rates leads to more significant fluctuations in the level of tax than income. They are the greater, the steeper the curve of tax rates and fluctuations in the volume of national income. This determines the regulatory possibilities of income tax. With a crisis of falling production and rising unemployment, taxes, automatically reduced, contribute to the growth of income, which awakens "the propensity to consume;" and stimulate demand.
J. Keynes assigned particular importance to taxes in their impact on the basic "psychological law", according to which people tend to increase their consumption with income growth, but not to the extent that it increases. As their income grows, their “propensity to save” grows, so a tax policy is needed that would withdraw these savings. In his opinion, income tax should be levied at progressive rates. He noted that such views are often seen as an attack on the capital needed for expanded reproduction. However, there is a need to withdraw part of the financial funds not invested in investments. Excessive savings can stimulate economic growth only under conditions of full employment (by Western economists, full employment means its value at the level of 97%), in crisis years they impede this growth. From this, recommendations are derived on the compilation of such a school of personal income tax rates, which would contribute to the redistribution of income from people who have savings to people who invest them. Excess savings withdrawn through taxes are channeled into investments through the state budget.
New in the theory of John. Keynes is the concept of the growth of public capital investments, which complement government measures to stimulate the "propensity to invest". In his opinion, the regulation of the volume of current investments cannot be left in private hands, only "wide socialization of investments will be the only way to ensure an approximation to full employment, although this should not exclude all kinds of compromises and ways of cooperating with private initiative"1. Also new is the provision introduced by J. Keynes into the theory of public finance on the need to increase public spending, "financed by loans." The followers of J. Keynes called it the principle of "deficit financing". According to J. Keynes, public investment and current government spending can be financed in debt. Government investment financed through loans will lead to an increase in "propensity and investment", and financing of current government spending will increase the "propensity to consume". He considers the growth of debts of the state and local authorities as an integral part of the state regulation of "effective demand". Since the time of John Keynes, the obligatory correspondence of budget expenditures and revenues has been considered an anachronism, and the fear of budget deficits and the growth of public debt has become a harmful prejudice, the concept of "healthy finances" has been done away with. The loan capital market is becoming one of the tools to achieve "effective demand", and the state budget deficit is turning into one of the ways to regulate the economy.
The general theory of J. Keynes, as well as his financial concept, contains a number of contradictory provisions. First, encouraging "effective demand" by increasing government spending can only be temporary. In essence, the state does not create new demand, but only transforms one of its forms into others. Government demand and consumption are created by reducing investment demand in the private sector and consumer demand. Ceteris paribus, an increase in government spending will shift demand from the private sector to the government sector, since the government can only finance its purchases through taxes or loans, which are anticipatory taxes. Consequently, if the state expands its demand, then the purchasing power of the population decreases to one degree or another, which exacerbates the problem of realizing the total social product. But in this transformation of demand, the monopoly has found a "rational grain" for itself. The centralization of demand from the state makes it possible to form a guaranteed market for monopolies. Work for the "treasury", noted V. I. Lenin, is no longer work for the free market, where the elements prevail1. The possibility of selling the products of monopolies is greatly facilitated, and the personal union of their managers with representatives of the state apparatus makes it possible to carry out state orders at high prices. The ideological function of the theory of J. Keynes is justifying this advantage.
Secondly, the growth of investments, financed by taxes and loans, contributes to the expansion of production activities, an increase in national income. But public investment raises the organic composition of capital, which leads to lagging employment growth. Despite state intervention, unemployment not only was not overcome, but also increased, especially in the 70s.
Thirdly, the financing of government spending through loans leads to an increase in the scale of secondary exploitation of workers, since the repayment of debts and the payment of interest on them are made at the expense of taxes. Taxes imposed on mass consumers, i.e., workers, ultimately exacerbate the contradiction between the social character of production and the private form of appropriation of its results. The placement of a part of state loans in issuing and commercial banks increases inflation.
Thus, John. Keynes developed a fundamentally new theory of finance, aimed at regulating the economy under the domination of monopolies. He created the theory of state regulation of the economy within the framework of bourgeois reformism. The substantiation of state intervention in the reproduction process with the help of finance as an objective necessity of adapting capitalist production relations to the process of socialization of production, capital and labor testifies to the foresight of the author of the theory. In fact, he tacitly recognizes the antagonistic contradictions between production and consumption and tries to find ways to resolve them by building a reformist model of state intervention in the process of expanded capitalist reproduction. The views of J. Keynes had a strong influence on the entire further development of bourgeois financial science.
The development of financial policy and its implementation in practice, based on the main provisions of the theory of J. Keynes, was carried out by his followers. In the 1940s and 1960s it had success and certain positive results. The extensive type of economic development corresponded to the Keynesian postulate about the need to increase government spending, in which the monopolies were directly interested. The idea of achieving full employment was in the interests of liberal-minded circles. In a number of Western European countries, social reformist forms of state regulation were implemented. On this basis, there was an increase in spending on education, health care, a fairly effective system was formed. social insurance. And until the 1970s, the financial theory and practice of most of the leading industrialized states of the capitalist world were based on the initial provisions of the theory of J. Keynes.
1. List the main causes of the world economic crisis of 1929-1933.
1. Serious disruption (imbalance) in the economy, and above all in the chain of production - distribution - consumption. That is, they produced more than they could buy.
2. The market mechanism of automatic regulation and the system for realizing the results of production (distribution and consumption) went out of order - huge production was concentrated in the hands of a few corporations and trusts, thanks to which conditions of monopoly, price dictate and competition were created. Several corporations, such as those dominant in the steel industry, cut production, but prices remained almost the same. Therefore, the market and competition as regulators have ceased to work.
2. What are its main manifestations and features?
The depreciation of shares, the bankruptcy of banks, the production has lost its financial supply - investments and loans. As a result, factories and plants, offices were closed, trade was curtailed. Unemployment rose.
The crisis acquired a global character, lasted quite a long time - 5 years.
The crisis occurred in the United States - a country where there were the highest rates of economic growth, where a high level of maturity was achieved in industrial development, in the organization and management of mass production. Consequently, the world economic crisis that began was of a structural and systemic nature, that is, it was a crisis of a certain stage in the development of the capitalist system - a break, a turning point in the development of capitalism.
The closure of enterprises, the reduction in production gave rise to mass unemployment, the growth of contrasts of wealth and poverty, the appearance of the homeless and the poor on the streets of cities, food riots and social protest movements. In addition to these visible signs of the system's decay, much remained as if behind the scenes - the loss of a sense of dignity by many people, hopelessness, suicide, a decline in morality, an increase in crime.
3. Why did the crisis put on the agenda the problem of state regulation of the market economy?
In the USA, Germany, England, for the first third of the XX century. reached a high level of concentration: in the hands of a few corporations and trusts, huge industries were concentrated, thanks to which conditions were created for monopoly, price dictatorship and restriction of competition. Several corporations, such as those dominant in the steel industry, cut production, but prices remained almost the same. Therefore, the market and competition as regulators have ceased to work. In the current situation, it was impossible to automatically get out of the crisis with the help of the previous market mechanisms.
4. What did the English economist Keynes offer?
He substantiated the need for state regulation of economic development and the redistribution of production results. At the same time, the key issue is to increase the purchasing power of the population (it is necessary to create “effective demand”) so that mass production corresponds to mass consumption, otherwise the system will not be able to get out of the impasse of a relative excess of goods produced. Only the state power could solve such a macroeconomic problem.
Keynesianism proposed a specific mechanism for anti-crisis or anti-inflationary (depending on the specific situation) regulation: in the first case, through an increase in government spending, lower taxes and bank interest (the “go” principle), and in the second case, through a reduction in government spending, an increase in taxes and bank interest. (principle "stop"). These principles, which provide for “pushing” consumption growth during a crisis, and “holding back” it during inflation, are called “stop and go”.
5. Why should mass production correspond to mass consumption?
The produced goods must be sold, otherwise the income of both the enterprise itself and its employees will begin to fall. Accordingly, the purchasing power of the population will also fall.
6. What types of political regimes existed in Europe?
Liberal-democratic regime: equal application of laws, recognition of fundamental and inalienable human rights that have priority over the rights of the state, the principle of separation of powers, parliamentarism, civil society as a system of public organizations independent and independent of the state.
Totalitarian regime: totalitarianism, according to the meaning of the term itself (total is universal), stands for universality, totality of state regulation. Replacement of market relations by state planning and distribution. In this case, private property is so limited that it disappears as the basis of personal freedom.
A totalitarian state presupposes the inseparable political and state leadership of the country by the one-party bureaucratic elite. Therefore, in the political field, totalitarianism means the destruction of the regime of liberal democracy, elective institutions or their reduction to an empty formality, the absorption of civil society by the state.
In the field of ideology, totalitarianism instills unanimity, intolerance for other views, and the cult of the leader.
Authoritarianism is a political regime in which political power is exercised by a political leader, political party, family or social group with minimal participation of the people. At the same time, there is limited or strict regulation of the political rights of citizens and socio-political organizations, but there is no large repressive apparatus. Interference in civil society is insignificant, the principle “everything that is not prohibited by the state is allowed” applies, which implies the absence of total regulation, the need for a single ideology.
Task for table 1.
Analyze basic principles political regimes and formulate the lines of their comparison.
Lines of juxtaposition: Ideological politics, parties and statecraft, military control, censorship, repression, economics, private life and society.
John M. Keynes was born in Cambridge to an upper-middle-class family.
His father was a lecturer in economics and philosophy at the University of Cambridge.
Keynes studied at Eton College, received a scholarship for brilliant academic performance, then at the Mathematics Department at King's College, Cambridge.
Under the influence of the great economist Alfred Marshall, Keynes became interested in the relatively new science of economics. He published his first article on economics in 1909, and by 1911 he was editor of an economics journal.
During World War I, Keynes helped negotiate with Britain's creditors, as Britain's debt had soared during the war.
In The Economic Consequences of the Peace, Keynes put forward the central problem of imposing huge indemnities on Germany. Keynes called this a tragic mistake, which should lead to a revival of the country's export expansion and the emergence of contradictions that could lead to a new war. Keynes's opinion was taken into account after the Second World War ...
In the 1920s, Keynes was critical of the British government's decision to remain on the 1914 gold standard. He argued that the high value of the pound sterling made exports difficult and was main reason deflation and high unemployment in Britain in 1920.
Keynes married the ballerina Lydia Lopukhova, they had no children. He died of a heart attack in 1946.
Keynes was at the same time a philosopher, an economist and a student of morals. He never ceased to wonder about the ultimate goals of economic activity. He believed that the craving for wealth is justified only by the fact that it allows you to live well, not necessarily richly, but righteously.
Keynes did not just study the economy, he offered concepts, tools to overcome the crises of capitalism within the framework of market ideology. Moreover, the post-war reconstruction of Europe and the United States was largely based on his principles.
Keynesian ideas
Keynes is called one of the founders of macroeconomics as an independent science.
An economy for all: Keynes sought to express the most important ideas in accessible language. Keynes was against excessive mathematization, which interfered with the perception of the economy by non-specialists.
The basic tenet of the Keynesian school is that government intervention can stabilize an economy.
During the Great Depression of the 1930s, economic theory failed to explain the causes of the severe global economic downturn and to develop adequate public policies to restore production and employment. Keynesianism is often described as a reaction of economic theory to the Great Depression.
Keynes revolutionized economic theory by discarding the prevailing idea at the time that free markets automatically provide full employment for the population, that is, everyone who wants to get a job is sure to.
A market economy is not characterized by an equilibrium that ensures full employment. The reason is the tendency to save a part of income, which leads to the fact that aggregate demand is less than aggregate supply. The state must regulate the economy by affecting aggregate demand: increasing the money supply and lowering interest rates. The lack of demand is compensated by public works and budget financing.
The key point of Keynes's theory is the assertion that aggregate demand, i.e., the sum of spending by households, enterprises and government, is the main driving force in the economy.
Keynes argued that free markets do not have self-regulating mechanisms that provide full employment for the population. According to Keynes, the state intervenes in the economy by pursuing a public policy of eradicating unemployment and stabilizing prices.
The correct monetary policy, according to Keynes, should proceed from the priority of maintaining the stability of domestic prices, and not aim at maintaining an overvalued exchange rate.
Keynes and socialist economics
In view of the importance of the state in the economy noted by Keynes and his criticism of capitalism (+ Russian wife), prerequisites were created for rapprochement with Soviet economists. There is a legend that Keynes visited the USSR and met with Stalin. The result could be ideas for restructuring the capitalist system based on the thesis that there is no self-regulation mechanism in the market economy.
However, Keynesianism denied the uniqueness of planned and administrative management and regulation of the economy. In return, Keynes proposed a system of macroeconomic regulation. This. as well as the rejection of Marx, in different years caused varying degrees of criticism in the USSR, up to the wording "intriguer from the economy."
Keynes and the globalists
Keynes was involved in the development of the concept of the Bretton Woods system. He owns the idea of creating a system for regulating exchange rates, which would be combined with the principle of their stability in the long term (today China largely follows these exercises, regulating its currency at the state level). Keynes came up with the idea of creating the IMF.
Criticism of Keynes and Keynesianism
After the Second World War, the classical school began to revive again. Neoclassical representatives insist that the socialist economy is less efficient than the market, although the latter is not perfect, but it is better to regulate it through political rather than economic intervention.
The emergence of monetarism interrupted the dominance of Keynesianism, however, monetarism used the concept of monetary regulation developed by J. M. Keynes.
Keynesianism was criticized by history itself, so two important maxims from the above abstracts on employment:
- Less unemployment, more demand, more inflation.
- More unemployment, less demand, less inflation.
But in the 1970s in the United States again there was a crisis in which there was high unemployment and at the same time high inflation, this phenomenon was called stagflation. This weakened economists' confidence in Keynesianism.
Crisis according to Keynes
The fall in overall consumer demand causes a reduction in production, which leads to unemployment (ruin of small businesses, layoffs of employees, including at large enterprises). Unemployment leads to a decrease in the income of buyers. And this, in turn, forces a further decline in consumer demand. There is a vicious circle of chronic depression.
Keynes proposed the following solution: if the mass consumer is not able to revive aggregate demand, the state should do it. Large government orders (albeit of little use) will lead to additional hiring of labor. By receiving wages, the former unemployed will increase their spending on consumer goods, and, accordingly, will increase aggregate economic demand. This, in turn, will lead to an increase in the aggregate supply of goods and services and a general recovery of the economy.
Richard Nixon (President of the United States) 1971: "Today we are all Keynesians." Robert Lucas: Apparently, in a crisis, everyone becomes a Keynesian.
There is an opinion that the Keynesian approach to economics makes sense to carry out only in times of crisis.
John Maynard Keynes(1883-1946) - English economist, made a significant contribution to the development of economic thought of the XX century.
The economic trend that emerged under the influence of his ideas was called Keynesianism. Keynes is considered one of the founders of macroeconomics as an independent science.
(Keynesianism) - an economic theory of state regulation of the economy, arose during the difficult period of the most acute economic crisis that shook the world economy in 1929-1933.
According to many scientists, the main work of J. Keynes "The General Theory of Employment, Interest and Money" (1936) became a turning point not only in the development of economic theory, but also determined economic policy most countries.
The main methodological provisions of the approach of J. M. Keynes:
- The most important problems of expanded reproduction must be solved not from the standpoint of studying the supply of resources, but from the standpoint of demand The that provides the implementation of the resources.
- The market economy cannot self-regulate, and therefore state intervention inevitably.
- Crises of overproduction are undesirable, so the problem of equilibrium in macroeconomics should be solved from the position of " effective demand”, which expresses the balance between consumer and production, income and employment.
- The introduction of the term "effective demand" stimulated analysis of macroeconomic indicators, which made it possible to find out how the economic system as a whole functions, the flow of produced, distributed and consumed value moves.
- The main instrument for regulating the economy was budgetary policy, which was entrusted with the task of providing employment for the labor force and production equipment.
Thus, Keynes formulated a new section in economic theory - macroeconomics and introduced the state as the subject of economic regulation.
Abstract by Maria Zagorskaya.
Biography of Keynes.
John Maynard Keynes(Keynes, John Maynard) was born on June 5, 1883 in Great Britain in the family of economist John Neville Keynes, who taught economics and logic at the University of Cambridge and wrote a book on the subject of economic science. Keynes's mother was the daughter of a minister, a successful writer, and in 1932-1933. even served as mayor of Cambridge.
Keynes went to prestigious school at Eton, during his studies, one of his hobbies developed, which markedly affected his scientific work, namely, collecting rare books. So, Keynes was the owner of many of the original works of Isaac Newton.
Gradually, Keynes became one of the outstanding students of the school: he managed to win the main prize in mathematics for two years in a row, and in 1901 he was also the first in history and literature. Beginning in 1902, Keynes studied at Cambridge, where his main interest was mathematics, philosophy and economics.
From 1906 to 1908 Keynes worked Clerk at the Ministry of Indian Affairs However, after a short time he switched to teaching, which he did almost until the end of his life - until 1942.
Two years of work in the ministry were not in vain - Keynes received a seat on the Royal Commission on Indian Finance and Monetary Circulation, wrote his first book "Money circulation and finance of India" ("Indian Currency and Finance", 1913), at the same time, his interest in the monetary sphere and its influence on the state of the economy as a whole developed.
In 1921, Keynes prepared a dissertation, which he published in the form of a monograph. "Treatise on Probability" (“Treatise on Probability”) is the result of his youthful passion for mathematics. In it, Keynes laid out an original theory of probability based on the assumption that probability is a logical, not a numerical, ratio.
From 1911 to 1937 Keynes was magazine editor « economic Journal ». During the First World War, in 1914 there was a banking crisis, and Keynes was appointed to work in English Treasury where he worked until 1919. After leaving the Treasury, Keynes returned to Cambridge to treasurerKing’ sCollege, where he was able to increase the size of contributions to the treasury of Cambridge by 10 times.
Keynes made his fortune on stock market speculation, which was one of the scientist's hobbies. The most interesting and revolutionary ideas of Keynes arose in his head not only on the basis of "armchair" reflections, but also as a result of the accumulation of his own business experience. From 1921 to 1938 he was member of the board of directors at least five investment and insurance companies. In 1929, Keynes was on the verge of bankruptcy, but soon managed to restore his wealth.
At the time, there was discussion in England about whether sterling should be returned to the gold standard at pre-war dollar parity. Winston Churchill's official policy was to answer yes to this question. Keynes was an opponent of this monetary reform, this was expressed in his work "Treatise on Monetary Reform" ("A Tract on Monetary Reform", 1923).
In 1925, Keynes married a Russian-born ballerina from the Diaghilev enterprise, Lidia Lopukhova, with whom he lived. happy life but the couple had no children.
In 1926-1929. Keynes played a prominent role in shaping the policies of Lloyd George's Liberal Party. This activity was developed in the appointment in 1929 to the post member of the finance and industry committee, and in 1930 Keynes becomes member of the economic advisory board under the British government.
Released in 1930 "Treatise on Money" ("A Treatise on Money"), in which he tried to show how an economy based on the gold standard can fall into the trap of low employment when the market mechanism is unable to rescue the economic system from this situation.
In 1936 Keynes published his famous book ("The General Theory of Employment, Interest and Money"). The main idea of the book is that the capitalist economy lacks an internal mechanism of self-regulation and that the normal functioning of the market economy does not ensure the achievement of full employment.
Keynes's greatest scientific work was also his last major work: in 1937, he suffered a severe heart attack. Keynes returned to scientific and teaching activities in 1939.
With the onset of World War II, Keynes became member of the military advisory committee at the UK Treasury. Keynes is working on the creation of the International Monetary Fund. Keynes' active work provided him with wide recognition, expressed in the award of a baronial title to him in 1942.
The last major event in the life of Keynes was a trip to the United States to participate in the opening of the IMF. Soon, heart disease made itself felt, and on April 21, 1946, John M. Case died of a myocardial infarction at the age of 62, and was buried in Westminster (London).
As a talented economist and businessman, Keynes left a serious fortune to his wife and parents - his investment portfolio was estimated at 400 thousand pounds sterling (today it is 11.2 million), and the value of the collection of books and art was 80 thousand pounds sterling ( 2.2 million).
Main scientific works of Keynes
| Year | Treatise | Main idea |
| 1913 | Money circulation and finance in India | The author tried to establish a relationship between price movements in India and the inflow and outflow of gold. |
| 1923 | Treatise on monetary reform(A Tract on Monetary Reform) | Keynes analyzes causes and consequences changes in the value of money, while paying attention to such important points as the impact of inflation on income distribution, the role of expectations, the relationship between expectations in price changes and interest rates, etc. A sound monetary policy should be based on the priority of maintaining domestic price stability, and not aim to maintain an overvalued exchange rate, as the British government did at that time. The author does not agree with the policy of the Bank of England. Since 1925, when Britain switched to gold standard, J. M. Keynes comes to the conclusion that the mistakes of politicians are the result of erroneous theoretical ideas. |
| 1931 | Treatise on money
(A Treatise of Money) |
Keynes continues to explore questions regarding exchange rates and the gold standard. In this work, for the first time, the idea of the absence of automatic balancing between expected savings and expected investment, that is, their equality at the level of full employment. |
| 1936 | General Theory of Employment and Money
(General Theory of Employment, Interest and Money) |
For the first time, the ideas of Adam Smith were consistently criticized. Keynes considers the instability of the market capitalist economy and, for the first time in economics, proves the need for government intervention in the economy. Focuses on the analysis of the ratio of investment and savings with the study of the macroeconomic category - effective demand(the central category of Keynesianism). |
Moral ideas of Keynes
Keynes was at the same time a philosopher, an economist and a student of morals. He never ceased to wonder about the ultimate goals of economic activity. Keynes believed that the desire for wealth - "the love of money", in his words - is justified only in so far as it allows you to "live well."
And "to live well" - this, according to Keynes, does not mean "to live richly", it means " live righteously».
For Keynes, the only justification for human economic activity is striving for the moral improvement of the world. Keynes predicted that as labor productivity increased, the hours of work would shorten, creating conditions in which people's lives would become " reasonable, pleasant and worthy". This is Keynes' answer to the question of why economics is needed.
Economic theory of Keynes.
The theory of state regulation of the economy by J. Keynes arose during the difficult period of the most acute economic crisis that shook the world economy in 1929-1933.
The economic crisis has shown that self-regulation of the market with the help of the "invisible hand", the thesis, which had been affirmed since the time of A. Smith, turned out to be untenable in the new conditions of intensive development of the world economy.
The subject of research by J. Keynes is the analysis of the reproduction process, capital investment and national income, investment and employment, money circulation, wages, profits, interest and other economic categories at the macroeconomic level.
The task of the study is to ensure the optimal, uninterrupted functioning of the economy.
Keynes' fundamental work "The General Theory of Employment, Interest and Money"(1936) contains a number of new ideas.
From the first pages of his book, he points out the priority of the first word in its title, i.e. general theory, in contrast to the private interpretation of these categories by the neoclassicists. The restructuring of economic theory based on the teachings of J. Keynes was regarded as Keynesian revolution. In contrast to the accepted and well-established postulates and provisions in economic theory, J. Keynes in the exchange concept prefers not production, but sphere of circulation. If in the Austrian (Viennese) school of economics the doctrine is based on individual psychology - the subjective opinion of "Homo economicus", then in Keynesianism - mass psychology.
Consider the basic concepts of Keynes's theory.
The reason for the development of crises and unemployment.
Keynes caused crises and unemployment and developed a program to combat them. Thus Keynes was the first to acknowledged the existence of unemployment and crises inherent in capitalism.
Then he declared the inability of capitalism to cope with these problems with its internal forces. According to Keynes, when solving them, it is necessary state intervention. In fact, he dealt a blow to the neoclassical direction in general, as well as to the thesis of limited resources.
There is not a lack of resources, but, on the contrary, their overabundance as evidenced by unemployment. And if part-time employment is natural for a market economy, then the implementation of the theory implies full employment. Moreover, by the latter, Keynes understood not absolute employment, but relative. He considered necessary 3 percent unemployment, which should serve as a buffer for pressure on the employed and a reserve for maneuver in the expansion of production.
Keynes explained the emergence of crises and unemployment as insufficient "aggregate demand" resulting from two reasons.
Basic psychological law of society.
The first reason he named "basic psychological law" society. Its essence is that the psychology of society is such that As income rises, consumption rises, but to a lesser extent than income.
Keynes argues this approach with "common sense". On the contrary, with a decrease in income, the population reduces the allocation of funds for savings in order to maintain the same standard of living.
In other words, the growth of citizens' income outstrips their consumption, which leads to insufficient aggregate demand. As a result, there are disproportions in the economy, crises, which in turn weaken the incentives for capitalists to further investment.
Fig.1. The main psychological law: the ratio of income growth and consumption.
The rate of return on capital.
Second reason insufficient "aggregate demand" Keynes believes low rate of return on capital due to the high rate of interest. This forces the capitalists to keep their capital in cash (liquid form). This hurts the growth of investment and further curtails "aggregate demand". Insufficient investment growth, in turn, does not allow for employment in society.
Consequently, insufficient spending of income, on the one hand, and "liquidity preference" on the other, leads to underconsumption. Underconsumption reduces "aggregate demand". Unsold goods accumulate, which leads to crises and unemployment.
Keynes built the following chain: a fall in overall consumer demand causes a reduction in the production of goods and services. The reduction in production leads to the ruin of small commodity producers, to the dismissal of employees by large enterprises, and large-scale unemployment. Unemployment entails a decrease in the income of the population, that is, buyers. And this, in turn, forces a further decline in consumer demand for goods and services.
Fig.2 A vicious circle associated with a drop in demand.
Keynes concludes: if the market economy is left to itself, it will stagnate.
Fig.3. Causes of crises and unemployment.
Macroeconomic model of Keynes.
Keynes developed macroeconomic model, in which he established the relationship between investment, employment, consumption and income. Important role it belongs to the state.
In view of the fact that the state has more information than individual individuals, Keynes assumes an active government intervention into economic processes with the aim of the progressive development of the country.
The state should do everything possible to raise the marginal (additional) efficiency of capital investments, i.e. marginal profitability of the last unit of capital due to subsidies, public procurement, etc.
On the other hand, the Central Bank lower interest rates and moderate inflation. Inflation should provide a systematic moderate rise in prices, which will stimulate the growth of capital investment. As a result, new jobs will be created, leading to the achievement of full employment.
Keynes made the main bet in increasing aggregate demand on the growth of productive demand and productive consumption. He proposed to compensate for the lack of personal consumption expansion of productive consumption.
Consumer demand needs to be stimulated through consumer credit.
Fig.4. macroeconomic model.
Essence, the central link in the theory of J. Keynes - effective demand principle, which should be regulated and supported by the state through solvency and a corresponding expansion of the market.
As a decisive means for increasing the overall volume of employment, Keynes puts forward an increase in private and public investment ( investment).
As a means to stimulate private investment, Keynes proposed regulation of the rate of interest. The rate of interest according to Keynes (payment for a loan) is the reward for parting with liquidity. It is the "price" that balances the insistence on holding wealth in the form of cash against the amount of money in circulation.
Keynes believed that the government has the ability to regulate the rate of interest by increasing the amount of money in circulation. By pursuing an “expansion policy”, the state should take it upon itself to stimulate private investment through tax cuts and increase their spending by expanding the public sector or increase in subsidies consumers (pensions, allowances, scholarships). Particular hopes are placed on deficit financing from the budget, covered by the issuance and placement on the market of large government loans.
According to Keynes, the psychological inclination of a person to save a certain part of the income restrains the increase in income due to the reduction in the volume of capital investments, on which the permanent receipt of income depends. As for the marginal propensity of a person to consume, then, according to the author of the General Theory, it is supposedly constant and may therefore provide a stable relationship between increased investment and income levels.
An integral part of the theory of effective demand is the concept of a multiplier.
cartoon process
The most complete expression macroeconomic model Keynes found in the theory of the so-called "multiplication process". This theory is based on multiplier principle.
Multiplier means multiplier, i.e. a multiple increase in the growth of income, employment and consumption to the growth of investment. The Keynesian "investment multiplier" expresses the ratio of the increase in income to the increase in investment.
The mechanism of the "investment multiplier" is that investments in any industry cause in it increase in production and employment. This will result in an additional extension demand on commodities, which will cause expansion of their production in the relevant industries, which will present additional demand to the means of production.
According to Keynes, the investment multiplier indicates that when there is an increase in the total amount of investment, then income increases by an amount that is R times greater than the increase in investment.
Thus, the theory of the multiplier substantiates the existence of a direct and proportional relationship between capital accumulation and consumption. The amount of capital accumulation (investment) is determined by the “propensity to consume”, and accumulation causes a multiple increase in consumption.
Predecessors of the Keynesian theory of economic regulation
Methodological connection with the concept of mercantilism
J. M. Keynes did not deny the influence of the mercantilists on the concept of state regulation of economic processes that he created.
His common judgments with them are obvious and include:
in an effort to increase the mass of money in the country (as a means of reducing their cost and, accordingly, reducing interest rates and encouraging investment in production);
in the approval of price increases (as a way to stimulate the expansion of trade and production);
in recognizing that lack of money is the cause of unemployment;
in understanding the national (state) nature of economic policy.
Methodological differences with the classics and neoclassics
In the “General Theory” by J. M. Keynes, the idea of the inexpediency of excessive thrift and accumulation and, on the contrary, the possible benefits of all-round spending of funds, is clearly traced, since, as the scientist believed, in the first case, the funds are likely to acquire an inefficient liquid (monetary) form , and in the second - can be directed to increase demand and employment.
He also sharply and convincingly criticizes those economists who are committed to the dogmatic postulates of the "law of markets" J.B. Say and other purely "economic" laws, calling them representatives of the classical school.
Keynesianism is a direction in economic theory that appeared in response to the challenges of the Great Depression (the economic crisis of 1929–1939). The current is named after the English economist John Maynard Keynes. Keynes is considered one of the founders of macroeconomics as an independent discipline. The main work of the scientist is “The General Theory of Employment, Interest and Money” (1936).
It gave impetus to the division of economic theory into microeconomics and macroeconomics. Although such macroeconomic topics as economic cycles and the theory of money were studied before, the merit of the English economist John Maynard Keynes is that he systematized this knowledge and laid the foundation for a new direction of research, which for a long time differed from the rest of economic science not only thematically, but and methodologically.
American Union queue during the Great Depression
// wikipedia.org
However, since the 1980s, the methodological differences between micro- and macroeconomics have faded. Now all macroeconomic science, including modern Keynesianism, is based on clear microeconomic justifications, that is, on the behavior of individual individuals and firms. Macroeconomics differs from microeconomics only thematically - it studies processes related to the entire economy as a whole: economic growth, inflation, the behavior of exchange rates.
Notable Keynesian scholars include the last two Federal Reserve officials, Ben Bernanke and Janet Yellen. Keynesian theorists Olivier Blanchard and Kenneth Rogoff recently worked as chief economists at the International Monetary Fund, before Stanley Fischer, who later headed the Central Bank of Israel. The author of well-known textbooks on economics, Gregory Mankiw, is also an adherent of Keynesian theory.
John Maynard Keynes, 1933
// wikipedia.org
The Great Depression and the emergence of Keynesianism
Keynes offered as an explanation for the Great Depression the fall in aggregate demand, the causes of which he vaguely labeled "animal instincts of investors." That is, the panic that began in 1929 after the stock market crash resulted in the fact that firms stopped spending money on investment spending.
Aggregate demand is the desire of all economic players to purchase the goods and services that the economy produces. This may be a desire on the part of consumers, that is, people who purchase goods and services for their needs. This may be a desire on the part of firms to acquire investment goods or build new capacities for their production. During recessions, it is investment demand that most often sees fall: firms abandon projects, they do not hire people to build a new plant or a new building, and unemployment occurs because of this. Also, aggregate demand includes purchases from the government, which makes the state order, and from the external sector (exports).
When the Great Depression began, according to the logic of the classical theory, the reduction in aggregate demand should have led to a fall in prices and wages. But Keynes made another important observation that prices and wages do not have time to adjust to the new equilibrium in time and firms have not been able to reduce them. And at the old prices, they could no longer sell as many goods as they sold before. Therefore, firms were forced to reduce production and lay off part of the workers. Displaced workers lost income, demand fell even further, and this led to a cyclical downturn in the economy for a long time.
Reducing the money supply
A couple of decades after Keynes's work, an alternative view emerged about the causes of the Great Depression. It came from economists Milton Friedman and Anna Schwartz. They believed that the fall was caused not so much by the "animal instincts of investors" as by the reduction in the money supply, which the central banks allowed in different countries, primarily in the United States of America and France. This reduction spread to other countries through the gold standard system that existed at that time.
This point of view eventually became dominant. But by and large, it does not contradict Keynesian theory, because the fall in the money supply is also a fall in aggregate demand. The fall in the money supply means that credit has become less available. Firms and the public did not receive credit funds, did not spend money on what they planned to spend before the recession.
Positive Keynesianism
In economics and in public discussion, Keynesianism means different things. It is important here to distinguish between positive and normative Keynesianism.
Positive Keynesianism is an economic theory that attempts to explain observed phenomena. First of all, he tries to explain what is called the economic cycle, that is, to find the reasons why the economy periodically experiences periods of recession (recession).
Business cycle
Both the early Keynesian theory and the modern, new Keynesian version proceed from the fact that such recessions are non-equilibrium phenomena, that is, some deviations from normality associated with the imperfections of the market economy. The imperfection that is most often noticed is price rigidity, that is, the inability of prices to adjust quickly to changing conditions. The second important part of positive Keynesianism is the hypothesis that such recessions in most cases (though not in all) are due to a fall in aggregate demand.
Normative Keynesianism
Normative Keynesianism answers the question of what to do in the event of an economic downturn. And often Keynesianism in public discussion is understood as any ideology of government intervention in the economy. It seems to me that this point attracts more attention than it deserves, because an economist who believes in the Keynesian explanation of recessions does not necessarily support massive government intervention.
State regulation of the economy
Keynes, when he formulated his theory in the 1930s, was in favor of rather active intervention in the form of government spending, more regulation of the market. This ideology dominated in the post-war period, in the 1950s and 60s, so it is clear where such an attitude towards the Keynesian point of view comes from in the public discussion.
In the 1970s, a wave of economic deregulation began in the world. Someone believes that it was excessive, and someone, on the contrary, that it was belated. Most economists who consider themselves Keynesians in a positive sense, that is, believe in the Keynesian explanation of recessions, do not at all call for a return to the kind of regulation that we saw before the 1970s.
The only industry where more regulation has been called for again after 2008-2009 is the financial sector. Although many will say that this crisis, on the contrary, was caused in many ways by the wrong actions of governments, which in the pre-crisis years gave implicit guarantees to large banks. These guarantees allowed banks to be too risky, knowing that in a crisis they would be rescued at the expense of taxpayers.
There is no consensus among Keynesian scholars. For example, Nobel laureates Paul Krugman and Joseph Stiglitz are more proponents of state intervention in the economy than many other Keynesians. And there is, for example, Gregory Mankiw, a Harvard professor and economic adviser to US President George W. Bush, a Keynesian by his scientific convictions and one of the authors of the new Keynesian theory. Nevertheless, Mankiw adheres to a rather conservative point of view, believing that it is better for the state to interfere as little as possible, and if it interferes, then only through monetary policy. This is not regulation, but the provision of credit to the economy during periods of recession.
budget policy
If aggregate demand falls and a recession begins, then the natural reaction to this problem is to try to stimulate it artificially. The government has two tools here: budgetary and monetary policy.
The fiscal policy advocated by Keynes assumes that the state must present demand when the private sector does not present it. The government increases government spending on public needs: it begins to build roads, bridges.
Not everyone agrees that this is reasonable, because the budget policy is slow, it is often voluntaristic, and a large number of issues related to corruption and inefficient use of budget funds immediately arise. When we pass, especially on an emergency basis, a large amount of money through the government, there will inevitably be inefficient spending. But during the Great Depression, it was this policy that became dominant.
monetary policy
There is more use of monetary policy now, especially if recessions are less cataclysmic than the Great Depression. As part of monetary policy, the central bank lowers the interest rate at which it lends money to the economy. Thus, he adds money to the economy, and the economy, having received cheap credit funds, increases consumer and investment spending. Thus, aggregate demand is restored to its original level.
Monetary policy is now considered more efficient: it is more operational and less voluntaristic than budgetary. Although, as the 2008 crisis showed, governments use both of these tools during great cataclysms.
Monetarism
In public discussion, Keynesianism is often opposed to monetarism as an ideology, respectively, of non-intervention of the state.
Monetarism is a paradigm introduced by the American economist Milton Friedman. He believed that the economy was internally stable and did not need to be artificially stabilized either through fiscal policy or through an active monetary policy. All the government has to do is to see to it that the money supply grows smoothly at a constant rate.
Excessive growth of the money supply leads to inflation, which is detrimental to the economy. And if the money supply suddenly falls, as in the early 1930s, then this can lead to economic downturns such as the Great Depression. That is, Friedman believed that the Great Depression arose through the fault of the authorities, who stimulated the fall of the economy by allowing the money supply to fall. This view that all the government should do is to keep the money supply growing smoothly was originally presented as monetarism.
But in that form, monetarism no longer exists. From the point of view of theory, monetarism has long merged with Keynesianism, because monetary policy is one of the ways to stimulate the economy during a recession, that is, stabilization around. And unexpected fluctuations in the money supply, caused either by the mistakes of the authorities, or by some kind of perturbation in the financial market, are aggregate demand shocks, which, among other things, are discussed by Keynesians.
Keynesianism and the financial crisis
Aggregate demand can fall for various reasons. For example, one of the main causes of the global financial crisis in 2008 was the bursting of the housing bubble in many countries: real estate became very cheap, and people who felt rich no longer felt rich, so they began to spend less on buying goods and services. At the same time, a large number of banks went bankrupt, so they stopped lending to both firms and the public. As a result, both firms and the public, having lost access to credit, stopped spending money either on the purchase of goods and services, or on investment expenditures.
The global economic crisis (in foreign sources, the term Great Recession is common, by analogy with the Great Depression)
// InvestmentZen, flickr.com
Responding to such crises by artificially stimulating demand is absolutely standard policy, and 2008 was no exception. The vast majority of countries involved in this task both monetary policy (the most striking manifestation was a series of quantitative easing in the US and Europe) and budgetary policy. And in Russia, similar measures were also used in 2008-2009. In response to the crisis, government spending was increased and bank lending was stimulated. There was a moment at the end of 2008 when the Bank of Russia raised the interest rate to protect the ruble, but a few months later it started lowering the rate, like the rest of the world's central banks.
Neo-Keynesianism
The traditional version of Keynesianism that existed until the 1980s was later replaced by neo-Keynesianism. Main ideas in new version remained the same: the dominance of the aggregate demand side in explaining recessions and explaining these recessions as deviations from market equilibrium primarily due to slow price adjustment. The differences are mostly methodological and therefore more understandable to academic economists.
New Keynesian theory is based on microeconomic justifications. Serious attention is paid to how specific individuals and firms behave in models, how their expectations are formed, and how decisions are made. Keynes neglected this not because he considered it unimportant, but because it was impossible to embrace everything at once. However, the neglect of these aspects led to the fact that some of the formulas turned out to be incorrect, which was the reason for the policy mistakes that were made in the 1970s in different countries. This resulted in very high inflation everywhere.
Some economists after those events felt that Keynesian theory, with the idea of non-equilibrium fluctuations and rigid prices, was wrong in itself, and so they founded another theory called the New Classical Theory. Other economists have decided that some of the mistakes that have been made are not a reason to tear down the whole theory, but rather, it needs to be fixed, rewritten with more attention to microeconomic justifications. This has been done, and, in general, the main conclusions of the new Keynesianism remain the same as they were 50-60 years ago.
New classical theory
The new classical theory starts from the idea that the economy is always close to equilibrium and economic fluctuations are equilibrium phenomena. In practice, however, few people believe that the Great Depression or the 2008 crisis were equilibrium phenomena and that unemployment during these episodes was voluntary. Therefore, I perceive the new classical theory as a methodological basis, more interesting for scientists than for practitioners. Not surprisingly, among the well-known practical economists working in central banks or ministries of finance, it is the Keynesians who dominate.
Ben Bernanke and Janet Yellen - Keynesian scholars, the last two heads of the US Federal Reserve
// wikipedia.org
At the same time, the new classical theory is the basis for modern Keynesian theory. That is, the Keynesians take a new classical theory and add some imperfections of the market to it, for example, the slow speed of price adjustment. Within the framework of these models, it turns out that if we believe that prices quickly come to equilibrium, then we live in a neoclassical world. If we believe that prices adjust for a long time, then we live in the Keynesian paradigm.
Classical and Keynesian theory in their modern form easily coexist at the same conferences, in the same journals, and often in the head of the same economist. And sometimes it makes sense to use one tool to answer one question, and sometimes another tool, depending on what question we are studying. That is, these are not isolated theories.
