Overview of the contribution to macroeconomics of John Maynard Keynes

MACROECONOMICS OF JOHN MAYNARD KEYNES 7

Abstract

Keynes lived in the period between1883 and 1946 and fronted, great ideas in the field of Economicsthereby bringing about what has been called the Keynesian economics.It is from his great contribution in the field of macroeconomics thathas earned him the title of father to modern macroeconomics. He iscelebrated for having contributed much into macroeconomics, and thispaper highlights the main contributions that shaped the field ofeconomics into what is currently identified as modern macroeconomicsby Keynes. Concisely, Keynes touched on investments, demand/supply,employment, government involvement in an economy as well as the roleof the private sector within an economy.

The field of macroeconomics has been shaped by the thematiccontributions of great persons like Adam Smith, Thomas Malthus, KarlMarx, Milton Friedman, Friedrich Hayek and John Maynard Keynes amongothers. Understanding these conceptual frameworks, therefore, enablesone to understand and appreciate the discipline. However, this papertakes a qualitative look at the contribution of one father to themodern day macroeconomics discipline John Maynard Keynes.

Discussion

First, Keynes addressed the cause of inflation, which according tohim, it results whenever investments surpass the savings. On theother hand, whenever the spending is more than savings within aneconomy, then that is a recipe for recession. The implications ofthese were that whenever an economy experiences depression, the bestway to alleviate the condition is by encouraging more of spendingthan saving. Therefore, this would raise issues with critics who wereascribed to the traditional economics and whose opinions were that intimes of hard economics, and then thrifty spending should beencouraged. His argument was that profit is the engine through whichinvestments and trade are encouraged and not spending. Theimplication was however, two-sided, and his opinion on inflation wasthat savings should be encouraged and supported the more duringinflation times to control the associated inflationary pressure. Whentoo much money is in circulation, any economy faces the instabilityresulting from inflation, and this can only be curbed through thepolicy intervention of more savings than spending (Chattopadhyay,2011).

On another argument, Keynes is remembered through his argumentconcerning the Say’s law. According to the proponents of the law,it is the supply that creates or brings about demand (Rogers, 1999).However, Keynes ascribed to the opinion that the opposite was trueand therefore held that demand directly influences the supply throughregulating the level of output. Keynes argued that when the demandfor a particular commodity exceeds the current supply, then ittriggers the need for higher production. Since the demand law, demandis expressed by the need and ability to purchase a commodity orservice. Whenever the will and resource power are not present, theneven if the supply increased, nod demand would be resultant (Jahan,Mahmud &amp Papageorgiou, 2014).

In another dimension, Keynes addressed the issue of employment andreasoned contrary to past thoughts that too low wage rate results infull employment. His position was that full employment status in aneconomy could not be realized by lowering the wages of employees butrather by spending. He approached the subject from the economicconstituents’ angle of aggregate expenditures as well as the outputquantities. He reasoned that economies were constituted of aggregateoutput quantities as would result from expenditure and thereforeargued that when little spending is a characteristic of an economy,and then unemployment levels will prevalently remain high.

Keynes also addressed the role of government in alleviating therecessionary and inflationary pressures within an economy. First, henoted that the aggregate demand within any economy falls during andas a result of the recession. Consequently, individuals andbusinesses spend less and tend to save but the effect is possibleresultant to a vicious circle of a kind. First, when people spendless, demand levels drop and this has implications for supply wherethe levels also tend to reduce. In reduced supply, producers tend tolay off workers, thereby increasing the unemployment rates, which areideally consequential to any economy. In fact, as Keynes argues,every healthy economy strives to realize the stability in fullemployment and as such, the government has the main role to play inalleviating the situation by embracing government borrowing. Thesolution is when a government borrows, injects the money into aneconomy, and whenever the economy has recovered from the recession,then the government can pay back what was borrowed. His argument,therefore, centers on the role of government in stabilizing aneconomy from the pressures of recession through government spendingof borrowed money. Injection of more money by the government into theeconomy triggers expansion and recovery of various sectors, therebycorrecting the vicious circle as above explained.

He also argued that any successful economy is wholly dependent on thecontributions of both private sectors as well as the government. Itis from his opinion on the essence of government in an economy thatbrought about the divide from the Adam Smith laissez-faire school ofthought. According to the school, economies functions better throughlittle influence by governments and therefore advocated free marketsystems. The Keynesian school ascribes to the position that decisionsby private sector, especially as regards spending plays a criticalrole in stabilizing or otherwise destabilizing any economy (Colander,1992). For instance, overspending by the private sector in anyeconomy during the recession causes a market failure, which can onlybe addressed by active policies by the government. The governmentembraces stimulus fiscal policies through more spending and in theoutcome, an economy moves towards stability. Nevertheless, Keynesbelieved in the participation of both the government and the privatesector as against free markets. He also ascribed to the belief systemthat prices and wages in an economy are dependent and responsive tosupply/demand forces. It is therefore because of such forces thatsurpluses and or shortages of labor can be explained by the forces ofa market as pertains to demand and or supply.

However, it is worth noting that changes in aggregate demand ascaused by unanticipated or anticipated factors directly affectsemployment and output especially in the short run. The thoughtperceives prices are being rigid and as such, the main changes inoutput levels are dependent on other factors namely investment,government spending and consumption. For example, if the spending bygovernment increases, but all other components named remain constant,then the output has to change. It is from these observations that theKeynesian thoughts are said to influence the modern macroeconomicsdiscipline (Snowdon &amp Vane, 1995).

Conclusion

Keynes addressed many issues of economic importance and advocated fora change in how macroeconomics is perceived through introducingprinciples, which were later to be called the KeynesianMacroeconomics. It is from his contributions that he is fondlyrespected as the father of modern macroeconomics. He is rememberedfor having contributed much into macroeconomics as have beenhighlighted in this paper. In a summary, Keynes’ thoughts touchedon investments, demand/supply, employment, government involvement inan economy also the responsibility of the private sector within aneconomy.

References

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Colander, D. (1992). New Keynesian economics in perspective.Eastern Economic Journal, 18(4), 438. Retrieved fromhttp://search.proquest.com/docview/198143929?accountid=45049

Jahan, S., Mahmud, A., &amp Papageorgiou, C. (2014, September 1).What Is Keynesian Economics? – Back to Basics – Finance &ampDevelopment, September 2014. Retrieved April 3, 2015, fromhttp://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm

Rogers, C. (1999). Say`s law and the keynesian revolution howmacroeconomics lost its way. Economic Record, 75(228), 91-93.Retrieved fromhttp://search.proquest.com/docview/219664163?accountid=45049

Snowdon, B., &amp Vane, H. (1995). New-keynesian economics today:The empire strikes back. American Economist, 39(1), 48.Retrieved fromhttp://search.proquest.com/docview/200685555?accountid=45049