Background
Keynesianism or Keynesian theory was born in the 1930s.
1. Scientific theories under the background of the Great Depression in the 1930s
From 1929 to 1933, the world broke out an unprecedented serious economic crisis. This great crisis has swept all countries in the world. After a four-year-long crisis, the whole world has fallen into a long-term special depression. Western countries call this great crisis and the ensuing special depression the "Great Depression of the 1930s."
2. Scientific theories adapted to state interventionism
Before the First World War, state interventionism began to appear. During the war, this kind of state intervention developed rapidly and had a military character of extraordinary periods. New economics opposes laissez-faireism and advocates state interventionism; it points out the important role of the "visible hand" government in ensuring the smooth operation of the economy, and does not simply emphasize the role of the "invisible hand" market mechanism.
3. The academic background of the emergence
Before the emergence and spread of Keynesian economics, the dominant economics was the tradition represented by Marshall, Pigou (ACPigou), etc. economics. Veblen first used the term "neo-classical" to describe Marshall economics in 1900. Later, economics generally accepted the fixed meanings of "neo-classical school" and "neo-classical economics" as Marshall, Pigou and others and their economics. Neoclassical economics dominates mainstream academic circles in terms of theory and policy. Keynes himself also grew up under the influence of neoclassical economics. Keynesian economics criticized the employment theory in neoclassical economics, and inherited the mercantilism of state intervention, Malthus’s theory of insufficient effective demand, Mendeville’s theory that high consumption promotes prosperity, and Hobson’s excessive savings leading to unemployment And the theory of economic depression.
General Theory of Employment
The Dichotomy of Economics
Traditional economics divides economic theory into two parts: economic principles and monetary principles. Keynes did not agree with this dichotomy. While criticizing, he proposed his own new dichotomy. He pointed out that economics is divided into two aspects: one is value theory and distribution theory, and the other is currency theory. I think it is a wrong way of dividing. I think the correct dichotomy should be. On the one hand, it is the theory of a single industry or firm and the theory of the distribution and remuneration of a given amount of resources among various uses. On the other hand, it is the theory of output and employment from the overall perspective. Keynes' dichotomy actually advocated dividing economics into two parts: microeconomics and macroeconomics. This scientific dichotomy had a profound impact on later economics.
The principle of effective demand
The core of Keynesian economics is employment theory, and the logical starting point of employment theory is effective demand. Before Keynes, economists at Cambridge, such as Pigou, divided unemployment into frictional unemployment and voluntary unemployment, and believed that they included all unemployment. Keynes accepted the two categories of frictional unemployment and voluntary unemployment in traditional economics. The difference is that he proposed a third category of unemployment: involuntary unemployment. Keynes's definition of effective demand is: the value of the total demand at the intersection of the total demand function and the total supply function is called the effective demand.
Summary of the General Theory of Employment
Dillard, an interpreter of Keynesian economics, summarized the formal work of the general theory of employment and drew diagrams.
Propensity to consume
Keynes’ propensity to consume refers to the functional relationship between income and consumption. Keynes pointed out that propensity to consume is a fairly stable function. Under normal circumstances, total consumption mainly depends on total income, while changes in consumption tendency itself are secondary. Keynes divided the propensity to consume into average propensity to consume and marginal propensity to consume. The average propensity to consume is the ratio of total consumption to the total income, and the marginal propensity to consume is the ratio of the increase in consumption to the increase in income. Keynes believes that the factors that affect the propensity to consume can be divided into two categories: subjective factors and objective factors. Subjective factors include human psychological factors, social habits and social systems. The objective factors are: changes in currency wages, changes in income, net income, changes in windfall gains in capital value, changes in interest rates, changes in fiscal policy, and changes in expectations.
Multiplier
Keynes used the concept of marginal propensity to consume to establish the investment multiplier theory. The concept of multiplier was first proposed by Keynesian student Kahn in the question "The Relationship between Domestic Investment and Unemployment". According to Kahn’s employment multiplier, when net investment increases, the total increase in employment will be a multiple of the initial increase in employment. Keynes accepted Kahn's multiplier theory and proposed investment multipliers. The investment multiplier is a coefficient representing the proportional relationship between investment increment and income. The multiplier is based on the subjective psychological factor of propensity to consume. Keynes pointed out: The multiplier is a function of the public's psychological inclinations.
1. The marginal efficiency of capital
The marginal efficiency of capital is one of the three basic psychological factors that Keynes said that causes insufficient effective demand. The marginal efficiency of capital proposed by Keynes refers to the rate of profit that can be expected to increase by one unit of investment. Keynes regarded the future income of capital assets as a series of expected future annual income of this investment, and regarded the supply price of capital assets as the expected replacement cost of assets. Moreover, he believes that the marginal efficiency of capital is diminishing. Keynes spent a considerable amount of space discussing investment temptation in The General Theory of Money. The investment inducement theory is the most important part of his general employment theory. Keynes pointed out that only if the expected return on capital assets exceeds the supply price or replacement cost of capital assets, can continued investment be profitable and can induce investment temptation for capitalists.
2. Liquidity preference and money quantity flow preference
Liquidity preference and money quantity flow preference, also translated as flexible preference, are the three basic psychology that Keynes said that causes insufficient effective demand One of the factors. Liquidity preference refers to the desire and psychology of the public to hold income and wealth in currency. Regarding the causes of liquidity preferences, Keynes pointed out that it comes from three motivations: trading motivation, cautious motivation and speculation. Transaction motivation refers to the desire to hold cash in order to cope with daily transactions. Transaction motives are divided into income motives and business motives. Prudent motivation refers to the desire to hold cash in order to prevent accidents and seize unforeseen favorable buying opportunities. Speculation refers to the desire to hold cash in order to focus on favorable investment opportunities. Keynes believed that the amount of money needed for liquidity preferences with transaction motives and cautious motives roughly depends on the general economic activities of the economic system and the level of currency income, and it is not very sensitive to changes in interest rates. The money supply is determined by the central bank. The money supply is divided into two parts: one part meets the needs of trading motives and cautious motives, and the other part meets the needs of speculation.
Business cycle
Keynes pointed out that the business cycle is a very complex phenomenon. To fully explain the business cycle, every factor in his general employment theory is needed, especially , Fluctuations in the propensity to consume, fluctuations in the state of liquidity preferences, and fluctuations in the marginal efficiency of capital all play a role. But he believes that the main factor in the economic cycle is the fluctuation of the marginal efficiency of capital. Keynes started from the sudden emergence of a crisis in the late boom period. He pointed out that in the latter part of the boom, people made optimistic expectations about the future returns of capital goods. When the boom continues, people’s disillusionment is disillusioned because people suddenly doubt the reliability of future earnings, or because the inventory of newly produced durable goods continues to increase, leading to a decline or suspicion of early earnings. During the recession, the changing trends of both inventory and working capital have different manifestations at different stages. In short, after a period of time, the reduction of capital, surplus inventory and circulating capital has led to a significant recovery of their scarcity, and thus the marginal efficiency of capital has increased. During the recession, the amount of money needed for trading motives decreases, and interest rates fall as a result. Lower interest rates have led to lower costs. All this has prompted an increase in investment capital. In addition, due to the high marginal propensity to consume during the period of income decline and the large employment multiplier, output, employment and income have increased rapidly. After the economy has experienced depression and recovery, it has entered a stage of prosperity. At the end of the boom, when the marginal efficiency of capital collapses again, the crisis will suddenly happen again. This is the economic cycle.
Keynes' economic policy view
The core of Keynes's economic policy view is to oppose laissez-faire and advocate state intervention. Keynes's expansion of government functions mainly refers to the expansion of the government's functions in regulating consumption propensity and investment inducement. The purpose of adjusting the propensity to consume is to stimulate consumption. Regulating investment inducements is aimed at stimulating investment. Effective demand is composed of consumer demand and investment demand. Stimulating consumption and investment means stimulating effective demand. Keynes also believes that the smartest way for the government is to do a two-pronged approach. On the one hand, society should control the investment rate and increase investment; on the other hand, it should increase consumption tendency and increase consumption. However, Keynes emphasized that we should not focus too much on increasing consumption, but should focus on investment. Monetary policy and fiscal policy can be adopted to stimulate consumption and investment. Keynes pointed out that it is difficult to rely on monetary policy alone, and fiscal policy should mainly be used. Regarding fiscal policy, Keynes disagreed with the view that traditional economics maintains the balance of the national budget, but believed that deficit finance is beneficial. Regarding monetary policy, Keynes disagreed with the view that traditional economics maintains a stable domestic price level, but pointed out that moderate inflation is harmless.
Basic Ideas
Followers of Keynesian Economics, such as British economists Harold, Robinson, Hicks, American economists Hansen, Samuelson Et al. insisted on Keynes' basic ideas and made many important developments in theory and policy. These are also important parts of Keynesian economics. These developments mainly include: First, use the IS-LM model to explain Keynes's theory of national income determination. Second, use the acceleration principle to supplement the multiplier principle, and combine the two to analyze the business cycle. Third, use relative income hypothesis, life cycle hypothesis and permanent income hypothesis to supplement Cases's consumption function theory-absolute income hypothesis. Fourth, the Keynesian theory of national income determination is long-term and dynamic, and various growth models explaining economic growth are proposed. Fifth, the development of investment theory analyzes various factors that affect investment. Sixth, the development of monetary theory. Seventh, the establishment of macroeconomic econometric models. Eighth, the theory of total supply is used to supplement the analysis of total demand, and the "total demand-total supply model" is established. Ninth, expand Keynes' closed economic analysis to open economic analysis. Tenth, the concretization and development of economic policies, and so on.
Money wages
Traditional economics represented by Marshall and Pigou pointed out that money wages are flexible. When there is unemployment, money wages will automatically fall, and unemployment will decrease accordingly. , Until full employment is restored. Keynes disagreed with the above view of traditional economics. When assuming that money wages and prices remain unchanged, Keynes pointed out that the amount of employment depends on effective demand, not money wages. Regarding the question of whether a reduction in monetary wages will increase employment, Keynes discussed two situations. The first situation is whether the reduction in monetary wages directly tends to increase employment when the propensity to consume, the marginal efficiency of capital, and efficiency remain unchanged. In this regard, Keynes's answer is no. The second situation is whether there is a direct trend of increasing employment when the propensity to consume, the marginal efficiency of capitalists, or interest rates are affected by the reduction of monetary wages. In this regard, Keynes's answer is yes. In addition, Keynes also disagrees with traditional economics' policy propositions about increasing employment by lowering monetary wages.
Price Theory
The price theory of traditional economics points out that the increase in the quantity of money is the determinant of the price level, and the increase in the quantity of money will directly affect the price level. The Keynesian price theory believes that the increase in the money supply has no direct impact on the price level, but directly affects the interest rate level. Keynes pointed out that there are several different situations between the increase in the quantity of money and the price level: (a) When the quantity of money increases, the price of unemployment will not be affected in any way. (b) When the amount of money increases, the elasticity of supply of some goods and services becomes smaller, while the elasticity of supply of other goods and services is still very large. At this time, increasing output will encounter a series of "bottleneck" phenomena. (c) When the final critical point of full employment has been reached, increasing the money supply will directly affect money wages and prices. In the long-term impact of the change in the quantity of money on the price level, Keynes believes that this is not a purely theoretical question, but a question of historical conclusions.
School representatives
Neoclassical Synthesis
Neoclassical Synthesis (Neoclassical Synthesis), also known as Post-Keynesian Mainstream, is born in An important school of modern Keynesianism in the United States. The neoclassical synthesis school tried to construct a comprehensive scientific new economics hall based on Keynes's total economy category, using neoclassical theories and methods of mass analysis.
(1) Formation of Neoclassical Syntheticism It is formed by the integration of neoclassical economics.
1. The origin of the neoclassical synthesis school
After Keynes's "General Theory" came out, it set off a revolution in economics. In order to make Keynesianism more acceptable to the economics community, many Keynesians began to publish research and interpretation works on the "General Theory", revise it and expand the theory. The extensive research on "General Theory" has become increasingly urgent due to the changes in historical conditions after the Second Development War. The neo-classical comprehensive school is exactly the product of the new historical conditions after the economic development and changes after the war. Although neoclassical synthesis was formed after World War II, the synthesis of Keynesianism and neoclassical doctrine began before the war.
2. Representatives and major works of the Neoclassical Synthesis School
(1) Alvin Hansen
Pioneer of the Neoclassical Synthesis School, United States The famous Keynesian, known as the American Keynesian architect. In theory, Hansen’s original study of business cycles and crisis theories was a believer in neoclassical economic theory, and he had objections to Keynesian theory. Since 1937, he became a faculty member at Harvard University and turned to believe in Keynesian theory and actively spread Keynesianism in the United States. His propaganda Keynes paid attention to his writings, which made Keynesian theory "popularized" and "Americanized". Representative works include "Full Recovery or Stagnation", "Fiscal Policy and Economic Cycle", "Economic Policy and Sufficient Employment