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Friday, December 12, 2008

The General Theory of Employment, Interest and Money

I spent a decent amount of time plowing through Keynes and I got surprisingly little out of it. His theory of course is fascinating, but his language just a tad too antiquated and complicated to make his book anything even close to a pleasure. Considering how relevant he seems to have become again it seemed like a good idea to have a look at him though.

Keynes basically wrote a criticism of classical econolic theory. He argued that Smith's invisible hand would not in fact provide market-clearing mechanisms for the employment market. In certain situations, an economy could get stuck at sub-equilibrium outpout and thus employment and welfare. Notably this were the case if future expectations lead to a slide in investment and consumtpion. In this case actions by individually rational actors lead to a sub-optimal aggregate outcome. In order to jump-start the economy the government needs to intervene either through monetary expansion or (if the former proves impossible) through fiscal deficit spending. It does not matter whether this budgetary deficit is sensibly spent ('digging for gold, building pyramides) pointless activities help create employment and in extension wealth.'

Fairly simple it seems (even though it isn't and I hope no one who reads this manages to call me out on any grave mistakes) and applicable only in the rare circumstances where output (employment) clearly lies above its potential (natural equilibrium).

1 comment:

G said...

"sub-optimal aggregate outcome" ?
come on, we all know that's ...