John Maynard Keynes was born in Cambridge in 1883 and died in Sussex in 1946. He was an English economist, graduated in mathematics, studied philosophy and economics. He worked in the public administration, was a lecturer in economics, editor of the “Economic Journal”, worked at the German treasury during the war.
Works and thought
He wrote “The Economic Consequences of Peace” in 1919.
After the crisis of 1929 he decided to formulate new economic theories: according to him, the support of employment and income will be decisive for economic development. His main work was “The General Theory of Employment, Interest and Money”, written in 1936. In his short essay “How to finance a war” he explained how the conversion of public loans into a lower rate, the he exemption from minimum rights and subsidies to larger families could stimulate consumption and prevent the increase in demand from leading to higher prices. According to Keynes, it is precisely the state that must encourage citizens to consume, through taxation and the rate of interest.
Keynesian theory disproves two points of classical theory:
- Achievement of equilibrium (it is not supply as a function of demand, as Say said, but demand as a function of supply) and full employment (there can also be an equilibrium in under employment);
- existence of invisible mechanisms that bring the system back to full employment.
According to Keynes, saving depends on income and the interest rate, investment on the profit expectations of the capital employed, which in any case must be higher than the value of the interest that would be received by depositing the capital in the bank (marginal efficiency of capital) . This can lead to less demand than supply and this would cause economic crisis and depression.
Keynesian theory proposes two remedies:
- Do not reduce wages, since it is these that indirectly support global demand (through the demand for goods and services);
- fuel global demand through state interventions (public investments, fiscal policies and budget policies).
Roosevelt in the New Deal applied the Keynesian theory.
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