Keynes’s ideas encountered difficulties and distrust in conservative circles, but also favorably received by those economists who, in Roosevelt’s circle, had departed from the sacred principles of the classical tradition and had initiated a pragmatic economic policy. Keynes in the paper “The end of laissez-faire” states that it is not true that individuals have a “natural freedom” it is true that selfish interest is generally enlightened.
Keynes did not propose the abolition of free enterprise, but a capitalism “wisely governed” by the state aimed at leading the market. This intervention must not replace private individuals in the activities they can carry out, but take the decisions that nobody wants to make. In 1930 Keynes published the “Treatise on Money”, revolutionizing economic concepts that were peacefully accepted by all. While according to the traditional theory, savings and investments coincide, according to Keynes this coincidence, if there is one, is completely random since, in advanced capitalism, decisions are made by different subjects based on different and independent motivations from each other. . For Keynes, saving does not depend on the interest rate as it is conditioned by the level of income. The error of classical theory is in recognizing that a decrease in consumption can lead to a reduction in overall demand and consequent unemployment, rather than to an increase in investments. Therefore, the classical theory does not recognize that there can be a “structural unemployment” such as that which actually occurred on a very large scale starting from 1929. Keynes’s observations strongly posed the need that the economy should not be left to free game of private interests, but regulated by a providential “invisible hand”. In a 1933 letter, Keynes urged President Roosevelt to place enormous emphasis on the increase in national purchasing power resulting from government spending financed by loans.
He was convinced that the current depression was not a conjunctural event, one of the usual crises that the system would sooner or later spontaneously absorb with the reduction of wages to revive the economy.
The idea that reducing wages would increase employment by lowering production costs, as well as the idea that unemployment stemmed from the low propensity to save, were “crude concepts”.
By subverting the classical system, Keynes argued instead that the greatest evil was precisely the excessive propensity to save and the compression of wages, which subtracted capital from productive investments and therefore from recovery, from saving demand and the reabsorption of unemployment. It was necessary to increase global demand through the use of financial resources by the government by taking out loans, even if this meant the fall of another “myth” of the classical economy, the parity of the state budget.
This set in motion the so-called investment multiplier just as it is described in the following diagram.
When the state intervenes through public spending, the recipients of new or greater incomes will spend such income on consumer goods which depends on their marginal propensity to consume.
The higher the propensity to consume, the greater the percentage of income that “falls” into production and the multiplicative process of income resulting from an increase in investments.