How should I critically analyze the Keynesian economy

Latin America Institute (LAI)

a) John M. Keynes (1883-1946)

To present the theory and the influence of Keynes in a short paragraph borders a little on trying to get a camel through the eye of a needle. While other economists from his time worked on a sub-area and the corresponding question on a topic for a lifetime, John Maynard Keynes revolutionized monetary theory, founded macroeconomics and for the Great Depression of 1929 he had not only an economic solution at hand, but also the appropriate one Policy recommendation to counter such a crisis. Mainly on the macroeconomic aspects of his "General Theory" should be briefly discussed here.

The most important innovation by Keynes compared to the neoclassics was the new role of the state. In Keynesian theory, the state is an actor in economic activity and intervenes in times of downturn by investing in the economy. Say had also postulated that every offer creates its demand. The world economic crisis showed an opposite development. It was Keynes who described for the first time that an economy can experience an "investment trap" because (almost) all income is consumed, so no part of the income is saved and there are no incentives for entrepreneurs to invest. Keynes also showed that supply and demand do not always have to be socially optimal and that “structural unemployment” - that is, a constantly larger supply with insufficient demand - can occur, especially on the labor market.

Keynes' considerations were of great importance for development economics, as he had defined the role of the state in such a way that, as an economic actor, it can and should contribute to changing the situation. Keynes is considered to be the founder of heterodox economics, the area of ​​economics to which economists still attribute themselves today, who do not assume the common doctrine of a functioning market (neoclassical / liberal school).

Further reading:

Keynes, John M. (1997): A Treatise on Currency Reform. 2nd edition, reprint of the 1st original edition from 1924. Translated by Ernst Kochertaler. Berlin: Duncker & Humblot.

Keynes, John M. (2006): General Theory of Employment, Interest, and Money. Translated by Fritz Waeger. Berlin: Duncker & Humblot.

Keynes, John M. (2007): The general theory of employment, interest and money. Basingstoke, Hampshire: Palgrave.

Lepenies, Philip and Manfred Nitsch (2000): John Maynard Keynes (1883-1946). Uncertain future expectations as the motor and brake on economic development. in: D + C, Development and Cooperation Vol. 41 (12). Pp. 354-356.

Minsky, Hyman P. (1990): John Maynard Keynes: Financing Processes, Investment, and Instability of Capitalism. Marburg: Metropolis.

Putnoki, Hans and Bodo Hilgers (2007): Great economists and their theories. A chronological overview. Chapter The Wine Tasting. John Maynard Keynes. Weinheim: Wiley-VCH Verlag. Pp. 79-86.

Zank, Wolfgang (1993): The state as a lever. in: Times No. 3. “Time of Economists. A critical assessment of economic thinking ”. Hamburg: The time. Pp. 65-67.

b) Michal Kalecki (1899-1970)

“What is good for the individual does not necessarily have to benefit society” (Bhaduri / Laski 1993: 68). Michal Kalecki's central argument can be summed up in this catchy and so plausible sentence. Like John M. Keynes, Michal Kalecki was also shaped by the global economic crisis and worked on the economic analysis of the problems as well as on his own solution. Neoclassical theory emphasized saving as a condition for investing. Michal Kalecki's simple and effective criticism consisted of examining what happens in an economy if everyone in a society behaves in an economically rational manner and follows this assumption. He showed that by saving, less is consumed, but more money is available for investment. However, since there is less demand, less is produced and there is overcapacity. These are dismantled and workers made redundant, who can then also consume less again. A cycle emerged from the sum of the rational behavior of individuals - to the detriment of all. Joan Robinson[1], John M. Keynes and other heterodox economists also worked on this "rationality trap". Demand is therefore the key variable in their models. The re-evaluation of demand in Alfred Marshall's equilibrium model is an important element of the Keynesian economists, in contrast to the supply orientation of the orthodox economy.

In the part of Michal Kalecki's theory about profits, the insights can also be found among entrepreneurs. The more the companies invest, the higher their later profits will be, since the demand for goods rises faster than the investments: "The capitalists earn what they spend and the workers spend what they earn" (Bhaduri / Laski 1993: 69). If a company maximizes its profits by lowering wages, this is only beneficial for the company in the short term, as others follow suit. Overall demand is falling and the (market) rational behavior of individuals has become a burden on society as a whole.

Further reading:

Bhaduri, Amit and Kazimierz Laski (1993): Prosperity through Demand. in: Times No. 3. “Time of Economists. A critical assessment of economic thinking ”. Hamburg: The time. Pp. 68-70.

Kalecki, Michal (1990-1997): Collected works of Michal Kalecki. Vol. 1-7. Jerzy Osiatyński (ed.). Oxford: Oxford University Press.

Kalecki, Michal (1987): Crisis and Prosperity in Capitalism: Selected Essays 1933-1971. Marburg: Metropolis

[1] Joan Robinson, 1903-1983, published the seminal essay “The Accumulation of Capital” in which she explores the question of the conditions for steady growth based on Marxist-Keynesian theory. Like Keynes, she belonged to the circle of heterodox economists who met regularly in the “Cambridge Circus” to debate economic issues.