Investment is either foreign or domestic. The same level of income gets determined whether we have the Y = C +I approach or the S=I approach. And thus, just as capital investment was driven by stock market speculation, interest rates are driven by bond market speculation. Even if the entrepreneurs wished he could not avoid this loss. Most of the analysis of the General Theory is conducted in terms of relatively stable wage units (though the analysis of the theory of prices and inflation is not done in terms of constant wage units because with the rise in price, wages alone cannot remain constant). The public can’t control the amount of hoarding, since that’s necessarily equal to the amount of cash. I must not be supposed to deny the possibility, or even the probability, of this outcome. 9: How does raising interest rates affect consumption? and measured them in wage units to be able to ignore the questions arising out of changes in relative prices of resources. Thus the interest rate depends on people’s desire to hoard cash — their liquidity preference (L) — and the quantity of money (M). It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. The first half of this book will be dedicated to prying it open. The remaining chapters of Keynes's book contain amplifications of various sorts and are described later in this article. Hayek economics was founded by famous economist Friedrich August von Hayek. It may turn out that the propensity to consume will be so easily strengthened by the effects of a falling rate of interest, that full employment can be reached with a rate of accumulation little greater than at present. There’s the value of the widgets you expect [AS: there’s that word again] it to produce, less the cost of its inputs and maintenance. Keynes does not deduct the whole of depreciation from the Gross National Product, he subtracts a little less than the whole amount of depreciation called ‘User Cost’. There are a large number of short-run and long-run influences which affect the marginal efficiency of capital. It would be absurd to assert of the United States in 1929 the existence of over-investment in the strict sense. Therefore, Keynes justified state intervention in economic affairs to fight instability. Obviously a lot more in absolute terms, but far less proportionately.) “In this event the monetary authority would have lost effective control over the rate of interest.” [AS: This, I presume, is the liquidity trap.] For the book is, indeed, truly brilliant, a definite work of genius. ], 7: Keynes spends the chapter defending his decision to define savings as equal to investment. So the government will print money to keep the interest rate at a level corresponding to full employment. And we return to the problem that many of our economic decisions depend on our “spontaneous optimism,” our “animal spirits,” our “urge to action rather than inaction,” not “the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” This means not only that slumps get exaggerated (since they depress animal spirits, worsening the slump) but that economic performance depends to a large degree on keeping businessmen happy. Prices in Keynes’s model use only after full employment. While each person thinks they’ll do better off by saving money instead of spending it, if a whole country decides to save their money, they’re all worse off, since nobody will have a job. What will we do when we’ve built all the factories the people of the future can be expected to use? In ease of disequilibrium, planned or intended or ex-ante saving is more than or less than planned investment. Before publishing your Articles on this site, please read the following pages: 1. Thus decreased consumption leads to decreased employment. He laid down the policy of starting public works financed from deficit financing through direct throw of additional currency or via credit creation. It was this theory of demand and supply of output as a whole which was neglected for more than 100 years and which Keynes analysed. In the analysis of trade cycle, theory of multiplier is an important tool Keynes’s policy of public works was based on his belief in the working of the multiplier vigorously in the depression phase. It conveys the impression that there are several factors on which employment depends. Assumptions of Keynes’s General Theory 5. He observed that public works need to be undertaken only as long as private investment is deficient. 180 crores. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. Thus gold-mines are of the greatest value and importance to civilisation. 1,000 in the beginning of the year remains worth Rs. 21: Traditional economics is divided between the theory of value (perfect competition, supply and demand, and all that good stuff) in the main spot and then over to the side has a separate theory of money (dealing interest rates and inflation), with no clear connection between the two. 1) You can’t just go ahead and make it — it can’t be “grown like a crop or manufactured like a motor-car.” 2) You can’t reclaim it from use for other purposes — it doesn’t have any. And then those factories hire people to work there, who spend their wages on other things. 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