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John Maynard Keynes in Modern Macroeconomics Education (Part 2)

January 14th, 2011

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According to Keynes, too often has Adam Smith’s “invisible hand” been let off with a slap on the wrist despite its ineffectiveness in keeping economies above water and this forms the basis as to why Keynes sees the need for some form of government intervention. Keynes’s pessimism regarding markets was never taken seriously by textbooks, with most writers attributing it to the turbulent period he lived in.

One particularly big predicament for Keynes was the development of the private corporation. A part which the standard macroeconomics textbook fails to give coverage on, the private corporation is to Keynes the cause of faults in the financial market. The distribution of shares as a method enabling individuals to hold wealth in a liquid form generated instability in the accumulation of wealth. Caporaso and Levine (1992, p110) observe that this makes long run commitment to a particular productive enterprise no longer compulsory and places a premium on short term capital gains. As Keynes (1936, p156) put it, those who profit from this are those who best forecast “what the average opinion expects the average opinion to be” a short time ahead of the general public. This in turn encourages speculative activities and in the end results in price instability. Keynes (1936, p159) likens these investors to gamblers, stating that “when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”. Keynes advocates share market transaction taxes in order to solve this problem. Simply put, the ultra-short term nature of financial market exchanges would be heavily dampened by a tax that is capable of raising transaction costs. This shifts investor perspectives away from the short run side of the spectrum and reigns in the pace of transactions. This reform along with Keynes’s proposal for an International Clearing Union was never mentioned in textbooks, possibly for their radical nature.

Taking things a little further, it is perhaps fair to say that Keynes would not agree to the content of today’s macroeconomics textbook even if they are based on derivations of his concept. Firstly, the way in which textbooks today present content can best be portrayed as being of mainly mathematical and diagrammatical manner. Today’s textbooks are neoclassical, combining Keynesian theory and classical theory. Macroeconomics textbooks take an engineering approach at seeing the world, resulting in society being projected as a highly mechanized structure to ruling technocrats. This is much in line with the Benthamite movement where society’s utility is given a value and governmental decisions are made to maximize collective utility. On the other hand, we have Keynes who was not just an economist, but was additionally a social reformer and a philosopher. He had a more earthly view of the world and concedes that uncertainty remains an integral part in everyday life. He took note of the way people discount what they don’t know from making future decisions, and how this posed a flaw in the decision-making process. Then there is also the concept of “animal spirits” where Keynes believed people are often governed by their whims and fancies rather than cost-benefit calculation. This is perhaps consistent with his personal life in which he was known to enjoy artwork, have affairs with men, and finally marry a famous ballerina. This quirky side of Keynes contrasts sharply from the rigid economics of textbooks.

In the end, Keynes’s writings and beliefs were to guide people towards what he thought would be an ideal state of society. Before The General Theory, he wrote Economic Possibilities for our Grandchildren in 1930 which dealt with the potential of future living conditions and society.

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