Topic 4: Keynesian Economics
Lekachman, Robert. 1966. The Age of Keynes, 58-111. New York, NY: Random House.
Chapters three and four in Lekachman’s book describe the factors leading up to Keynes’ General Theory, some of his earlier influential work, the major innovations the General Theory introduced, and the impact this work had on economic thought in general. Keynes’ early work mostly pertained to public policy and applied economics. Up until this point, economics had been mostly research for the sake of the advancement of knowledge, but offered little in the way of advice to policymakers. Keynes argued that economic theory isn’t just a method of observation, but rather a set of tools that can be used to make informed decisions by narrowing an otherwise large set of possible outcomes. One of his first major attacks on classical economic theory related to its treatment of investment, which assumed that investment is necessarily a perfect conversion of savings into capital. In fact, this is not true. Saving is not always transferred into investment, and when this is the case overall output is lowered since these funds are neither being used in consumption nor are they being recycled into capital. Prior to his general theory, Keynes also speculated about the existence of a multiplier effect, specifically in relation to government spending.
In his General Theory, Keynes focuses most importantly on the effect aggregate demand has on equilibrium conditions. Previously, Say’s Law implied a self-perpetuating equilibrium where any change in supply would lead to equivalent adjustments in demand. Variation in demand was assumed to have no effect on aggregate demand, but rather only on the make up of aggregate demand. Realistically, aggregate demand is influenced by consumption, investment and government policies. In particular, Keynes focused on the topic of consumption since an individual’s decision on how best to allocate his funds is influenced by a number of possible perspectives not influenced by the interest rate at all, but mostly relating to expectations on economic conditions. Previous labor theories naively assumed that individuals rationally assessed a cost benefit analysis in regard to wages, and that if they are unable to find a job at the wage rate they feel they deserve they will remain voluntarily unemployed. Realistically, in a time where jobs are scarce, workers may adjust their expectations and accept a job below their marginal product of labor, or may have no other choice than to remain involuntarily unemployed. Keynes also discusses the importance of expectations in the investment market, as these are not definite figures. He considered expectations for capital to be more or less arbitrary, and accentuates the importance of fleeting hopes on the part of investors.
Stylistically, this book maintains the complexity of Keynes’ theories without using convoluted, overwhelming language. The parts that are anecdotal are both relevant and brief (which is rarely the case when such items are included). Lekachman focuses on the environmental factors which inspired Keynes, placing his work in both a historical and social context. This approach makes it easier for a reader to internalize the concepts of Keynes’ work, and also lends to the credibility of the theory itself. Since the book is also written chronologically (as opposed to being separated by topics), it is also easier to see the progress of Keynes’ ideas and how his later ones were more perfect revisions of his own previous positions.
