John Keynes' General Theory of Economics has four basic ideas, the first is that economies will suffer from a lack of demand for products being made, this leads to a rise in unemployment as companies can't afford to pay their staff as people do not want to buy the products being made, therefore the company isn't making money. The second is that an economy's attempts to correct shortfalls will work slowly. The third idea is that government policies to increase demand will lead to a quick reduction in employment, but might not be sustained. The fourth is that increasing the money supply may force the government to spend more as the private sector might not always want to spend more when supply is increased.
The crucial innovation in The General Theory is the demolition of Say’s Law (basically Laissez-Faire or 'do nothing' economics, this was advocated by President Hoover is the 1950s. It also described how production of goods creates the demand for them, not just the supply).
Some have denied what Keynes realised, he said that that Say's Law is at best a useless tautology, when individuals have the option of accumulating money rather than purchasing real goods and services. The General Theory mostly offers a static model and paints a picture of an economy that is stuck in depression and not telling us how it got into the state it’s in.
Keynes made it clear that his scepticism about the effectiveness of monetary policy (the idea that the money supply should be controlled by the government) wasn't a statement of a general principle. In the past he believed that things had been otherwise. He also believed that monetary policy had worked in the past – but not now.
Keynes had mistaken an episode for a trend. He wrote his book in the 1930s, a time of great depression and economic turmoil in the UK and USA. He explained the trap that the Bank of England and Federal Reserve had got themselves into - they were unable to increase employment, even when they increased the money supply by huge amounts. He knew that things had not always been this bad. He wrongly believed that the monetary environment of the 1930s would be the norm from then on.
The turmoil of the 1930s has not made a reappearance. In the United States, very low interest rates ended in the 1950s and have never returned. It has been similar in the UK, although there is large-scale unemployment in continental Europe, that unemployment seems to have more to do with supply-side issues than with sheer lack of demand, for example factories being unable to produce goods.
Keynes didn’t foresee a future of persistent inflation. This meant that he was pessimistic about the future prospects for monetary policy, it also meant that he never addressed the policy problems posed by inflation. It is arguable that his failure to address problems nobody imagined would occur in the 1930s shouldn't be considered a flaw in Keynes’s analysis, as nothing of that sort had really happened before.
Although Keynes' idea that spending more will help the economy works in the short term, it is not a realistic long term solution. If everyone begins spending lots of money on food for example, then the food producers will be able to keep up with the huge demand for their goods for a short while, but if people keep spending for an extended period of time, it is bound to result in food producers being unable to supply the food that people want to splash out on.
Doing the opposite and spending less will result in less money in the economy. Food producers may not be able to afford to keep supplying the food to people, not necessarily because of the huge demand for it, but because the producers themselves are unable to make the food and supply it to people.
A compromise between the two must be found for an economy to survive, in this I mean being able to supply goods and services to people at a price that they want to pay, but also making sure that the companies that produce the goods are making enough money to stay afloat so they can continue producing.
As an intellectual work, it is argued by Krugman that Keynes' work is up there with only a handful of other works in economics. He said that he holds works in the highest regard if they change people's perceptions of the world. Adam Smith did that in The Wealth of Nations, people began to view the economy as not just a collection of people getting money and spending it, the system he devised was a self-regulating system in which each individual “is led by an invisible hand to promote an end which was no part of his intention.” The General Theory is in the same league, says Krugman, the idea that mass unemployment is the result of inadequate demand, became completely clear.
Krugman adds that The General Theory is unique because it combined intellectual achievement with immediate practical relevance to the global economic crisis of the 1930s. Until The General Theory, mass unemployment was regarded as a problem with complex causes and no easy solution other than the replacement of markets with government control. Keynes showed that mass unemployment had a simple cause, inadequate demand.
Marxist economics
Marx saw the economy as a machine that made products and that the factories and workers who made the products were the lifeblood of society. He believed that a new economic system was needed -socialism. Once private property is abolished, communism would take hold and no divisions would exist in society, these divisions were caused by the capitalist system according to Marx.
Karl Marx's economic theory surrounds an idea that was the foundation of Adam Smith and David Ricardo's works, the labour theory of value. This says that the value of a commodity is the labour time/effort to make the product In this model, capitalists do not pay their workers the full value of the commodities that they produce, but they compensate the worker for the necessary labour only (the worker's wage, which only cover the necessary means of living).
Marx supposed that the labour is only a fraction of a full working day - the rest is the surplus-labour and would be pocketed by the capitalist. Marx theorised that the gap between the value a worker produces and his wage is a form of unpaid labour, known as surplus value. Marx also argues that markets tend to obscure the social relationships and processes of production.
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