What Is the Connection Between Keynesian Economics and the Great Depression?

Keynes Economics is a set of economic ideas developed by John Maynard Keynes and his disciples. It mainly analyzes the causal relationship between total consumption and total income. Think of total income as total consumption plus investment. If every increase in savings is not offset by new investment, income will fall and unemployment will rise. Keynes for the first time in economic theory proposed the balance solvability of underemployment. He believes that the level of consumption depends on the individual's propensity to consume, which is a function of income. The total investment of an enterprise is mostly determined by the marginal efficiency of capital, or by the profit expected by the owner of the capital investment. The interest rate is not a factor that equates the supply of savings with the demand for investment, but rather an independent factor that determines the degree to which individuals wish to maintain cash savings (flow preferences). Therefore, savings and investment do not necessarily tend to be balanced. On the contrary, the level of savings is always higher than investment, resulting in unemployment and economic stagnation. In order to prevent a large number of unemployment during the depression phase of the business cycle, he believes that the central government should use deficit finance to stimulate spending, create investment, and supplement the lack of aggregate demand. In this way, with the help of the investment multiplier, income can be raised to the level of full employment. ^[1]

Keynes Economics

To

Keynesian neoclassical synthesis

Neoclassical Synthescs, also known as Post-Keynesian Mainstream, is an important school of modern Keynesianism that originated in the United States. The neoclassical synthesis school tried to construct a comprehensive scientific new economics palace based on Keynes's total economic category and the theory and method of neoclassical quantitative analysis.

(I) Formation of Neo-Classical Comprehensive School

The neoclassical synthesis was formed under the new economic and historical conditions after the Second World War, in the process of interpreting and expanding Keynesianism, and integrating neoclassical economics.

1.The origin of neoclassical synthesis

After the publication of Keynes's General Theory, a revolution was launched in economics. In order to make Keynesianism more acceptable to the economics community, many Keynesians began to publish research, explain the treatises of The General Theory, revise it and expand the theory. The expanded research on General Theory has become increasingly urgent due to changes in historical conditions after the Second World War. The neoclassical synthesis is the product of new historical conditions after the post-war economic development. Although neoclassical synthesis was formed after World War II, the synthesis of Keynesianism and neoclassical doctrine began before the war.

2. Representatives and major works of neoclassical synthesis

(1) Alvin Hanson

The pioneer of neoclassical synthesis, the famous American Keynesian, is known as the American Keynesian architectural designer. In theory, Hansen's original research on the business cycle and crisis theory was a believer in neo-classical economic theory, and he had objections to Keynes' theory. From 1937, he taught at Harvard University and turned to adherence to Keynesian theory, and actively spread Keynesianism in the United States. His propaganda Keynes paid attention to his works, which made Keynes' theory "popular" and "Americanized". Representative works include "Full Recovery or Stagnation", "Fiscal Policy and Economic Cycle", "Economic Policy and Full Employment", "Monetary Theory and Fiscal Policy", "Keynesian Doctrine Guide", "American Economy", "20th Century Economics of the 1960s.

(2) John Richard Hicks

Hicks received the Nobel Prize in Economics in 1972. He published many books during his life, and designed a wide range of theories. Hicks introduced general equilibrium and ordinal utility analysis to form its value theory, which greatly improved British and American orthodox economics. The IS-LM model proposed by him when commenting on Keynes's General Theory is widely used in modern economics. Hicks's representative works are: "Value and Capital", "Reconstruction of Consumer Surplus Theory", "Contribution to Business Cycle Theory", "Revision of Demand Theory", "Capital and Growth".

(3) Paul A. Samuelson

Well-known American economist, the main representative of neoclassical synthesis. In 1970, he won the Nobel Prize in Economics for developing static and dynamic economic theories and improving the quantitative analysis of economic science. Samuelson has his own corrections, additions, refinements, or developments in almost every aspect of Western economics. His main books are: The Basis of Economic Analysis, Economics, and Co-authors of Linear Programming and Economic Analysis with Doffman and Solo. The main papers are: "The Joint Effect of Multiplier Analysis and Acceleration Principles", "Equilibrium of International Trade and Production Price", "Fables and Reality of Capital Theory: Alternative Production Functions", "People in Distress" Wait.

(4) James Tobin

Well-known American economist, econometrician, one of the main representatives of neoclassical synthesis. He won the Nobel Prize in Economics in 1981. Tobin's research is more focused on money, and its roots are financial markets and related issues. The more prominent achievements are the theory of asset selection and the theory of monetary economic growth. Asset selection theory is the representative theory of his Nobel Prize. His main books are: "National Economic Policy", "Essays on Economics: Macroeconomics", "New Economics in a Decade", "Essays on Economics: Consumption and Econometrics", etc.

(5) Robert Merton Solo

He was awarded the Nobel Prize in Economics in 1987. He is an economist trained under the guidance of Samuelson and is one of the main representatives of the neoclassical synthesis. His research results are mainly manifested in capital theory and economic growth theory. His book on linear programming, co-authored by Dorfman and others, is well-known. His representative works include: "Linear Programming and Economic Analysis", "Capital Theory and Rate of Return", "The Nature and Causes of Failure in the United States", "Theory of Growth: Explanation", and a thesis "Theory of Economic Growth".

(6) Franco Modigliani

He won the Nobel Prize in Economics in 1985. His important contribution in theory is to put forward the life cycle hypothesis of savings and corporate financial theorem. His representative works are: "National Income and International Trade"; published in 1980 in a three-volume collection: "Theory of Macroeconomics" (Vol. 1), "The Life Cycle Hypothesis of Savings" (Vol. 2) and Proceedings of Fiscal Theory and Others (Vol. III).

(7) Arthur Okun

He received his Ph.D. in Economics from Columbia University in 1956 and was an economic adviser to President Kennedy and President Johnson. His main contribution in theory is to analyze the substitution relationship between equality and efficiency, and put forward the "Oxon positive theory" for estimating "possible output". His representative works are: "Prosperity Political Economy", "Equality and Efficiency".

(2) The income determinism of neoclassical synthesis

The neoclassical synthesis school integrated Keynes's macro income determinism and neoclassical equilibrium price theory into one, established a new theoretical system, and put forward new policy claims based on it. Income determinism is a theory about how the total output of society, thus the total employment, and the level of total income are determined, and how.

(Three) IS-LM model

IS-LM model is also called Hicks-Hanson model

In 1937, Hicks first proposed IS-LL analysis. Twenty years later, Hansen proposed this analysis tool and renamed the LL curve to the LM curve. Keynes's theory of interest rates has two flaws: one is the uncertainty of interest rates, and the other is that the equilibrium of the money market cannot guarantee that the commodity market will also reach equilibrium. Hicks and Hanson's IS-LM model repaired the shortcomings of Keynesian theory, combined Keynesian income determinism and monetary theory, and established a general equilibrium model.

1.IS-LM general equilibrium model

In commodities from time to time, investment I is a function of the interest rate r, and I decreases as r decreases. Savings S is a function of income Y, and S is an increasing function of Y. Hicks believes that if I = I (r) and S = S (Y) are combined, another relationship between income and interest rate is obtained, and an IS curve is formed. The following formula determines the equilibrium income: I (r) = S (Y) In the money market, the nominal money supply is M, and the money demand is L = L (r, Y). The money supply is determined by the government. It is an established quantity. The demand for money is a function of interest rate and income. When the following formula is established, the money market reaches equilibrium: M = L (r, Y). It indicates that when the money supply is established, the money market is in various equilibrium states and various combinations of income and interest rates. By combining the equations I (r) = S (Y) and M = L (r, Y), a solution of the unknown (r, Y) can be obtained. This solution is the intersection E of the IS curve and the LM curve. This gives a general equilibrium model of the common equilibrium of the commodity market and the money market. Intersection E represents the general equilibrium state. This combination of interest rate and income is the point where both the product market and the money market reach the point where supply and demand are equal. When the economy reaches a general equilibrium, income levels reach a stable equilibrium.

2. Equilibrium changes in commodity and money markets

The equilibrium combination of income and interest determined by the intersection of the IS-LM curves will change as either one of the two curves changes or the two curves change simultaneously. The movement of the IS curve results from changes in demand, especially changes in investment demand. With the LM curve unchanged, the IS curve shifted to the right indicates a higher income and higher interest rate combination at a higher equilibrium point with the LM curve. On the contrary, the opposite is true. The movement of the LM curve is mainly due to changes in the money supply. With the IS curve unchanged, the LM curve shifted to the right indicates a higher income and lower interest rate combination at the higher equilibrium point with the IS curve. On the contrary, the opposite. The effect of simultaneous movement of IS curve and LM curve on market equilibrium. When the LM curve is unchanged, the IS curve moves to the right, income increases, and interest rates increase. When the IS curve is unchanged, the LM curve moves to the right, income increases, and interest rates decrease. If the IS curve and the LM curve move to the right at the same time, as long as the two are properly matched, the income will increase and the interest rate will not change.

(D) the basic theoretical system of neoclassical synthesis

The entire theory of neoclassical synthesis consists of its basic theoretical system, the theory of economic growth, and the theory of economic cycles. The basic theoretical system is mainly composed of three parts: first, the aggregate supply curve of neoclassical economic theory plus wage rigidity assumptions; second, the demand curve everywhere from the IS-LM model; and third, the combination of the Phillips curve and the total supply and demand curve.

1. Aggregate demand curve

The equilibrium conditions of the commodity market are: I (r) = S (Y), and the equilibrium conditions of the money market are: M / P = L (r, Y). By combining the above two formulas, and using Y and r as unknowns, we can get The relationship between total demand Y and price P: Y = F (P) This formula is the formula of the total demand curve of the Keynesian model. The aggregate demand curve AD shows that under the condition that the commodity market and the money market are simultaneously balanced, the price level and the direction of change in total income (or total output) are opposite. The aggregate demand curve is derived from the IS-LM model, which is a combination of neo-classical theory and Keynesianism. Therefore, the aggregate demand curve reflects the combination of the two theories.

2. Aggregate supply curve

How to get the AS curve of the total supply curve. For the sake of simplicity, some neoclassical scholars have approximated the curve before reaching full employment with a horizontal line. Thus, the aggregate supply curve is divided into two parts: one is a horizontal line, which represents the relationship between price and output before it reaches full employment output; the other is a vertical line, which describes the relationship between price and output after full employment output is reached. Because the aggregate supply curve is shaped like an inverted "L", it is also called an inverted "L" shaped aggregate supply curve. It reflects the synthesis of Keynesian macroeconomic theory and neo-classical economic theory in a certain sense.

(5) Macroeconomic policies

The macroeconomic goals of the neoclassical comprehensive school are: full employment, price stability, economic growth, and balance of payments. Economic policy is the means and measures designed to achieve these goals at the same time. The government usually uses fiscal and monetary policies in conjunction with each other to achieve the above-mentioned macro-control objectives at the same time.

1. Fiscal policy

Fiscal policy is the government's stated goal, and it is an economic policy that affects the level of macroeconomic activity through changes in fiscal revenue and expenditure. The main means for the government to adjust its fiscal policy for total income and expenditure are: change the level of government purchases, change the level of government transfer payments, and change tax rates.

2. Monetary policy

The central bank has three main tools when implementing monetary policy: open market operations, adjusting the central bank's discount rate to commercial banks, and adjusting the legal reserve rate.

3. Coordination of monetary and fiscal policies

The neoclassical synthesis believes that Keynes's policy proposal was aimed at the Great Depression of the 1930s, when effective demand was insufficient and unemployment was severe. The government should implement an expansionary monetary and fiscal policy, relax money, reduce taxes, and expand government spending to stimulate investment and consumption and make up for the lack of effective demand. The neoclassical synthesis pointed out that the economic situation after World War II was very different from that of the Great Depression of the 1930s. Government intervention policies and measures should also be diversified, and the policy mix approach should be changed. In the 1950s, Hansen et al. Proposed a compensatory fiscal and monetary policy; in the early 1960s, Tobin and Heller advocated a growing fiscal and monetary policy; after the late 1960s, they entered a period of policy diversification.

Keynesian Post-Keynesian School of Economics

form

Post-Keynesians formed and developed in the debate with neoclassical synthesis. After the publication of Keynes's The General Theory, the followers of Keynes diverged in their understanding of some of the arguments in the General Theory and their actual problems. This shows that two opposing schools have formed: neoclassical synthesis and post-Keynesian. The former is centered on the Massachusetts Institute of Technology in Cambridge, USA, and the latter is centered on the University of Cambridge, England. Therefore, the dispute between the two factions is also called "the dispute between the two Cambridges".

2. The basic characteristics of the theory

Post-Keynesianism opposed neoclassical microeconomic theory, insisted on Keynesian macroeconomic theory, and tried to further split the two theories. The post-Keynesian school, while criticizing the neoclassical synthesis school, also actively articulated its arguments. The basic characteristics of this school in theory are:

(1) Extend Keynes' short-term, comparative static analysis to long-term, dynamic analysis

(2) Post-Keynesian opposition to neoclassical synthesis restores traditional economic equilibrium analysis

(3) Emphasis on income distribution theory

(4) Critical Theory of Marginal Productivity Distribution

(5) Emphasize that currency will cause economic instability

(6) Attaching importance to the method of normative analysis

3, the main representative

The main representatives of the post-Keynesian school are: Joan Robinson, Nicolas Cardo, Piro Slafa, Luigi Passinetti and others.

4. Representative value theory

The post-Keynesian school's representative value theory is Slavan's value theory. The contribution of the Slavic value theory is that he is trying to establish a value analysis method that originated from classical economists and Marx. In the works of classical economists such as Ricardo, surplus is an important concept. Sraffa pointed out that Ricardo adhered to the theory of labor value, but did not solve the problem of unified value standards, and Marx did not solve this problem. The neoclassical school uses the subjective concept of "marginal utility" to explain value. It is even more wrong. To solve this dilemma, Slafa proposed the "standard synthetic commodity production system", referred to as the "standard system", and designed a "Commodity" as the standard of value standards, scientifically solved Ricardo's problem. From the "standard system", it can be known that there is a trade-off relationship between the profit rate and wages: R is the relative value of the surplus product, which is determined by the technical conditions of its production. The higher the profit rate, the lower the wage; vice versa. The equations of the Slavic system show that output depends on the technical relationship in the production process, not on the interaction between market supply and demand. However, the price is not determined by the production technology, but by the growth and decline of wages and profits determined through negotiations between the capitalist and the union. Slafa also pointed out in his theory of commodity prices that the value of commodities is ultimately determined by labor. The equation that determines the price of each commodity is a labor function. Commodities are produced by a combination of labor and means of production. The Post-Keynesian school pointed out that the "reduction" principle of Slafa not only adhered to Ricardo's theory of labor value, but also scientifically solved the problem of Marx's "transformation" from value to production price.

5. Income distribution theory

1. Critique of Neoclassical Synthetic Distribution Theory

2. Post-Keynesian theory of distribution

The analysis of the correlation between profit rate and price by Slafa, and the "constant value scale" derived from the commodity standard system, provided a value theory basis for the post-Keynesian theory of distribution.

(1) Robinson's Distribution Theory Robinson Growth Model

(2) Kaldor's distribution theory Kaldor's formulas for the share of profit in national income and the rate of profit in economic growth models are always valid.

(3) Passinetti's Distribution Theory

(4) The theory of Slavic distribution

6. Economic policy claims

The post-Keynesian economic policy proposition is based on its income distribution theory. They stand for:

1. Improve the advanced taxation system to achieve equalization of income.

2. Alleviate the "poverty in the rich" phenomenon through government welfare measures.

3. Comprehensive social regulation of investment, overcoming blind economic growth, and bringing the economy and society into the "long-term, full-employment and long-term" track envisioned by Keynes.

New Keynesians

The origin and development of Keynesian economics

1. Original Keynesianism and New Keynesianism

Keynesianism has long been in mainstream economics in the field of macroeconomics. However, since the late 1960s and early 1970s, Keynesianism has been criticized by opponents of the liberal economy for failing to explain stagflation. Keynesianism was unable to cope with the challenges of reality and theory and fell from the throne of mainstream orthodox economics. The trend of economic liberalism is sweeping the western macroeconomic field, and Keynesianism is declining. The emergence of new Keynesianism has made Keynesianism out of its predicament.

2.Theoretical background of the formation of New Keynesianism

The condition for the emergence of New Keynesianism is that the theoretical flaws of the original Keynesianism and the weak timeliness of the neoclassical macroeconomics in explaining practical problems. The deficiencies of the original Keynes and the theoretical progress of neo-classical macroeconomics gave the New Keynesians a useful enlightenment. Neo-Keynesianism was formed after the original Keynesianism was attacked by neoclassical macroeconomics, and it learned from the experience and lessons of the struggle between Keynesianism and its opposing schools. Revival.

3. Assumptions and characteristics of New Keynesianism

The non-market clearing hypothesis is the most important hypothesis of New Keynesianism. This hypothesis comes from the original Keynesianism. However, there are significant differences between the two non-market clearing theories. The neo-Keynesian assumptions are:

(1) It is assumed that wages and prices are sticky, that is, wages and prices are not adjustable but adjustable. However, the adjustment is very slow and takes considerable time.

(2) The new Keynesian model adds two assumptions ignored by the original Keynesian model: one is the principle of maximizing economic parties, and the other is rational expectations. The characteristics of neo-Keynesian economics are: denial of the neoclassical dichotomy, that the economy is a non-Wallas equilibrium, and that actual incompleteness is important.

Keynesian theory of price stickiness

The New Keynesian theory of price stickiness can be divided into two categories: one is the nominal price stickiness theory; it is the actual price stickiness theory.

1.Nominal price stickiness theory

(1) Menu cost theory

There are many literatures on menu cost theory, among which the representative theories are: menu cost and business cycle theory; approximate rational business cycle model; actual rigidity and currency non-neutrality theory.

(2) staggered adjustment price theory

The staggered adjustment theory holds that in an imperfectly competitive market, in order to maximize profits, manufacturers usually use staggered rather than synchronized price adjustments.

2. Sticky Theory of Actual Price

The New Keynesian theory of actual price stickiness, in addition to the "real rigidity and currency non-neutrality theory" mentioned above, includes: firm credit theory, demand asymmetry theory, input-output table theory, oligopoly market, and price stickiness s.

(Three) labor market theory

The New Keynesian labor market theory overcomes the authority specified by Keynesianism and maintains the non-clear Keynesian labor market credo. The key assumption of the neo-Keynesian labor market theory is wage stickiness, which can be summarized into two categories: one is the theory of nominal wage stickiness; the other is the theory of actual wage stickiness.

1. Nominal wage stickiness theory

The representative theories of neo-Keynesian stickiness of nominal wages are: staggered adjustment wage theory and long-term labor contract theory.

2. Sticky Theory of Real Wages

There are many new Keynesian theories on the stickiness of real wages, and their typical theories are: implicit contract theory, efficiency wage theory, and inside-outsider theory. The implicit contract theory includes public information implicit contract theory and asymmetric information implicit contract theory. The main contents of the theory of efficiency wages include the following three aspects: efficiency wages and the labor market; the micro-foundation of efficiency wages; efficiency wages and unemployment. The theory of unemployment lag also includes three aspects: salary adjustment for pure insiders; salary adjustment under pressure from outsiders; persistence of unemployment and wage adjustment.

Keynesian theory of credit rationing

The New Keynesian credit rationing theory starts from the asymmetry of information in the credit market, and discusses that the selection effect of interest rates and loan collateral will lead to credit rationing in the credit market, the credit market will fail, and government intervention will have a positive effect.

1. There are two options for the selection effect of interest rates and credit ratios, one is positive selection and the other is reverse selection. The positive selection effect of interest rates means that an increase in interest rates can increase the bank's returns, which is the direct impact of interest rates on bank returns. Interest rates also provide incentives for manufacturers and can change their attitudes towards risk. Banks use the inverse selection effect of interest rates as a detection tact, which can identify the degree of scarcity of manufacturers and the risk of lending to different manufacturers. The optimal bank interest rate is usually not equal to the interest rate at the time of market clearing, so the credit market has a rationing. The emergence of rationing in the credit market is the result of the bank's selection effect based on interest rates in the free credit market. It is the result of rational actions in order to achieve profit maximization. It is not the product of state intervention.

2. The selection effect of loan collateral and credit rationing loan collateral have positive selection effect and negative selection effect. The former means that when there is excess demand in the credit market, banks increase the level of loan collateral to increase the reliability of repayment, reduce the risk of bad debts, and increase bank income. At the same time, it has curtailed borrower demand for loans. The latter means that the increasing level of loan collateral will increase the risk of the loan and reduce the reliability of repayment. Banks can use these two to determine the optimal level of collateral. The New Keynesian theory of credit rationing states that due to the simultaneous functioning of interest rate wit and rationing wit in the credit market, there will be multiple equilibriums in the credit market, and market mechanisms will fail, and market failure can be corrected through government intervention.

Keynes Economic Policy

1.New Keynesian price policy

The main purpose of the New Keynesian's price policy proposal is to curb price stickiness and make prices flexible, so as to repair malfunctioning market mechanisms and stabilize overall output. Neo-Keynesians made broadly similar policy recommendations in staggered price theory and menu cost theory. Both of these policy recommendations advocate coordinating the behavior of economic people and correcting market failures through policy intervention, which is basically correct, but lacks operability.

2.New Keynesian employment policy

The New Keynesian theory of labor and wages explains the stickiness of wages and unemployment on the basis of microeconomics, and proposes several policies on wage employment. These policy suggestions mainly focus on theories of insider-outsider theory and staggered labor contract theory. The New Keynesian employment policy is still to increase wage elasticity and reduce unemployment. The policy idea is reasonable, but it has a strong idealism, and it is difficult to implement it. The courage of the government to work contracts is lacking in feasibility in capitalist countries.

3.New Keynesian monetary and credit policies

(1) Monetary policy The New Keynesian believes that in order to achieve the goal of stable output, the government deserves the monetary policy that it deserves: the adjustment of the currency market and the actual disturbances that affect prices, and the reverse of nominal disturbances that cause price changes . However, the impact of these two policies on employees is different. The former means that employees 'wages are less stable when output is stable, while the latter means that employees' wages are more stable when output is stable.

(2) Credit policy The New Keynesian credit policy proposal is that the government should intervene in the credit market from the perspective of maximizing social welfare. Use loan subsidies or provide credit guarantees to reduce market interest rates so that projects with social benefits can obtain loans.

Book "Keynesian Review of Economics"

Author: Liudi Yuan

ISBN: 9787307023826

Keynes Economics Review

Number of pages: 494

Publisher: Wuhan University Press

Price: 24.50

Binding: paperback

Publication year: 1998-7-1

Introduction ...

The main purpose of this series is to use Keynesianism as a breakthrough point in advocating such a rigorous and pioneering research style in the study of contemporary western economics:

One is to strive to understand the doctrine itself, and the description must be accurate and unwilling. Don't be ignorant, superficial, and go astray.

Secondly, contemporary Western economics theory, including Keynesianism, belongs to the category of ideology. There is a question of right and wrong, and it must make in-depth and detailed comments based on Marxist scientific analysis methods of seeking truth from facts. We insist on being divided into two; yes, yes, no, no matter whether it is derogatory or derogatory, we strive to be appropriate and convince others. It must be pointed out here that this series of books is dedicated to Keynesianism, in terms of the formation and development of its entire theoretical system, including the background of the times and ideological sources, as well as the theoretical connotations of its main members. Its right and wrong. Some of the comments in this series are mainly, such as comments on Keynesian general theory of employment, such as the letter paper on PA Samuelson's new ancient song comprehensive theory, and comments on Joan Robinson's new Cambridge economic theory, such as A · H · Hanson's comments on economics, such as a comparative analysis of Keynesian doctrines, and so on. The other volumes focus on the doctrine of economics, but also make concise comments. In short, this series of books pays special attention to the critical analysis and critical analysis of Keynesianism, and strives to be in-depth and meticulous, seek truth from facts, and convince people. This is the basic purpose of our series of books, but also an important feature of it.

Third, regarding the reference, reference, and utilization of these economic theories in China's economic construction, we insist on extracting the best of them and making them foreign. On the one hand, we are opposed to total denial, and on the other hand, we are all exclusionary; on the other hand, more importantly, we particularly emphasize resolute opposition to blind worship, which is bound to have serious negative consequences for the national economy and the people's livelihood. We should be vigilant.