Keynse General TheoryEssay Preview: Keynse General TheoryReport this essayThis article focuses on the interpretation that restricts the applicability of Keynes General theory for modern capitalism. It makes his theory specific for the modern capitalist economy rather than for all economic systems. According to this paper, Keynes also developed the fundamental elements of the general theory of unemployment and potential instability under capitalism irrespective of the financial institutions. This paper checks whether Keyness theory is more general than the neoclassical theory or is applicable to economic systems other than capitalism. The paper will focus on the interpretation by those who have emphasized the financial institutions characteristics.
Powell, G., Stokes, G.D., and Hovind, D.J. (2006). Inequality in the UK and on economic relations British Journal of Political Economy. London: Routledge.
This study is considered a critical review of key developments. Our focus will be on what is known about different forms of inequality as they relate to economic inequalities. Among those that we find are two broad-based measures of ‘net worth’ and ‘total income’ that reflect current and historical social inequality, one of which is net investment for a large portion of total social benefits. A second measure, ‘net working class’ is related to those who have a net capital investment, while a third measure, ‘global wealth’ refers to those who have capital and a share of the capital wealth of the global economy. These measures will have no impact on the real world economic relationship which is closely related to the national and political class.”
Walker, D.C., and Stokes, G.D. (2006). “Economic Mobility” and the Role of Government and Political Parties The Political Economy of Poverty and Capital in the 20th Century: Policy Implications” THE MODERN CAPITALISM INTERPRETATION:This modernist interpretation revolves around the financial institutions assumed by the Keynes. According to Hyman Minsky Keyness general theory is quite relevant to the financially developed capitalist economy. He says that for Classicals and Neoclassicals money is just a medium of exchange whereas for Keynes money also has its speculative demand and Keynes in the general theory assumes a monetary economy with sophisticated financial institutions. Crotty said that wherever there is capitalism, general theory is applicable. He was of the view that Keyness general theory takes in expected profitability as an endogenous factor that has an unknown effect on investment demand, creating instability. Putting less emphasis on financial institutions Paul Wells said that the Keyness objection to the neoclassicals theory was that the neoclassicals theory was more applicable in pre-Recardian days, but not in modern industrial period. Like Minsky, Vercelli also argued that instability depends upon the development of financial institutions. Oliver Favereau shared Keyness view that unemployment is caused due to a shift from enterprise to speculation. He argued that uncertainty would have fewer effects if there is less speculation. Whereas Chick argued that general theory depends on 1) investment not being determined by savings, 2) for this to happen banks should be developed enough to lend irrespective of its reserves. 3) This stage only reached in the late nineteenth or early twentieth century. Here Geoff says that this was the only period in which investment preceded savings and general theory applied.
SOME EVIDENCE IN THE MODERN CAPITALISM INTERPRETATION:There a two significant parts of Keynes theory, one is his discussion of the state of long term expectation, and the other is his discussion of the money demand or the liquidity preference. These two are linked with uncertainty; stock exchange creates artificial demand which creates predominance of speculation over enterprise, and contradiction between ownership and management.
Keyness “GENERAL THEORY” valid only for modern capitalism?According to Keynes there are three motives of money demand or liquidity preference; that are for transactions for precautionary measures and for speculation, he was of the view that there is a fourth motive that is for finance. If investment is made in long term debt the loss in subsequently turning it into cash would be more than hording it in cash form for the same time period, Due to the existence of uncertainty as to the future of rate of interest, need for cash arises provided that there exist an organized market for dealing in debts and this is what speculative motive is. It comes from uncertainty and expectations about the future it is most important in transmitting the effects of change in quantity of money. The contradiction between Keynes and the neoclassical was due to the fact that latter ignored the speculative motive of money demand. Here the argument arises that, there exists uncertainty but while presenting the model for speculative demand he ignored the future value of money, while determining the other two by income and this one just by interest rate.
In his theory of determination of investment, both the long term expectations and the liquidity preference are included, where the investment makes the most important part of aggregate demand that in turn determines the level of employment through expected future demand. Keynes ideas regarding finance conclude that savings that are strictly taken as a flow have no role in the determination of investment.
ELEMENTS OF A GENERAL THEORY OF EMPLOYMENT AND POTENTIAL INSTABILITY UNDER CAPITALISM:There are some evidences to characterize this theory as general as it applies to capitalism in general. It gives us a view of industrial district paradigm. Keyness views about modern capitalism require a sophisticated institutional