Paper on Keynesian Contributions to Public Finance.

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PAPER ON KEYNESIAN CONTRIBUTIONS TO PUBLIC FINANCE 1. Impact of Keynesian Revolution on Public Finance In 1936 British economist John Maynard Keynes published The General Theory of Employment, Interest, and Money. Distressed by the failure of national governments to cope with the Great Depression, Keynes rejected many assumptions of classical economics and argued that state intervention, and in particular regulation of interest rates, could control inflation and minimize unemployment. What however was the “Keynesian Revolution?” Perhaps we can find the answer by taking a brief glance at Keynes’s celebrated book The General Theory of Employment, Interest and Money and the “short argument” on page 63: Equation 1: Income = value of output…show more content…
Income = value of output (A+B) = consumption (A) + investment + National Dividend. 2. Saving (B) = income (A+ B) minus consumption (A) 3. Therefore: Saving (B) = investment + National Dividend. It would be necessary to ensure that the “value of output” (so far as it represented the total price of retail goods) was kept down by using a part of the “National Dividend” to reduce retail prices, by means of the second Douglas proposal, the “National Discount” or “Compensated Price.” The central policy change was the proposition that government action could change the level of unemployment, via deficit spending (fiscal stimulus) such as by public works or tax cuts, and changes in interest rates and money supply (monetary policy) – the prevailing orthodoxy prior to that point was the Treasury view that government action could not change the level of unemployment. A central aspect of the Keynesian revolution was a change in theory concerning the factors determining employment levels in the overall economy. The revolution was set against the orthodox classical economic framework, and its successor, neoclassical economics, which based on Say's Law argued that unless special conditions prevailed the free market would naturally establish full employment equilibrium with no need for government intervention. This view held that employers will be able to make a profit by employing all available workers as long as workers drop their wages below the value of the total
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