Was John Maynard Keynes Right? Applicable Concept: Aggregate Demand and Aggregate Supply Analysis In The General Theory of Employment, Interest, and Money, Keynes wrote: The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back…. There are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. Keynes (1883–1946) is regarded as the father of modern macroeconomics. He was the son of an eminent English economist, John Neville Keynes, who was a lecturer in economics and logic at Cambridge University. Keynes was educated at Eton and Cambridge in mathematics and probability theory, but ultimately he selected the field of economics and accepted a lectureship in economics at Cambridge. Hulton-Deutsch Collection/Historical/Corbis Keynes was a many-faceted man who was an honored and supremely successful member of the British academic, financial, and political upper class. He amassed a $2 million personal fortune by speculating in stocks, international currencies, and commodities. (Use CPI index numbers to compute the equivalent amount in today’s dollars.) In addition to making a huge fortune for himself, Keynes served as a trustee of King’s College and increased its endowment over tenfold.Keynes was a prolific scholar who is best remembered for The General Theory, published in 1936. This work made a convincing attack on the classical theory that capitalism would self-correct from a severe recession. Keynes based his model on the belief that increasing aggregate demand will achieve full employment, while prices and wages remain inflexible. Moreover, his bold policy prescription was for the government to raise its spending and/or reduce taxes in order to increase the economy’s aggregate demand curve and put the unemployed back to work. Price Level, Real GDP, and Unemployment Rate, 1933–1941 Year CPI Real GDP (billions of 2009 dollars) Unemployment rate (percent) 1933 13.0 778 24.9 1939 13.9 1,163 17.2 1940 14.0 1,265 14.6 1941 14.7 1,489 9.9SOURCES: Bureau of Economic Analysis, National Income Accounts, http://www.bea.gov/iTable/index_nipa.cfm, Table 1.1.6, Bureau of Labor Statistics, Consumer Price Index, http://data.bls.gov/cgi-bin/surveymost?cu and Economic Report of the President, 2015, http://www.gpo.gov/fdsys/pkg/ERP-2012/content-detail.html, Table B-11. Analyze the Issue Was Keynes correct? Based on the above data, use the aggregate demand and aggregate supply model to explain Keynes’s theory that increases in aggregate demand propel an economy toward full employment.

Was John Maynard Keynes Right? Applicable Concept: Aggregate Demand and Aggregate Supply Analysis In The General Theory of Employment, Interest, and Money, Keynes wrote: The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back…. There are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. Keynes (1883–1946) is regarded as the father of modern macroeconomics. He was the son of an eminent English economist, John Neville Keynes, who was a lecturer in economics and logic at Cambridge University. Keynes was educated at Eton and Cambridge in mathematics and probability theory, but ultimately he selected the field of economics and accepted a lectureship in economics at Cambridge. Hulton-Deutsch Collection/Historical/Corbis Keynes was a many-faceted man who was an honored and supremely successful member of the British academic, financial, and political upper class. He amassed a $2 million personal fortune by speculating in stocks, international currencies, and commodities. (Use CPI index numbers to compute the equivalent amount in today’s dollars.) In addition to making a huge fortune for himself, Keynes served as a trustee of King’s College and increased its endowment over tenfold.Keynes was a prolific scholar who is best remembered for The General Theory, published in 1936. This work made a convincing attack on the classical theory that capitalism would self-correct from a severe recession. Keynes based his model on the belief that increasing aggregate demand will achieve full employment, while prices and wages remain inflexible. Moreover, his bold policy prescription was for the government to raise its spending and/or reduce taxes in order to increase the economy’s aggregate demand curve and put the unemployed back to work. Price Level, Real GDP, and Unemployment Rate, 1933–1941 Year CPI Real GDP (billions of 2009 dollars) Unemployment rate (percent) 1933 13.0 778 24.9 1939 13.9 1,163 17.2 1940 14.0 1,265 14.6 1941 14.7 1,489 9.9SOURCES: Bureau of Economic Analysis, National Income Accounts, http://www.bea.gov/iTable/index_nipa.cfm, Table 1.1.6, Bureau of Labor Statistics, Consumer Price Index, http://data.bls.gov/cgi-bin/surveymost?cu and Economic Report of the President, 2015, http://www.gpo.gov/fdsys/pkg/ERP-2012/content-detail.html, Table B-11. Analyze the Issue Was Keynes correct? Based on the above data, use the aggregate demand and aggregate supply model to explain Keynes’s theory that increases in aggregate demand propel an economy toward full employment.

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter36: Six Debates Over Macroeconomic Policy

Section: Chapter Questions

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Was John Maynard Keynes Right?

Applicable Concept: Aggregate Demand and Aggregate Supply Analysis

In The General Theory of Employment, Interest, and Money, Keynes wrote:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back…. There are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. Keynes (1883–1946) is regarded as the father of modern macroeconomics. He was the son of an eminent English economist, John Neville Keynes, who was a lecturer in economics and logic at Cambridge University. Keynes was educated at Eton and Cambridge in mathematics and probability theory, but ultimately he selected the field of economics and accepted a lectureship in economics at Cambridge.

Hulton-Deutsch Collection/Historical/Corbis

Keynes was a many-faceted man who was an honored and supremely successful member of the British academic, financial, and political upper class. He amassed a $2 million personal fortune by speculating in stocks, international currencies, and commodities. (Use CPI index numbers to compute the equivalent amount in today’s dollars.) In addition to making a huge fortune for himself, Keynes served as a trustee of King’s College and increased its endowment over tenfold.Keynes was a prolific scholar who is best remembered for The General Theory, published in 1936. This work made a convincing attack on the classical theory that capitalism would self-correct from a severe recession. Keynes based his model on the belief that increasing aggregate demand will achieve full employment, while prices and wages remain inflexible. Moreover, his bold policy prescription was for the government to raise its spending and/or reduce taxes in order to increase the economy’s aggregate demand curve and put the unemployed back to work.

Price Level, Real GDP, and Unemployment Rate, 1933–1941

Year	CPI	Real GDP (billions of 2009 dollars)	Unemployment rate (percent)
1933	13.0	778	24.9
1939	13.9	1,163	17.2
1940	14.0	1,265	14.6
1941	14.7	1,489	9.9

SOURCES: Bureau of Economic Analysis, National Income Accounts, http://www.bea.gov/iTable/index_nipa.cfm, Table 1.1.6, Bureau of Labor Statistics, Consumer Price Index, http://data.bls.gov/cgi-bin/surveymost?cu and Economic Report of the President, 2015, http://www.gpo.gov/fdsys/pkg/ERP-2012/content-detail.html, Table B-11.

Analyze the Issue

Was Keynes correct? Based on the above data, use the aggregate demand and aggregate supply model to explain Keynes’s theory that increases in aggregate demand propel an economy toward full employment.

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