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Masters of Money: John Maynard Keynes

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Claudio Mrc

Presentation made during my MA at City University, for the module Political Economy of Global Finance. It focuses on a brief description of the Keynes' reasonings related to why we have economic crisis and how we can escape from them. Should governments borrow and spend their way out of trouble or slash spending and reduce the national debt? As requested by the professor, it has been based on the BBC video "Masters of Money" (in which BBC economics editor Stephanie Flanders examines how J. M. Keynes, F. V. Hayek and K. Marx, helped shape the 20th century and continue to exert a huge influence on our world today), and particularly, for the part I chose to present, on the J. M. Keynes' chapter of that video, in which it is argued that Keynes has never been more relevant or controversial than now (after that the global crisis struck in 2008). It has been further developed and made an academic work through an accurate research and study of the Keynes' literature.

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Masters of Money: John Maynard Keynes
John Maynard Keynes Participants expectations are in fact highly unstable because they depend on their confidence as well as the likelihood of future events that uncertainty prevents to evaluate mathematically (Keynes, 1921, A Treatise on Probability) You will never be able to make ends meet with measures that reduce national income[] it is the burden of unemployment and the fall in national income that are jumbling the budget. Look after unemployment and the budget will look after itself (Keynes, The collected writing of John Maynard Keynes, Vol. XXI) In an interconnected world when youre begging your neighbours you might as well be begging yourself (Stephanie Flanders on Keynes idea about beggar-thy-neighbour policies)
Uncertainty and Expectations Keynes saw that economies were fundamentally unpredictable because people were unpredictable. Economy is made up of people, human nature, not numbers. Decision making is affected by animal spirits (emotions which influence human behaviour and can be measured in terms of consumer confidence; trust is also included or produced by animal spirits) and not by the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities impossibility to predict the future In fact the times when economics look most predictable, are usually the times when things are about to go disastrously wrong. He explained how investment bubbles occur because of the herd mentality that takes over is self-propagating. At some point the bubbles always burst Great Moderation
The role of the State during crises Markets are unpredictable and the way to recovery could be blocked by pessimism or low animal spirit In normal times Keynes thought that monetary policy was the best way to help the economy: you cut interest rate to encourage people to borrow and spend more and companies to invest, but when animal spirits are really low that might not be enough, companies might not see the point of making new investments, people might not borrow no matter how cheap it is, thats what Keynes thought the government do need to make up the gap with more public spending Cut government spending in a situation such as recession or depression cause demands goes down, unemployment goes up and its a vicious circle. Confidence isnt restored when unemployment goes up and business goes down, rather it is eroded
When individuals stop spending, when businesses stop spending money, if the government also stops spending money at the same time, then what happens is that economy basically crashes Keynes realization that an economy could stay sunk indefinitely was a radical break with the conventional thinking He suggested the government should hire people to demolish south London and then rebuild it; he wasnt serious but he was making a serious point: if government borrows to create jobs, people would spend more, confidence would rise, the economy would recover. If you pick the right moment, he insisted the extra spending would pay for itself by producing higher tax revenues the aim was to boost confidence or animal spirit There are times when governments need to intervene to make capitalism work better, even when that means spending money it doesnt have. He tried to persuade the treasury to borrow at the bottom of the business cycle. In economic terms, what you need is more demand in the economy
Beggar-Thy-Neighbor Policies It is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries. The term was originally devised to characterize policies of trying to cure domestic depression and unemployment by shifting effective demand away from imports onto domestically produced goods, either through tariffs and quotas on imports, or by competitive devaluation Recognition that states need to cooperate for the economic development, need to work together to resolve macroeconomic problems global economy cooperation Keynes thought for the global economy to work it had to be a two-way street: the weak countries that run up a lot of debt with the rest of the world they have to become more competitive to pay their way, but the rich exporters, they have to do their best as well spending more in other countries goods and exporting less becoming a bit less competitive
Beggar-Thy-Neighbor in the Euro Zone Ministers in Berlin wanted to impose tough measures to the euro zone countries to get their economies into shape Austerity The stronger countries have been willing to help by offering massive loans but Keynes wouldnt have thought that was enough Two-way street economy: Germany should export less, spend more in other countries goods, become less competitive 2 problems: Germanys export-led-growth model, weak increase in Germans wages during the past years Keynes idea of the necessity of multinational cooperation through multinational institutions

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Masters of Money: John Maynard Keynes

  • 2. John Maynard Keynes Participants expectations are in fact highly unstable because they depend on their confidence as well as the likelihood of future events that uncertainty prevents to evaluate mathematically (Keynes, 1921, A Treatise on Probability) You will never be able to make ends meet with measures that reduce national income[] it is the burden of unemployment and the fall in national income that are jumbling the budget. Look after unemployment and the budget will look after itself (Keynes, The collected writing of John Maynard Keynes, Vol. XXI) In an interconnected world when youre begging your neighbours you might as well be begging yourself (Stephanie Flanders on Keynes idea about beggar-thy-neighbour policies)
  • 3. Uncertainty and Expectations Keynes saw that economies were fundamentally unpredictable because people were unpredictable. Economy is made up of people, human nature, not numbers. Decision making is affected by animal spirits (emotions which influence human behaviour and can be measured in terms of consumer confidence; trust is also included or produced by animal spirits) and not by the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities impossibility to predict the future In fact the times when economics look most predictable, are usually the times when things are about to go disastrously wrong. He explained how investment bubbles occur because of the herd mentality that takes over is self-propagating. At some point the bubbles always burst Great Moderation
  • 4. The role of the State during crises Markets are unpredictable and the way to recovery could be blocked by pessimism or low animal spirit In normal times Keynes thought that monetary policy was the best way to help the economy: you cut interest rate to encourage people to borrow and spend more and companies to invest, but when animal spirits are really low that might not be enough, companies might not see the point of making new investments, people might not borrow no matter how cheap it is, thats what Keynes thought the government do need to make up the gap with more public spending Cut government spending in a situation such as recession or depression cause demands goes down, unemployment goes up and its a vicious circle. Confidence isnt restored when unemployment goes up and business goes down, rather it is eroded
  • 5. When individuals stop spending, when businesses stop spending money, if the government also stops spending money at the same time, then what happens is that economy basically crashes Keynes realization that an economy could stay sunk indefinitely was a radical break with the conventional thinking He suggested the government should hire people to demolish south London and then rebuild it; he wasnt serious but he was making a serious point: if government borrows to create jobs, people would spend more, confidence would rise, the economy would recover. If you pick the right moment, he insisted the extra spending would pay for itself by producing higher tax revenues the aim was to boost confidence or animal spirit There are times when governments need to intervene to make capitalism work better, even when that means spending money it doesnt have. He tried to persuade the treasury to borrow at the bottom of the business cycle. In economic terms, what you need is more demand in the economy
  • 6. Beggar-Thy-Neighbor Policies It is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries. The term was originally devised to characterize policies of trying to cure domestic depression and unemployment by shifting effective demand away from imports onto domestically produced goods, either through tariffs and quotas on imports, or by competitive devaluation Recognition that states need to cooperate for the economic development, need to work together to resolve macroeconomic problems global economy cooperation Keynes thought for the global economy to work it had to be a two-way street: the weak countries that run up a lot of debt with the rest of the world they have to become more competitive to pay their way, but the rich exporters, they have to do their best as well spending more in other countries goods and exporting less becoming a bit less competitive
  • 7. Beggar-Thy-Neighbor in the Euro Zone Ministers in Berlin wanted to impose tough measures to the euro zone countries to get their economies into shape Austerity The stronger countries have been willing to help by offering massive loans but Keynes wouldnt have thought that was enough Two-way street economy: Germany should export less, spend more in other countries goods, become less competitive 2 problems: Germanys export-led-growth model, weak increase in Germans wages during the past years Keynes idea of the necessity of multinational cooperation through multinational institutions