Paper on Keynesian Contributions to Public Finance.

Topics: Keynesian economics, Macroeconomics, Economics Pages: 8 (2753 words) Published: May 2, 2011

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 = consumption + investment Equation 2: Saving = income - consumption
Equation 3 (therefore): Saving = investment.

By “income” Keynes means “national income” and by equating it to the “value of output” he shows that it is regarded as equivalent to the total price recoverable in respect of all goods and services produced by industry in a given period. “Output” must, I think, be taken to be capacity output.

Equation 2 can be written: Income = Consumption + Saving; and since income is equivalent to the total price of output, the other side may be taken to be an analysis of the costs which go to make up this price. It follows that “Consumption” comprises costs which represent payments to consumers, i.e., wages, salaries and dividends; these are usually classified as “A” payments by Social Creditors. “Saving” is defined by Keynes as “income not consumed” or, roughly speaking, as income paid out to "factors of production;" in other words, it comprises costs representing payments to other organizations for raw materials, machinery, plant, power, etc. These payments are, of course, classified as “B” payments in Social Credit theory.

Turning now to equation 1, it seems that “consumption” must mean the proportion of the total price of output which is money paid out of “money collected from consumers,” i.e., the total price of retail goods. Now “consumption” in equation 1 can be taken to be equal to “consumption” in equation 2: or, to put it another way, no more than a fraction of total costs takes the form of retail goods--the proportion of total costs, A + B, recovered through retail prices being limited to A. The remainder of the total price of output must therefore be paid out of money borrowed or otherwise raised by industry (“investment”) and represents the total price of capital goods sold for industrial re-equipment, export and, last but not least, rearmament. Equation 3 thus boils down to the Keynesian version of Douglas’s well-known statement that “A proportion of the product at least equivalent to B must be distributed by a form of purchasing power not comprised in the descriptions grouped under A.” Keynesians maintain that when saving and investment is in equilibrium, i.e., kept approximately equal, there will be full employment and a stable price level. The preservation of equilibrium thus depends upon there being a steady market for capital goods. It is true that a more or less precarious balance was maintained until the early ‘Sixties, but it could not be maintained indefinitely once the post-war reconstruction period was over. There was the further “complication” of automation which reduced employment.

It is obvious that, unless a radical change be made in the costing system, equation 2 must remain unaltered and, consequently, there can be no alteration of “consumption” in equation 1. There is no reason however why equation 2 should not be balanced with equation 1 by using a part, or the whole, of the sum which would otherwise be allocated to “investment,” for financing consumption. Any money issued in this way could not, of course, be recovered from the recipients whose sole source of income would be “consumption,” i.e., “A” payments; in other words, it would not...
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