Was Keynes Right After All

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(Krugman, 2011)“The good news, such as it is, is that President Obama has finally gone back to fighting against premature austerity — and he seems to be winning the political battle. And one of these years we might actually end up taking Keynes’s advice, which is every bit as valid now as it was 75 years ago AFTER ALL.” The U.S., now the world's largest debtor, embraces the great British economist's 75-year-old argument (Skidelsky, 1996)Born in a total different world of ‘Capitalistic Individualism’ was John Maynard Keynes on the 05th of June 1883, to save the ‘Capitalistic Individualism’. Which if left unchecked would make a ‘authoritarian state system’. At age of 31, during the First World War Keynes played an important role in averting gold standard collapse in banking crisis. (Rowse, 1996) Undoubtedly he was a genius person and a devoted state servant. (Keynes, 1920) His best-selling book making him world famous for his prediction that levying Germany on the post war reparation cost would pave way for hyperinflation in Germany and bearing a negative consequence over Europe & foster a desire for revenge among Germans. Followed by this was the prediction of the slowdown in economic growth and reduction in real wages due to return to a pre-war exchange rate yielded him name and fame. In the era where people were deciding between communism and capitalism, it was Keynes who showed them a third way which over turned the world of economics. A genius person like others of his era, Keynes was full of ideas, often innovative and heterodox. Even to this day many people refuse to accept that analysis of Keynes was correct; on the other hand none have questioned that what topic he dealt with was at the heart of economic theory and policy. Yet where did he go wrong for people to debate “WAS HE RIGHT – AFTER ALL”. Do not forget one thing: “if Adam smith was the father of economics, J M Keynes was the rock star of economics”

(Stewart, 1972) Between the two world wars there existed a huge unemployment feature. Keynes had an explanation to this. ‘The ideas of economists and political philosophers,’ he wrote in the General Theory are more powerful than commonly understood. (Harrod, 1951) It is precisely due to those defunct economists’ salves of the 1920s and 30s who call them as practice men, things went badly wrong. This is because the world had changed drastically since their time and following those invalid assumptions was defunct. In order to understand Keynes theory better and to justify his views we need to begin by looking back at what the pre-Keynesian economists had to say on subject of employment. (Robinson, 1947) Economics is not an exact science: controlled experiments cannot be conducted on its subject matter. (Stewart, 1972) Say’s Law stated that supply created its own demand. Ricardo later argued that some shift in demand could result in sudden fall of demand. With the emergence of the 19th century trade and attempts made to

account for it, resulted in qualification of say’s law. Nevertheless say’s law was valid among small periodic appearance of unemployment in capital good industries in large numbers. (Heilbroner, 1969)The unemployment was result of unbalanced production caused by rapid expansion. In principle, the economy would absorb the entire commodity it produced. So an economist then thought that all one could do was to stand back wait and watch. What if the economy never regained was the question. The only solution was to reduce wages in order to get back to full employment. (Hazlitt 1995:21), nevertheless, this theory made many economists including Keynes feel uneasy and refused to advocate the policy measures. (Hazlitt, 1995) Keynes was against this theory and proves it wrong through his work ‘The General Theory’ argues Hazlitt. (Kregel, 1983) The missing piece of theory “demand for the output as a whole” which was explained by Keynes in his theory was his greatest contribution.

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