Keynes: Useful Economics for the World Economy

Peter Temin
David Vines
Copyright Date: 2014
Published by: MIT Press
Pages: 136
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  • Book Info
    Book Description:

    As the global economic crisis continues to cause damage, some policy makers have called for a more Keynesian approach to current economic problems. In this book, the economists Peter Temin and David Vines provide an accessible introduction to Keynesian ideas that connects Keynes's insights to today's global economy and offers readers a way to understand current policy debates.John Maynard Keynes (1883--1946) created the branch of economics now known as macroeconomics. He played a major role in the reconstruction of Europe and the world economy after the Second World War. Keynesian economics came to be identified with efforts to mitigate the Great Depression and with postwar economic policies that helped power a golden age of economic growth. Temin and Vines argue that Keynes also provided a way to understand the interactions among nations, and therein lies his relevance for today's global crisis. Temin and Vines survey economic thinking before Keynes and explain how difficult it was for Keynes to escape from conventional wisdom. They set out the Keynesian analysis of a closed economy and expand the analysis to the international economy, using a few simple graphs to present Keynes's formal analyses in an accessible way. They discuss problems of today's world economy, showcasing the usefulness of a simple Keynesian approach to current economic policy choices. Keynesian ideas, they argue, can lay the basis for a return to economic growth.

    eISBN: 978-0-262-32194-5
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-viii)
  2. Table of Contents
    (pp. ix-x)
  3. Preface
    (pp. xi-xiv)
  4. 1 Economics before Keynes, I: Hume
    (pp. 1-8)

    Modern economics originated in eighteenth-century Britain. This should not be surprising; in the eighteenth century Britain increased its level of economic activity to a level that had been seen only in first-century Rome and seventeenth-century Holland. But although residents of these times and places may have been as well off, neither of those precursors was on its way to the Industrial Revolution. British economic thinking, distinguished as it is, is better known than other early efforts at least partly as a result of continued economic success in the English-speaking world. We introduce a few aspects of traditional economics here and...

  5. 2 Keynes at Versailles
    (pp. 9-18)

    Keynes was in charge of the international aspects of Britain’s economic policy by the end of the First World War, even though he was then only in his mid thirties. He was sent to Paris after the war as the chief Treasury representative of the British delegation at the negotiations that led to the Treaty of Versailles, but at the end of June 1919 he resigned in fury at what was happening in these negotiations. Returning to Britain, he slipped away to a country house that was the rural retreat of artistic friends from the Bloomsbury group and quickly wrote...

  6. 3 Keynes and the Macmillan Committee
    (pp. 19-30)

    Economic conditions in the 1920s were even more depressing than Keynes had predicted inThe Economic Consequences of the Peace. The first half of the decade was replete with hyperinflations and bank crises all across Europe. Germany resisted paying reparations—the “debt” it had inherited from the war and the Treaty of Versailles. France invaded Germany’s coal and steel areas to force the Germans to pay up. Germany responded by inflating its currency to reduce its debt, resulting in a famous hyperinflation. At the same time, Britain was deflating its currency in order to return to the gold standard at...

  7. 4 Economics before Keynes, II: Marshall
    (pp. 31-40)

    It is hard to reconstruct Keynes’ difficulties of 1930. We have sampled his writing and testimony since the First World War, and we continue by reviewing the state of economics at that time. Economists now divide their field into microeconomics (the study of individual markets) and macroeconomics (the study of economies as a whole), but this distinction did not exist before the Great Depression and Keynesian analysis. Instead, there was extensive microeconomics (brought to a kind of perfection under Alfred Marshall, Keynes’ predecessor at Cambridge), and only the most cursory views of macroeconomics. We survey this older view briefly to...

  8. 5 The General Theory
    (pp. 41-52)

    We now turn to Keynes’ approach to the two problems he faced at the end of 1930. He had failed to provide any alternative to the unsatisfactory workings of the gold standard. He consequently had failed to explain how a rise in Bank rate would increase unemployment and how expanding public works would reduce unemployment. He needed to rearrange his thinking to connect these apparently different questions.

    Keynes opened his presentation to the Macmillan Committee with a description of how to maintain external balance under the gold standard. To make the argument—and to deal with the urgent demands on...

  9. 6 IS-LM Curves
    (pp. 53-64)

    How can a government be sure that its increased spending would not be offset by a decrease in private spending? This was one of the questions Keynes could not answer during his presentation to the Macmillan Committee. Keynes had made important steps, but he still lacked a good answer to Hopkins.

    Keynes needed to expand his model of the Keynesian Cross to include the interest rate. The graphs in chapter 5 did not have any prices in them; they were based on the consumption function that related national consumption and production. This simple model produced insights like the Paradox of...

  10. 7 The Liquidity Trap
    (pp. 65-74)

    The Keynesian revolution changed our understanding of how the economy works. One way to understand the Keynesian revolution is to ask what happens if there is unemployment and wages are cut. According to Alfred Marshall, this makes firms demand more labor and reduce unemployment, an effect on unemployment that is magnified if some people decide to work less when the wage falls. According to Keynes, the reduction in wages reduces unemployment only if it leads to a reduction in the interest rate that stimulates more investment, or to a reduction in the amount of their income that people want to...

  11. 8 Bretton Woods and the Swan Diagram
    (pp. 75-88)

    At the beginning of the Second World War, the need for wartime external balance in Britain imposed two requirements that differed according to their time frame. In the short run, just as under the gold standard, there was a financing need. The level of imports required for survival (both military and non-military) had to be paid for somehow. The conversion of a large proportion of Britain’s export trades to the production of armaments made this impossible. The country became dangerously dependent on the United States for its short-run survival as a result of Britain’s commitment in the summer of 1940...

  12. 9 The Keynesian Age: Crises and Reactions
    (pp. 89-96)

    The decades that followed the Second World War were nothing like those that followed the First World War. The architecture of international economic relations constructed at Bretton Woods provided a format for economic cooperation that led to continuing prosperity. It was a Keynesian age, supported by policies proposed by Keynes throughout the previous quarter of a century.

    The International Monetary Fund and the World Bank were the stewards of this cooperation, and the IMF in particular moved into action swiftly to help with postwar adjustments. In an effort to avoid the crises of the interwar years, the Bretton Woods System...

  13. 10 An International Paradox of Thrift
    (pp. 97-106)

    Inflation was controlled at the end of the 1970s after President Carter appointed Paul Volcker as Chairman of the Federal Reserve System. Volcker dramatically reduced domestic demand with highly deflationary monetary policy. These dramatic events can be analyzed with the IS and LM curves of our figure 6.1, even though they were not billed as Keynesian. Volcker sharply contracted the money supply and shifted the LM curve to the left. That took the United States up the downward-sloping IS curve to higher interest rates and lower employment. It reduced demand, moved the aggregate demand curve to the left, and pushed...

  14. Glossary of Economic Terms
    (pp. 107-112)
  15. Sources and Further Readings
    (pp. 113-114)
  16. Index
    (pp. 115-117)