Introduction by Paul Krugman to The General Theory of Employment, Interest, and Money, by John Maynard Keynes – Seminar Paper

Krugman outlines the basic theories that john Maynard Keynes outlines in his book The General Theory. The majority of Krugman’s work is a study of each chapter of Keynes’ writing. Krugman praises Keynes’ writing style. During this overview Krugman also outlines which chapters of The General Theory should be read with relevance to economics and which ones can be purely read for entertainment. I found that to completely understand, or at least try to, most of Krugman’s writing it was important to first understand Keynesian economic theory.

“If your doctrine says that free markets, left to their own devices, produce the best of all possible worlds, and that government intervention in the economy always makes things worse, Keynes is your enemy. And he is an especially dangerous enemy because his ideas have been vindicated so thoroughly by experience.”

The basis of Keynesian theory is that the economy will not balance itself like Adam Smith believed; Keynes denies the idea of the hidden hand of the market but instead the economy is driven by consumption. If the economy is in a depression and there is mass unemployment then consumption must be increased to improve the economy. Krugman describes Keynes view and wrote “The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully” I believe that this is Krugman showing Keynes’ first step away from the classical economy of Smith.

Rather than the market being self-regulating Keynes says that instead of waiting for the economy to come back to normal it instead needs to be stimulated by the state. For example in the great depression in 1930s America Keynes argued that the way to bring the country out of the depression would be to decrease interest rates and for the government to inject income. With an injection of money into the economy this would increase consumption which in turn increases demand and creates jobs; therefore it would boost the economy. In fact at the end of Krugman’s article he mentions that the government spending and work programme that pulled America out of the depression was WW II. Chris mentioned in the lecture that wars are good for an economy because it allows a government to increase public debt by billions of pounds, which may sounds like a negative, but this then in turn stimulates the economy. For example the current costs of the Afghanistan and Iraq was reached over £20 bn in 2010.

In Krugman’s writing he breaks down Keynes’ theory to four broad bullet points :

•  Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment

•  The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and  painfully

•  Government policies to increase demand, by contrast, can reduce unemployment quickly

•  Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach.

Krugman also mentions that Keynes’ opposition to the classical economic theories was started by his rejection of Say’s Law. Say’s law said that recession is not caused by a failure in demand of unemployment. Say believed that an economy was improved by increasing production rather than increasing demand. It is clear that Keynes’ views are a polar opposite of Say’s law.

Krugman does criticise Keynes, he recognises that the economic time during which The General Theory was written was a rare economic time, where he says “unable to create employment no matter how much they tried to increase the money supply” and says that Keynes identified this as the state of the economy for the future. But we have not seen the low interest rates which plagued America through the 50s.

Overall Krugman sees The General Theory as one the of the most influential pieces of economic writing because Keynes changed the way in which people looked at economics and compares it to The Wealth Of Nations by Adam Smith in terms of importance. Krugman says “suddenly the idea that mass unemployment is the result of inadequate demand, long a fringe heresy, became completely comprehensible, indeed obvious.” And although not all of his ideas stand up now his effects on economics can still be seen today, especially during the current global recession.