Thursday 27 May 2010

Keynes - Digging and filling holes - Pointless or Perfect?

John Maynard Keynes was an economist who completely changed the face of the economy and indeed the capitalist system. But whether for better or worse is still debated in todays modern society. He completely rejected current economical theories like the free market.
His main theories are on money, what it is and what it does. He completely overturned any conventional views of money that it was a commodity and that it had a price based on supply and demand.
Therefore in conventional terms, the price of money would be interest rates. So if there was a high demand for money but a lack of it then the interest rate would rise, whereas if you flooded the market with money then the interest rate would fall drmatically. This was deemed by classical economist as the key to economic growth.
Keynes went against all the conventional views and believed that money was merely a SECONDARY factor in economy, and in fact it was the real economy, the REAL resources of the economy, precious metals or materials etc. He believed that in order to ensure economical growth you had to mirror the real economy, ensure that there was economical production going on this would create more jobs, for instance digging holes just to fill them again. His idea was to create jobs in order to put money in everyone's pocket so that they will go out and spend that money ensuring economical growth. However, there are negative points. In order to pay everyone the Government had to print MORE money, devaluing currency just so they could keep people employed in pointless jobs and undermining social stability.
So for Keynes, money is not an active factor in the economy, it doesn't make a difference to the rate of economical growth. The only thing you have to do with money is make sure there is enough of it going round in order to keep economical activity going. Completely opposite to classical economists who believe that money IS the key factor of economical growth. It is the only activity in the economy.

This can be mirrored in todays soceity. You can see with Labour, they took a more Keynesian view by creating government benifits and giving money to those who needed it. These people can then take these benefits and spend them how they like and investing money in infrastructure to create more jobs. But the Conservatives, believe that making cuts is the only way to save us from a recession. They believe cutting back on benefits will improve the value of the economy because there is a higher demand for money pushing up interest rates.


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