0 Preliminaries

Our goal is to lay out the background for understanding Keynes. This requires studying TWO things -- the historical background and the background of IDEAS which were in circulation.

Both are very well covered in the notes by Brian Ferguson attached below - this is the source for our lectures.

Lectures on John Maynard Keynes’ General Theory of Employment, Interest and Money (1): Chapter One, Background and Historical Setting | Show Abstract | Download This Paper | Open PDF in Browser |

University of Guelph Department of Economics and Finance Discussion Paper No. 2013-06

Number of Pages in PDF File: 5

The historical and Ideological Background: This is a summary of the 50+ page Brian Ferguson paper cited above.

POINT 1: Keynes launched a REVOLUTION in economic thought. He created the field of macroeconomics. PRIOR to Keynes, people thought that if we understand individual markets, then we understand the economy as a whole -- the small parts automatically fit together to make up the whole economy. In other words, understanding microeconomic theory, behavior of individuals and firms, is enough to understand the behavior of the whole. KEYNES was the first o point out that this was not true. The AGGREGATES could behave in ways different from the micro level picture. It was not enough to understand the micro picture, the big picture could be different.

ILLUSTRATIONS: Suppose due to increased uncertainty about the future, people want to hold more cash, and increase their savings. At the micro level, we can say that agents will reduce consumption and hold more cash. However, given a fixed aggregate money supply, ALL of the agents CANNOT succeed in holding more money. If someone holds more, others will hold less. So the effort by each agent to save more WILL NOT lead to greater aggregate savings, it cannot. Instead, something else must adjust to create equilibrium. The point is that behavior at the micro level cannot be summed up to find out the macro level behavior. In modern terminology, this is called EMERGENCE -- properties of the group which emerge out of individual behavior, but are complex, based on interactions within the group, and cannot be reduced to the individual level.

HISTORY of Keynesian Revolution: Keynesian theory as MIS-interpreted by Hicks and Samuelson, dominated the profession after World War II. 50's and 60's, and early 70's. The phenomon of stagflation caused by Arab Oil Embargo, was contrary to Keynesian theory. This allowed the Chicago School to successfully launch a Monetarist attack on Keynesian theories. Since then a large number of new schools of macroeconomic thought have emerged. Many schools like New Keynesian, Post Keynesian and others have been more or less in conflict with Keynes. One major PROBLEM is that VERY FEW people have actually read what Keynes wrote. People rely on (MIS)-interpretations of Keynes to understand what Keynes said, instead of directly reading his book. The IS-LM curves are the standard interpretation of Keynes, but are very far from what Keynes actually said. As a result, the teachings and thought of Keynes STILL contain revolutionary ideas which could be VERY useful for development of economics today.

Now I am planning to cover what Keynes actually said, and ALSO provide the historical background and context to enable us to understand Keynesian theory in the context of post-war economic experiences of the British economy. As stated earlier, this background is ESSENTIAL to understanding Keynes, and attempts to understand Keynes without this background are futile.

Brian Ferguson: Reading Keynes — This 50 page chapter will be covered as PRELIMINARY to the study of Keynes: The General Theory

Keynesian Revolution and Monetarist Counter-Revolution — Provides a brief sketch of historical events; the rise and fall of Keynesian economics.

Links to Articles on Keynesian Economics — Many articles

Mini-Course on Macroeconomics — Contains a series of 6 lectures covering many concepts of Keynesian Economics and their relevance and implications for today.

Putting Science in its proper Place — When Europeans lost faith in Christianity, they made SCIENCE their new religion. Link to articles on how we Muslims can avoid becoming fellow worshippers.