Monday, May 15, 2006

Keynesian Theory

John Maynard Keynes was a respected Economist long before he came up with his theory of utilizing Government deficits to end the Great Depression. I find I must take a quick aside to explain the causes of the Great Depression, before I can outline Keynes' Thoughts.

The real reasons for the Great Depression:
1) The American Stock Market was afloat with neuvo-rich Investors, a huge percentage having shown signs of Wealth since 1921. Their entire fortunes came from, or were invested in, the Stock Market.
2) Businessmen throughout the late 1920s had been investing all Business Profits in the Stock Market.
3) Banks were extending loans to Business and Individuals, who were transferring funds to investments in the Stock Market.
4) The Stock Market suffered a series of Reverses, most notably a lack of Consumer Demand coupled with overstocked Inventories of Business.
5) The nuevo-rich Investors paniced, trying to drag their Wealth from a Bear market.
6) Business had their financial reserves invested in the Stock Market, witnessed those financial reserves disappearing, and immediately slashed Production.
7) The activity of the Federal Reserve had relatively little to do with the Great Depression, other than refuse to absorb the bad loans of Banks which were going to fail anyway, because of the bad loan policy.

The rest of the World followed the American economy, mainly due their own native conditions, which mirrored the American condition. Keynes witnessed the Supply curve dropping below the potential Supply curve as exhibited by recent prior performance. He deduced the major factor for economic recovery would be redevelopment of Consumer Demand, but a redevelpment which could not be regenerated by huge Unemployment. He decided the Government must spend its way out of the Great Depression, creating Jobs which would eventually regenerate Consumer Demand.

Keynes' Theory was not a discussion of a normal Condition, but of the aberration of the Great Depression. He never believed that Government deficits were beneficial, except in the Case where there was a collapse of Consumer Demand. Government Deficits under relative full employment conditions were as despictable to him as to myself.

It is a sadness that the Thought of great Economists must be corrupted for such Individual to be considered eminent. There are many today who are castigating John Kenneth Galbraith, but they are not criticizing what he expounded, ranting only because of lack of serious study of his Thought. lgl

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Pippa said...
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