Week 8 Seminar 4

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

School of economics thought to be developed in Britain and originated with Adam Smith and reached maturity in the work of David Ricardo and John Stuart Mill. The theories of the classical school were mainly concerned with the dynamics of economic growth. Reacting against mercantilism, classical economics emphasized economic freedom. It stressed ideas such as laissez-faire and free competition. Many of the fundamental principles of classical economics were set forth in Smith's Wealth of Nations (1776), in which he argued that a nation's wealth was greatest when its citizens pursued their own self-interest. Neoclassical economists such as Alfred Marshall showed that the forces of supply and demand would ration economic resources to their most effective uses. Smith's ideas were elaborated and refined by Ricardo, who formulated the principle that the price of goods produced and sold under competitive conditions tends to be proportionate to the labour costs incurred in producing them. Mill's Principles of Political Economy (1848) gave the ideas greater currency by relating them to contemporary social conditions. Among those who have modified classical economics to reach very different conclusions are Karl Marx and John Maynard Keynes. John Maynard Keynes was born 5^th of June 1883 and died 21^st of April 1946 in Britain. Keynes was an economist whose ideas and theory were put in a book written in 1936. The General theory of Employment, Interest and Money created the terminology and shape of modern macroeconomic; it is about the way economists thought. The book tackles the idea of establishing classical economics which was developed by the likes of Adam Smith, David Ricardo and Thomas Malthus. Keynes was not a socialist his aim was to save capitalism and make sure it is not buried. He wrote the book at a time of mass unemployment, of waste and suffering. Keynes believed that capitalism had failed and the only way to turn things around is by the means of production could restore economic sanity. The General theory could be concluded in four 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