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Keynes' Theories

Describe the theories created/advanced by John Maynard Keynes.

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Keynes III: His Economic Theory

The structure for that set of ideas that JMK became famous for is not all that complex. One way to explain it is that the approach is a general refutation of "Say's Law." Say was responding to the much older argument that business failure exists because either of deflation or overproduction. Say was determined to reject the concept that economic slowdowns occur because of overproduction. Say holds that the overproduction thesis is far too simplistic.

He stated that commodities are priced relative to each other. If there is overproduction in one area, there is often underproduction in another. There is no abstract overproduction that then drives down prices and puts businesses in the red. What occurs is that certain firms in certain sectors misread or mis-predict the future of demand. When one good is produced in abundance, it represents a choice to produce more of x than of y. This relationship is the very root of prices and hence, shows that overproduction is sector specific.

Put more clearly, Say is arguing that once a good is produced, the producer wants to sell it as quickly as possible. The money he receives, too, does not get saved (since it may go down in value), but must be spent. This means, in reality, objects and traded with objects. Money is less important than most economists think. The only time that money makes its appearance is when markets do not have enough of it. Yet, the significance here is that, since gluts are sector specific, the system tends to equilibrium. Prices in the overproduced sector go down as the under-produced price goes up. ...

Solution Summary

The expert describes the theories created/advanced by John Maynard Keynes.