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Keynes monetary thought in the perspective of Bangladesh

The reason for this paper is to investigate Keynes' Economic thought critically, how his thoughts have revolutionized macroeconomic thinking and exactly how his coverage issues have affected the coverage decisions of the government authorities of different countries of the world. Finally, this newspaper will try to investigate the relevance of Keynes' plan views in the perspective of Bangladesh.

Introduction:

John Maynard Keynes was a English economist whose ideas have profoundly influenced the theory and practice of modern macroeconomics, as well as the economic policies of governments. He identified the causes of business cycles, and advocated the use of fiscal and financial steps to mitigate the undesireable effects of monetary recessions and depressions. His ideas are the basis for the institution of thought known as Keynesian economics, and its own various offshoots.

A research of the evolution of Keynes' insurance policy views is, by itself, both interesting and satisfying. The issues involved are quite complex and, in the area, there a great deal of misconception one of the historians of monetary thought. It really is quite true that Keynes' global popularity lies quite simply in his contribution to genuine theory. In fact he revolutionized macroeconomic thinking by his magnum opus, The General Theory of Career, Employment and Money (1936). Nonetheless it is also evenly true that his real interest, as an economist, lay down not in natural theory however in insurance policy. He always wanted to correct the economy by suitable coverage devices. His strong social sense and commitment never allowed him to live lengthy in the ivory tower of the academe.

Background:

John Maynard Keynes was born on 5 June, 1883 in Cambridge to a middle-class family. His daddy, John Neville Keynes, was an economist and a lecturer in moral sciences at the University or college of Cambridge and his mom Florence Ada Keynes an area communal reformer. Keynes gained a scholarship to review at Eton, where he shown talent in an array of subjects, particularly mathematics, classics and background. In 1902 Keynes kept Eton for King's University, Cambridge after receiving a scholarship because of this also to study mathematics. The famous Alfred Marshall begged Keynes to be an economist. Keynes started his professional profession with a good, substantial publication, Indian Money and Finance (1913). This publication was essentially policy oriented. It was an episode on the Report of the British Rose Committee of 1898 which possessed advised the adoption of the Yellow metal Standard for India. Thereafter for quite a while, he didn't employ himself in any scholarly economic examination. However in 1919 he wrote a booklet -- The Economic Consequences of the Peacefulness - which helped bring him instant international fame. It had been chiefly concerned with insurance policy issues - the German reparations problem. In order to understand the changes in Keynes' thought we have to consider the three main literature that he had written in the inter war period. They are (1) A Tract on Monetary Reform (1923), (2) The Treatise on Money (October 1930), and (3) The General Theory of Job, Job and Money (February1936). In the first Keynes' used the number theory of money which he learnt from his teachers-Alfred Marshall and Alec Pigou. He didn't break any new surface but followed the traditional path. In the second reserve Keynes' really wanted to innovate. The 3rd book, the General Theory (GT), which completely transformed the nature of macroeconomic theory by means of his popular C+I+G=Y equation was completely novel and truly original. In every these three literature Keynes' was concerned with the most intractable modern-day financial problem-that of unemployment. This was the challenge that was plaguing United kingdom economy because the end of the First World Conflict. In all these three catalogs Keynes have been arguing from the classical strategy of combating unemployment by the slash in the nominal income rate.

Keynesian Economics:

According to Keynesian theory, some microeconomic-level activities - if taken collectively by a big proportion of individuals and companies - can result in inefficient aggregate macroeconomic results, where the economy runs below its potential output and development rate. Such a situation had recently been referred to by traditional economists as a general glut. Keynes contended a general glut would occur when aggregate demand for goods was insufficient, resulting in an economical downturn with unnecessarily high unemployment and losses of potential output. In that situation, government guidelines could be used to increase aggregate demand, thus increasing economic activity and cutting down unemployment and deflation. Keynes argued that the solution to the Great Depression was to energize the economy ("inducement to invest") through some blend of two strategies: a decrease in interest levels and federal investment in infrastructure. Investment by administration injects income, which results in more spending in the overall economy, which in turn stimulates more development and investment relating still more income and spending etc. The initial activation starts a cascade of incidents, whose total increase in financial activity is a multiple of the original investment. Keynes desired to tell apart his ideas from and oppose these to "classical economics, " where he designed the economic ideas of David Ricardo and his enthusiasts, including John Stuart Mill, Alfred Marshall, Francis Ysidro Edgeworth, and Arthur Cecil Pago. A central tenet of the classical view, known as Say's law, expresses that "supply creates its demand". Say's Legislations can be interpreted in two ways. First, the claim that the full total value of outcome is add up to the total of income earned in production is a result of a nationwide income accounting personal information, and is therefore indisputable. A second and stronger claim, however, that the "costs of result are always covered in the aggregate by the sale-proceeds resulting from demand" depends on how utilization and keeping are linked to development and investment. In particular, Keynes argued that the second, strong form of Say's Regulation only retains if increases in individual savings exactly match a rise in aggregate investment.

Keynes sought to build up a theory that would clarify determinants of keeping, utilization, investment and creation. For the reason that theory, the connections of aggregate demand and aggregate supply determines the level of output and career throughout the market.

Marginal Propensity to Consume and Marginal Efficiency of Capital:

Keynes developed the idea of marginal propensity to consume (MPC) and Marginal efficiency of Capital.

Marginal propensity to consume: If the income of the household increase by a specific amount, only a fraction of the increase is spent on use. If we look at the consumption function-

C=`C + cY

Here the coefficient c is named the MPC. Keynes argued on the basis of a psychological law of usage that the MPC out of income was significantly less than unity and would decline as income increased. The implication is the fact, in the developed capitalist current economic climate, the nationwide propensity to consume tends to decline, which if not matched by increased investment, may cause the effective demand to fall short of full occupation output.

Marginal efficiency of Capital: The Marginal Efficiency of Capital is the partnership between the possible yield of an investment and its own supply price or replacement cost, i. e. the relation between the prospective yield of 1 more unit of this kind of capital and the expense of producing that product, furnishes us with the marginal efficiency of capital of this type.

Keynes says on web page 135 of Basic Theory:

"I establish the marginal efficiency of capital as being equal to that rate of discount which would make today's value of the group of annuities distributed by the results expected from the capital-asset during its life just add up to its supply price. "

Wages and spending:

During the fantastic Depression, the classical theory defined economical collapse as simply a lost incentive to produce, and the mass unemployment consequently of high and rigid real wages.

To Keynes, the determination of pay is more complicated. First, he argued that it is not real but nominal salary that are occur discussions between employers and workers, as opposed to a barter romance. Second, nominal wage reductions would be difficult to place into result because of laws and wage agreements. Even classical economists admitted that these exist; unlike Keynes, they advocated abolishing minimum income, unions, and long-term deals, increasing labor-market versatility. However, to Keynes, people will withstand nominal income reductions, even without unions, until they see other income falling and an over-all fall of prices.

He also argued that to boost employment, real salary had to go down: nominal income would need to land more than prices. However, doing this would reduce consumer demand, so the aggregate demand for goods would drop. This would subsequently reduce business sales revenues and expected income. Investment in new plant life and equipment-perhaps already discouraged by earlier excesses-would then become more risky, less likely. Instead of raising business expectations, income cuts will make concerns much worse.

Further, if income and prices were dropping, people would start to expect those to fall. This may make the current economic climate spiral downward as those who had money would simply hang on as slipping prices managed to get more valuable-rather than spending. As Irving Fisher argued in 1933, in his Debt-Deflation Theory of Great Depressions, deflation (dropping prices) can make a major depression deeper as dropping prices and wages made pre-existing nominal debt more valuable in real conditions.

Money Illusion: The term was coined by John Maynard Keynes in the first twentieth century, and Irving Fisher had written an important reserve about them, THE AMOUNT OF MONEY Illusion, in 1928. The lifetime of money illusion is disputed by economic economists who contend that individuals work rationally (i. e. think in real prices) with regard to their prosperity. It's been contended that money illusion affects economic patterns in three main ways:

Price stickiness. Money illusion has been suggested as you reason why nominal prices are poor to improve even where inflation has triggered real prices or costs to rise.

Contracts and laws and regulations aren't indexed to inflation as much as one would rationally expect.

Social discourse, in formal multimedia plus more generally, shows some dilemma about real and nominal value.

Money illusion can also affect people's perceptions of outcomes. Experiments show that folks generally perceive a 2% trim in nominal income as unfair, but see a 2% climb in nominal income where there is 4% inflation as fair, despite them being almost logical equivalents. Further, money illusion means nominal changes in price can influence demand even if real prices have continued to be constant.

If workers use their nominal wage as a guide point when analyzing wage offers, organizations will keep real salary relatively low in a period of high inflation as staff accept the apparently high nominal wage increase. These lower real income would allow organizations to hire more employees in cycles of high inflation.

Excessive Cutting down:

To Keynes, high saving, i. e. conserving beyond prepared investment, was a significant problem, encouraging tough economy or even despair. Excessive keeping results if investment falls, perhaps anticipated to dropping consumer demand, over-investment in early on years, or pessimistic business expectations, and if saving does not immediately fall in step, the economy would decline.

The classical economists argued that interest levels would fall due to the excess way to obtain "loanable funds". The first diagram, modified from really the only graph in THE OVERALL Theory, shows this process. (For convenience, other sources of the demand for or way to obtain funds are ignored here. ) Assume that fixed investment in capital goods comes from "old I" to "new I" (step a). Second (step b), the producing excess of saving causes interest-rate cuts, abolishing the excess resource: so again we have saving (S) equal to investment. The interest-rate (i) semester prevents that of creation and career.

Keynes experienced a complex discussion from this laissez-faire response. The graph below summarizes his debate, supposing again that fixed investment comes (step A). First, keeping does not fall much as rates of interest fall, since the income and substitution effects of falling rates will end up in conflicting guidelines. Second, since prepared fixed investment in herb and equipment is mainly predicated on long-term objectives of future success, that spending will not go up much as interest rates fall. So S and I are attracted as steep (inelastic) in the graph. Given the inelasticity of both demand and offer, a huge interest-rate fall is needed to close the conserving/investment gap. As drawn, this involves a negative interest at equilibrium (where the new I set would intersect the old S line). However, this negative interest is not essential to Keynes's argument.

Third, Keynes argued that conserving and investment are not the main determinants of interest rates, especially in the brief run. Instead, the supply of and the demand for the stock of money determine rates of interest in the short run. (This is not used the graph. ) Neither changes quickly in response to abnormal saving to permit fast interest-rate adjustment.

Finally, because of fear of capital loss on possessions besides money, Keynes recommended that there may be a "liquidity trap" arranging a floor under which interest rates cannot fall. While in this trap, rates of interest are so low that any increase in money supply may cause bond-holders (fearing goes up in interest levels and hence capital losses on their bonds) to market their bonds to realize money (liquidity). Within the diagram, the equilibrium suggested by the new I sections and the old S series cannot be come to, so that surplus saving persists. Even if the liquidity capture does not exist, there's a fourth (perhaps most important) factor to Keynes's critique. Keeping entails not spending most of one's income. It thus means insufficient demand for business outcome, unless it is well balanced by other sources of demand, such as predetermined investment. Thus, excessive saving corresponds to an unwanted deposition of inventories, or what traditional economists called a general glut. This pile-up of unsold goods and materials promotes businesses to diminish both production and employment. This in turn decreases people's incomes-and cutting down, leading to a leftward move in the S range in the diagram (step B). For Keynes, the land in income have most of the job by ending excessive cutting down and allowing the loanable funds market to realize equilibrium. Instead of interest-rate adjustment dealing with the situation, a recession will so. Thus in the diagram, the interest-rate change is small.

Active Fiscal Coverage:

As observed the classicals wished to balance the government budget. To Keynes, this would exacerbate the actual problem: pursuing either policy would raise keeping (broadly defined) and so lower the demand for both products and labor. For example, Keynesians see Herbert Hoover's June 1932 taxes increase as making the Depressive disorder worse.

Keynes† ideas influenced Franklin D. Roosevelt's view that insufficient buying-power brought on the Melancholy. During his presidency, Roosevelt adopted some aspects of Keynesian economics, especially after 1937, when, in the depths of the Melancholy, the United States suffered from recession yet again following fiscal contraction. But to numerous the real success of Keynesian policy is seen at the starting point of World War II, which provided a kick to the globe economy, removed uncertainty, and forced the rebuilding of destroyed capital. Keynesian ideas became almost formal in social-democratic Europe after the war and in the U. S. in the 1960s.

Keynes† theory recommended that active authorities policy could succeed in managing the economy. Rather than seeing unbalanced federal budgets as incorrect, Keynes advocated what has been called countercyclical fiscal guidelines, that is policies which acted against the tide of the business routine: deficit spending whenever a nation's economy is suffering from recession or when restoration is long-delayed and unemployment is persistently high-and the suppression of inflation in increase times by either increasing taxes or reducing on authorities outlays. He argued that governments should solve problems in the short run somewhat than looking forward to market pushes to do it in the long run, because "in the long run, we all have been dead.

This contrasted with the classical and neoclassical economic analysis of fiscal insurance policy. Fiscal stimulus (deficit spending) could actuate creation. But to these classes, there is no reason to believe this activation would outrun the side-effects that "crowd out" private investment: first, it would raise the demand for labor and raise wages, hurting profitability; Second, a authorities deficit increases the stock of administration bonds, reducing their selling price and stimulating high interest levels, making it more expensive for business to fund set investment. Thus, attempts to activate the economy would be self-defeating.

The Keynesian response is the fact that such fiscal plan is merely appropriate when unemployment is persistently high, above the non-accelerating inflation rate of unemployment (NAIRU). If so, crowding out is little. Further, private investment can be "crowded in": fiscal stimulus boosts the market for business result, raising cashflow and profitability, spurring business optimism. To Keynes, this accelerator effect meant that administration and business could be matches somewhat than substitutes in this situation. Second, as the stimulus occurs, gross domestic product rises, increasing the quantity of saving, assisting to finance the upsurge in set investment. Finally, federal outlays need not continually be wasteful: authorities investment in public goods that won't be provided by profit-seekers will encourage the private sector's expansion. That is, federal government spending on such things as basic research, general population health, education, and infrastructure may help the long-term growth of potential output.

Multiplier Impact and INTEREST:

Two aspects of Keynes' model experienced implications for insurance plan:

First, there is the "Keynesian multiplier", first developed by Richard F. Kahn in 1931. Exogenous rises in spending, such as an increase in administration outlays, heightens total spending by way of a multiple of that increase. A government could stimulate a great deal of new production with a modest outlay if:

The people who obtain this money then spend most on utilization goods and save the rest.

This extra spending allows businesses to employ more people and pay them, which allows an additional increase consumer spending.

This process continues. At each step, the upsurge in spending is smaller than in the previous step, so that the multiplier process tapers off and allows the attainment of equilibrium. This account is changed and moderated if we move beyond a "closed economy" and generate the role of taxation: the go up in imports and tax repayments at each step reduces the quantity of induced consumer spending and the size of the multiplier impact.

Second, Keynes re-analyzed the effect of the interest rate on investment. In the traditional model, the way to obtain funds (conserving) determined the quantity of set business investment. That's, since all personal savings was positioned in banks, and all business investors in need of borrowed funds visited banks, the quantity of savings determined the amount that was open to commit. To Keynes, the amount of investment was identified individually by long-term revenue prospects and, to a lesser extent, the interest. The latter starts the likelihood of regulating the market through money supply changes, via financial policy. Under conditions such as the Great Unhappiness, Keynes argued that this strategy would be relatively ineffective compared to fiscal policy. But during more "normal" times, economic expansion can energize the overall economy.

Criticism:

While Milton Friedman identified THE OVERALL Theory as 'a great e book', he argues that its implicit separation of nominal from real magnitudes is neither possible nor appealing; macroeconomic policy, Friedman argues, can reliably influence only the nominal. He and other monetarists have therefore argued that Keynesian economics can lead to stagflation, the combination of low progress and high inflation that developed economies endured in the first 1970s.

Austrian economist Friedrich Hayek criticized Keynesian economical regulations for what he called their fundamentally collectivist way, arguing that such theories encourage centralized planning, which causes malinvestment of capital, which is the cause of business cycles. Hayek also argued that Keynes' research of the aggregate relationships in an overall economy is fallacious, as recessions are brought on by micro-economic factors. Hayek said that what starts as short-term governmental fixes usually become permanent and expanding administration programs, which stifle the private sector and civil world.

Other Austrian university economists also have attacked Keynesian economics. Henry Hazlitt criticized, paragraph by paragraph, Keynes' General Theory in his 1959 intensive critique of Keynesianism: The Failure of the New Economics. In 1960 he shared the reserve The critics of Keynesian Economics where he compiled collectively the major criticisms of Keynes made to that yr.

Murray Rothbard accuses Keynesianism of experiencing "its roots deep in medieval and mercantilist thought. "

Another influential approach was based on the Lucas critique of Keynesian economics. This called for greater reliability with microeconomic theory and rationality, and especially emphasized the idea of rational prospects. Lucas while others argued that Keynesian economics required incredibly foolish and short-sighted behavior from people, which totally contradicted the monetary knowledge of their action at a micro level.

My Understanding:

Although Keynes explicitly addresses inflation, THE OVERALL Theory will not treat it as an essentially monetary phenomenon nor suggest that control of the amount of money supply or rates of interest is the main element solution for inflation. This conflicts both with neoclassical theory and with the experience of pragmatic policy-makers.

It is not necessarily true which is said in multiplier impact that when a government will stimulate the economy, the excess spending will generate businesses to hire more people and pay them. Those that get the extra spending due to government excitement may follow the capital-intensive method rather than labor-intensive method.

Keynes has argued that in the developed countries nationwide propensity to consume tends to decrease as income increases. But if we consider in the point of view of some developed countries like USA while others, this interpretation is different with the reality, as national propensity to consume tends to increase in these countries as income rises.

Keynes nevertheless successfully persuaded multitudes of supposedly proficient economists to simply accept a series of arguments. Savings became bad and deficits became good, and the wise accumulation of reserves for foreseeable and unforeseeable contingencies was imprudently in charge of disastrous implications. The accumulation of capital property becomes an monetary obstacle somewhat than an economical gain. Investment and work is stimulated by inflation and hindered by price declines. Market liquidity becomes more of a problem than an advantage.

As is consistently described throughout Keynes, "THE OVERALL Theory, " there is no evidence that surplus savings play any role in initiating intervals of economic stress.

Like Marx and all socialists, Keynes appears totally ignorant of the natural inefficiency of authorities management. He has total faith in the functions of federal and "community" implemented financial systems. Keynes offers narrower implemented solutions directed at controlling interest rates, directing investment moves, redistributing riches, and ultimately directing the actions of major business entities.

Keynes thus pulls a broad realization based on his very narrow special circumstance. His conclusion is applicable limited to a shut down system - thus always hobbled with grossly limited economic production and living requirements - that determinedly ignores long term implications. Even for shut systems, rigid wage systems must put increased pressures for adjustment on other cost factors - each with their own organic of effects - that Keynes doesn't consider.

Bangladesh Perspective:

Keynesian economics, insofar as it is designed in the General Theory of Job, Interest and Money, has little validity in the framework of underdeveloped economies like Bangladesh that Keynesian involuntary unemployment is not the type of unemployment which these economies go through, and the situation is one of long-term economic development as opposed to the attainment of 'full employment' in the Keynesian sense. The doctrines of high saving and inadequate ingestion do not connect with underdeveloped countries like Bangladesh, where limited keeping is one factor limiting the growth of investment and income. However, many of the doctrines of Keynes can be useful if they are properly executed.

At a time of downturn, Keynes suggested an economic policy to boost the aggregate demand (e. g. through ingestion, investment, and authorities acquisitions). No question big economies surrounding the world have declared big budgets and used unprecedented investment programs in the recent economical recession. Bangladesh's national budget for FY2009-10 appeared to have targeted the Keynesian need for investment. Admittedly, Bangladesh is a passive sufferer of the global tough economy and cannot blindly follow the steps of developed economies. The federal government budget of Bangladesh has always been in deficit. The reason behind this deficit is leaner government revenue collection and higher federal spending. Instead of seeing unbalanced administration budgets as wrong, A Keynesian interpretation of the approximated results suggests that by raising utilization expenditures, government shelling out for infrastructure also stimulates the demand-constrained Bangladesh market, which causes greater utilization of creation capacities. In turn, it increases countrywide output by using a multiplier-accelerator mechanism. Thus, deficit spending in an effective way induces positive effects on GDP expansion and on occupation in the short-run through increased consumption demand. This primary federal investment may 'crowd out' private investment by increasing interest rate. If so expansionary monetary insurance plan can be followed to decrease interest rate and stimulate private investment. So, a highly effective policy combination can raise the level of career without impacting on private spending too much. Though there exists potential for inflationary pressure to increase even as are experiencing now, an effective circulation of the way to obtain money have to be assured to avoid the health of inequality and poverty from worsening.

Conclusion:

Keynes is greatly regarded as the daddy of modern macroeconomics, and by various commentators such as economist John Sloman, the most influential economist of the 20th hundred years. Ahead of dying Keynes was an integral figure in the establishment of the International Monetary Finance (IMF). The advent of the global financial meltdown in 2007 has caused resurgence in Keynesian thought. The ex - British Best Minister Gordon Dark brown, President of america Barack Obama, and other world leaders have used Keynesian economics to justify government stimulus programs for his or her economies. Though Keynes's ideas have been doubted, distrusted, almost discarded and greatly modified his ideas are still a subject of debate and practice in 21st century economic policy.

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