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Facts about Keynes and his economics

Kabir U Ahmed
Your Guest Columnist Abu Ahmed wrote an Interesting "Commentary" on the revival of Keynesian economics in the United Stales under the above title in the November 15 issue of your Newspaper. He has made a number of statements on Keynes and Keynesian eco nomte* which are inaccurate and need careful analyses. Wc will focus attention only on some of them.
Abu Ahmed has stated that Economiat John Maynard Keynes wrote hl* epoch-mak Ing treatise* on economic* both tn the depressionary pe riod of 1930* and after thi* period tn 1940*." Anyone fa miliar with the works of J M Keynes will find 11 difficult lo accept. We will give the names and the years of publications of the moat Important book* of J M Kry ne* to ahow that hi* most Important work* were done much earlier. These are: ‘Indian Currency and Finance (1913). The Economic Consequences of the Peace' (1919). The Treatise on Probability- (1931). "A Tract on Monetary Reform' (1923), The Treatise on Probability Vol I9H- (1030). "The General Theory of Employment, Interest and Money' (193® and "How lo Pay for the War" (1940) Keynes ha* made seminal contribution* in each of thew books
Some people think that The General Theory of Employment. Interest and Money' to the only ’epoch making- book that J M Keynes wrote and that It wu the product of hi* work during the period of depression In Britain (1929 1031). without realising that moat of the theoretical foundation* of thi* book could be found in A Tract on Monetary Reform' and in the two volumes of The Treattoe on Probability' on which he had worked for the whole decade of 1020* Some people may al*o question the appropriateness of putting the ii*t of books on economic* But how Important this subject of probability is in economics r»n be appreciated if one understand* the role of uncertainty in economic ^analyst* And beaidea. Keynes
worked on It off and on for more than ten years since he submitted his dissertation for fellowship in King's College, Cambridge, around 1908.
Abu Ahmed further said that "Most of hts (Keynes') writings related to how to pull the US economy from the Great Depression of 1930s.' It should be noted that J M Keynes was British and his analytical insights came from his deep understanding and experiences of the British economy which was considered to be the Workshop" of the world ip the nineteenth and the early twentieth centuries. The US economy was not his main concern. Further, the above hst of publications shows that he wrote many books (and also articles in the Economic Journal which wc have no space to mention here) on pure theory.
He further claimed that "President Franklin D. Roosevelt took his advice and the US economy came out of depression at the end of the war period" The Second World War ended in 1945. but the depression in the US economy lasted from 1929 to 1939 It came out of the de pression In 1939 because the US government began to In crease Its expenditure on defence on a vast scale from 1938 onward*. The»c are matters of historical facts
Your Columnist also as serted that Keynes idea lost ground in the US economy when it faced double digit In flatten and unemployment fig ures in the later part of 1970s during Carter* regime Thi* statement is incorrect There was double digit inflation in the latter part of Carters regime specially after the sex end oil shock in 1979 follow Ing the Iranian revolution but not double digit unemploy mint President Carter intro duced urban Job training pro gramme and gave tax tnan lives to the employers In add! tlon he increased hts defence budget from 1078 onward* All these measures contributed substantially Lo the reduction of unemployment and to the pressure on domestic inflation By 1979. unemployment wa* reduced to around seven per
cent and inflation rate went up to about ten per cent. By 1980. due to the second oil shock, the price of oil rose from $18 per barrel to $38 per barrel. On top of that, there was the general commodity price increases in the outside world which pushed the inflation rale further up.
However, "Keynes' ideas" did not lose ground in the late 1970* but In the early 1970*, especially during 1972-76. This was the period when "stagflation", simultaneous occurrence of inflation and unemployment, was taking place In the US economy. It is worth exploring the reasons for this
The decade of 196Os was the period of vast increase in military expenditures related to Vietnam war. The "Great Society" programme of President Lyndon Johnson pushed the domestic expenditure further up. The result was the overvaluation of the US dollar abroad. Also the Bret ton Woods system or the Fixed Exchange rate system col lapsed by 1972. International payment system gave way to freely floating system.
During 1972 election, Richard Nixon, who incldcn tally turned a super Keynesian, increased public expenditures to win his second term. He did win the election but he began to squeeze the economy by increasing the revenue collections in the post election period. At about the same lime, the first "oil shock" of 1973 came and the combined effects of these factors on the econ omy was the recession of 1973 that lasted until 1976. The pe culiarity of this recession was that nol only the economic ac-tlvities were declining but also the costs of production was go ing up due lo oil price rise It was during this time that the Keynesian "Demand Management type approath to economic policies became less relevant Economists then sc nously began to turn their al tention lo the Monetarism of Milton Friedman which did not work either
Your Columnist has also said thal stagflation — a new con ccpt since the beginning of 198Os was introduced in eco nomlc science From the above
analysis it can be seen that “stagflation" was a phenomenon that came Into vogue not In 1980s but in early 1970s.
One needs also to point out that the observation of your Columnist that "Ronald Reagan's economic policy (supply side economics) worked and both unemployment and inflation rates came down to a normal level, between seven to eight per cent" is wrong. Had it worked, budget deficits and unemployment in the economy would have been much less. As a result of drastic cut In government expenditure (especially in welfare programmes) by Ronald Reagan and tight monetary policy pursued by Federal Reserve since late 1980 there was a recession In the economy In 1982 but It began to recover from 1983-84 which lapsed Into recession again In 1988-89. This recession is still lingering. The Inflation rate has certainly gone down during the Reagan era, but the unemployment rate has been running high.
Finally, one word on Keynesian economics in the US economy would be perhaps tn order. There is certainly room for expansion In the US economy now since there is a lot of excesa capacity and un employed resource*, but a blind Kcyneaian expansionary policy la going lo create diffi-culllea. Almost every sector of the economy has been debt-ridden: the government, the corporate sector, state gov ernments, banks and the households etc. Further, the people who have remained unemployed will need advanced training to produce competitive goods. The machines which have been lying Idle have become obsolete In their vintages New capital ma chlnerles will have to be built-up These arc by no means In soluble problems, but will only need time and careful design Ing of policies. Wherever there are rigidities and coordination failures. Keynesian economics come* to life. Keynes is very much alive, but it i«{only hi* "short" view thal Is in doubt.
The writer works tn the Export Development Project of USAID