Keynes

• General Theory of Employment, Interest and Money

• unemployment

  • If wages fall, demand increases and equilibrium is reached = unemployment disappears.

  • In contrast to neoclassical economics, which says that “if the market is left to its own devices, an equilibrium solution will be reached in the long run.

  • Keynes asserted, “[In the long run, we will all die.

  • liquidity preference Preliminary

  • Liquidity has value.

  • I’d rather have it in cash than invest or consume it.

• demand for labor

  • Determined by the quantity of goods planned to be produced.
    • goods
      • consumer goods
      • investment asset
  • Demand for labor declines during recessions.
  • Comparing the rate of return on investment to the bank’s rate of interest, a decrease in the rate of return on investment results in a significant decrease in the production of investment goods
  • The more recessionary the economy, the more uncertainty about the future, the higher the liquidity preference.
  • Walras: “The sum of excess demand for the various commodities is zero.”
    • Liquidity preference in the money market creates excess demand for money
    • This causes “lack of labor demand = unemployment” in the labor market.
    • Unselling occurs in the commodity market.
  • Liquidity preference for individuals to rationally prepare for future uncertainty

• Raise liquidity to address this problem and lower the interest rate.

  • zero-interest-rate policy

• Investing in stocks doesn’t hurt liquidity much because you can just sell them when you need them.

  • Buying a house is such a huge loss of liquidity.

• The Birth of Keynesian Macroeconomics

• Samuelson’s textbook “Economics” introduces IS-LM Model, Hicks’ interpretation of Keynes’ arguments - Cessation by Hicks - Keynesian macroeconomics apply when underemployment occurs. - Back to full employment, neoclassical microeconomics applies.

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