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Keynes Macroeconomic Theory

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How did Keynes's idea of the reasons for the macro-economic instability

challenge the prevailing economic orthodoxy?

After 100 years of the industrialization era modern economics began to see a change and shift of ideas. These ideas were brought to the front by John Maynard Keynes, who in 1936 transformed much of the modern economics by a single book The General Theory of Employment, Interest and Money. Keynes also wrote other titles as well as ‘A Tract on Monetary Reform (1923)' which was an attempt to secure a monetary policy instead of the gold standard.

Keynes (2002) believed that the stable economy of Britain was more desirable than the stable value of the pound on the foreign exchange. He argued against going back to the gold standards because he said it would effect British exports, as well as Britain's economy adversely, and so to publish his ideas Keynes wrote ‘A Tract on Monetary Reform (1923)' which argued how a managed monetary system should be put in to place instead of the gold standard to stabilise the British economy.

However, due to the orthodox ideas, England went back to the gold standard and disaster struck. Many had remained ignorant to Keynes's ideas as he was not able to convince many as there was inadequate amount of solid evidence present.

Therefore he attempted to prove the orthodox theory of Says Law wrong and identify the connections between the gold standard the level of employment in Britain, by writing ‘Treatise on money (1930)'.

However, yet again Keynes was not as successful as he hoped he would be. ‘Treatise' had many flaws, and stimulated a lot of criticism, as he yet again did not fully explain his theories.

Nevertheless, this book did convey the some of the basics of his new theory...

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... As for the rate of interest, it depends on the desire to cash and the quantity of money available' (Fusfeld, 2002, p.135).

The basic theory of ‘General Theory' was opposite to the old theory that the interest rate formed equality amongst savings and investment and that decrease in wages lead to full employment. Keynes argued that unlike orthodox economists who thought that reducing wages would lead to higher profits, in actual fact reducing wages would lead to a fall in demand for goods leading to unemployment.

Overall it took 100 years from industrialization for the emphasis to shift from the investor to the consumer.

In conclusion Keynes ideas challenged the orthodox reasons and at first due to the strength in the orthodox ideas Keynes was ignored but however, after the depression his ideas became accepted and due to changes the orthodox ideas began to crack.
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