John Keynes

John Keynes is an incredibly diverse topic and often a student writing a research paper needs help with narrowing it down. Our writers suggest you narrow it by beginning with discussing this economist's theory on how to combat recessions.

John Keynes produced a rational theory to the combat a recession shortly before World War II. According to Keynes, recession occurs when economic hardships are experienced and the masses begin to hoard money. A cyclical flow of money is necessary for a healthy economy and Keynes provided a solution which enables government to increase the amount of money in circulation (accomplished by the Treasury printing money and buying U.S. debt, thus putting more bills in circulation). The increase in money supply allows more spending among consumers, which inflates the economy back to its normal pace. In extreme cases of recession, government itself could begin spending to generate the economy while borrowing upon itself, such as it did in 1939, at the beginning of World War II.

Economists before Keynes (and also Keynes in his A Treatise on Money) believed that excess savings will bring down interest and encourage investment. But Keynes makes the crucial observation that a shortage in investment will cause a decrease in income and, because of marginal propensity to consume, a decrease in savings, which will raise interest rates and further discourage investment. If there is insufficient investment, people will not be able to save as much as they had in the past; in fact, they will begin to use up their past savings.

Because of this, even before The General Theory, Keynes advocated the reduction of interest rates by the government to both reduce savings and raise investment. But for Keynes, in The General Theory, even that reduction of interest rates would not be enough to reduce savings or stimulate investment sufficiently. According to Keynes, if certain conditions exist, especially in a depression, a reduction in interest will have little effect on savings. If there was a rise in liquidity preference (people's desire for cash), such as might be brought about by falling prices, savings would not be reduced no matter how low the interest was. And decreased interest rates would not have a great effect on investment because of the second consideration that affects investment-expectation. The expected yield of the investment is extremely unpredictable. Keynes said of the factors that influence output and employment, "of these several factors it is those which determine the rate of investment which are most unreliable, since it is they which are influenced by our views of the future about which we know so little. Keynes's conclusions that neither interest rates nor expected proceeds could sufficiently encourage investment led him to his final conclusion that unemployment could exist at equilibrium-unemployment would not fix itself, and government intervention was necessary to increase employment.