How Did Keynes’s Idea of the Reasons for the Macro-Economic Instability Challenge the Prevailing Economic Orthodoxy?

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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. The book seemed to concentrate on savings and investment as Says Law said that both savings and investment had to be equal but Keynes argued against it by saying that if more people saved than invested then economic activity would decrease and if more people invested than saved then economic activity would increase. Keynes also suggested that to keep both in balance a managed monetary system should be introduced. Keynes published this book during the Wall Street crash and yet again Keynes’s idea was not paid much attention to as economists as well as government officials were not aware of how serious the depression was going to be.

Then Keynes wrote his book ‘The General Theory of Employment, Interest, and money’ but the ideas in this book were inspired by the work of other economists.

Michael Tugan-Baranowsky’s development was later an important part of Keynes’s analysis. He said that the imbalance between savings and investments were at the heart of the business cycle. He said that the imbalance could not be overcome by changes in the interest rates, as he argued that there were reasons than the interest rate that motivated people to save. An even more important breakthrough was made by a Swedish economist.

Knut Wicksell was the Swedish economist, and it was based on his ideas that Keynes developed the theory of national income which led to the Keynesian revolution.

Say’s Law suggested that any money saved will eventually get invested, and if there was some imbalance in savings and investment it would be fixed by a rise or fall in interest rate. However, Wicksell soon realised that in practice the theory did not work and so developed the theory that natural equilibrium will be brought about by the ‘level of economic activity’ (Fusfeld, 2002, p.132) and not by changes in the interest rates.

However, although Wicksell's idea of the market rates was soon abandoned his idea of the equilibrium was carried on and transformed to the national income.

Also, William Foster and Waddill Catchings, who developed the concept of circular flow of spending. He stated