Keynesian Theory of Income
The Keynesian Theory of Income describes the relationship between national income and unemployment. It states that when an economy generates its full capacity of income, it is at an equilibrium state. However, this equilibrium state does not mean that full employment is achieved. In fact, unemployment may persist at this equilibrium level, a situation called an ‘underemployment equilibrium’.
Keynes’s general theory of employment, interest and money
The General Theory of Employment, Interest and Money was first published in 1936 and sparked a profound shift in economic thought. It gave macroeconomics a central place in economic theory and established Keynesian terminology. This article will discuss the history of macroeconomics, the theory of how economics works and the significance of Keynes’s book.
Keynes’s General Theory of Employment, Interest and Money demolished Say’s Law, which claimed that the value of wages equals the value of goods produced. This meant that wages inevitably went back into the economy, supporting current production. Rather than accepting the idea that this is a good thing, Keynes argued that conditions of uncertainty should be the norm in capitalist economies. He also proposed a theory of instability for unregulated markets.
Keynes’s general theory of employment, interests and money is not without controversy. Keynes’s book has been subject to numerous critical reviews, and early reviews were critical. The neoclassical synthesis of Keynesian economics, which was inspired by the work of Harvard economist Alvin Hansen, MIT professor Paul Samuelson and Oxford economist John Hicks, is not easy to understand without studying the field.
Hicks’ generalization of the marginal propensity to save
One of the foundational ideas in Keynesian theory is Hicks’ generalization of the marginal preference to save. It is a key departure from classical economics, in which the marginal propensity to save is equal to the total amount of income. Hence, the equilibrium income is the point where both curves meet. However, the Hicks generalization goes further by considering both the marginal propensity to save and spend. The IS-LM model, for example, illustrates this generalization.
Hicks’ generalization of the marginal Propensity to save in Keynesian income theory shows that the marginal propensity to save is greater for those with higher incomes than those with lower incomes. This relationship helps economists to calculate MPS by income level, where higher incomes produce a higher MPS. In turn, the MPS can be used to determine the Keynesian multiplier, which describes the impact of government spending and increased investment.
Hicks’ generalization of the liquidity preference function
In a Keynesian theory of income, Hicks’ generalization of the liquidity preferences function explains how investment and income affect each other. This formula is based on the concept of effective demand, where aggregate demand must equal total income.
Hicks’ generalization of the liquidity preferences function enables Keynes’s theory of income to be analyzed in a new way. It also allows for the role of interest rates, as Keynes acknowledged that these are influencing factors. Furthermore, Hicks’ generalization of the liquidity preferential function can be extended to a schedule of the marginal efficiency of capital.
The generalized liquidity preference function is also useful in understanding how monetary policies affect the economy. It reveals how monetary policy can hinder the efficiency of economic policies. Often, economists believe that the interest rate can never fall below a certain limit. This limit is commonly thought to be zero, or even slightly negative. But Keynes suggested that it might be higher. Although Keynes did not attach much practical significance to this concept, John Hicks recognised its significance.
