rs541: Yumi: finance

1

Running head: ECONOMICS

ECONOMICS

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Question one

Bill Gerrard and Alex Leijonhufvud present a very interesting outlook on Keynes General Theory. Each of them has a unique interpretation of the theory that aims at demystifying it and further intertwining it with the modern economic environment. However, it is Gerrard who offers a more sound argument on the interpretation of the General Theory by Keynes. His analysis better embodies the economic principles that Keynes sought to bring to the public forefront through his book. The analysis by Gerrard is also better because it takes into account the analysis by Leijonhufvud. In the third section of his analysis Gerrard looks at the work of Leijonhufvud and further breaks it down using his own paradigms and explains it in the broader context of Keynes work.

Gerrard (1991) breaks down the confusion surrounding the work by Keynes as an issue between interpretation and application. There are economic scholars who are obsessed with the interpretation of the general theory and what it truly means. There are also those who are more obsessed with its application in the current economic landscape as well as its place in the future economic landscape. It is important to note that Leijonhufvud also presents an element of duality in his analysis of Keynes General Theory. He presents what he notes as the doctrinal historical question of understanding Keynes General Theory and the task of discovering fresh perspectives with which to understand the economy and access economic theory.

According to Leijonhufvud (1967) the task of discovering fresh perspectives with which to understand the economy and with which to access economic theory is the primary objective while the doctrinal historical question is the secondary perspective. This duality is similar to the one expressed by Gerrard. It is also important to note that the primary objective identified by Leijonhufvud is similar to that identified by Gerrard. Gerrard also arrives at the conclusion that the question of application takes precedence to the question of interpretation. This means that the best way to understand the general theory by Keynes is to actually apply it in a given economic system and see whether or not it is actually a feasible theory that helps to predict and understand economic phenomena.

Gerrard (1991) expresses the opinion that the question of interpretation should be left to historians of economic thought and not macroeconomists. This does not mean that the question of interpretation is not important. Rather a useful interpretation is only as good as its ability to generate a better understanding of economic behavior. This means that the interpretation of the General Theory is only as useful as its ability to generate a new sense of understanding of the economy on the macro level. This is a very interesting outlook and is reminiscent of opinions expressed by Keynes himself in his emphasis on the applications of the general theory on the economy in contrast to the application of the classical theory which he deemed as not being realistic in the real economic sense.

Question two

Both of these papers are very insightful. The level of insight in both of them creates an impression that the author does in fact understand Keynes and is a good scholar of his work. Leijonhufvud (1967) presents a very interesting outlook on the model of wage rigidity. He manages to connect this model to the great expression and the manner in which it affected the employability of a large number of people. He notes that when employers employ the principle of wage rigidity they often do not have an option but to cut down on the number of employees that they have. This is especially the case when there is an economic downturn and the profits from the business cannot sustain the number of employees that they have.

The principle of wage rigidity as explained by Leijonhufvud (1967) is reminiscent of Keynes opinions that the level of employment is not necessarily determined by the price of labor. Rather it is determined by the aggregate demand. This explains why the principle of wage rigidity is not applicable in the real world and can lead to a business being forced to release a large number of its employees. This principle maintains a given price of labor irrespective of the aggregate demand in the market. This is a not a realistic outlook of the market and can lead to a lot of imbalances in the internal financial mechanics of the business. It will end up spending more money on labor compared to aggregate demand.

Leijonhufvud also presents very interesting insights in his analysis of the relationship between saving and the interest rate and how they relate to the theory of liquidity preference presented by Keynes (1967). The theory notes that people have a preference of holding on to their money hence increasing their level of liquidity especially due to the uncertainties that exist in the economic market. Leijonhufvud also notes that wealth cannot ultimately be ignored as one of the factors that influence behavior. He notes that people are usually inclined towards behaviors that are aimed at the maximization of their wealth. This brings forth the subject of savings and interest rates. Despite interest rates falling significantly people prefer to save their money as it increases their liquidity and is a more sure way to ensure that they have their wealth. The opposite of this is either spending the money or investing it, each of which come with elements of uncertainty and the idea of people losing their wealth.

Gerrard presents an element of understanding of Keynes work when he notes that the general theory deals with elements of market imperfections (1991). The general theory is basically in opposition of the classical theory. The latter is of the opinion that the economy is ultimately self regulating and can automatically adapt to a situation where it offers full employment at equilibrium. It is also of the point of view that during a recession employers can retain their employees by cutting their wages. However, Keynes presents a seemingly radical outlook of the situation. He notes that employment is a function of the aggregate demand in the market.

The idea that Keynes’ theory deal with market imperfections as expressed by Gerrard is a very interesting outlook on the theory. It notes that the theory looks at the market as it really is and not as it is supposed to be. Gerrard also expresses the opinion that the market is largely imperfect and cannot be expressed in ultimate terms as is the case in the classical theory. The market imperfections are an example of why the Great Depression saw a lot of people losing their jobs despite the theory by classical economists of employers being able to retain full employment by cutting the wages of their employees. The opinion by Gerrard that Keynes looks at the imperfections in the economy is not a criticism of his work rather it is an acknowledgement of the fact that Keynes was willing to look at the market as it really is and not as it is supposed to be in some idealistic sense. To this effect he presents a very sound understanding of the work by Keynes.

Gerrard also notes that the General Theory by Keynes has a major achievement in its ability to generate diversity in research programs. An example of this is own analysis that takes a dualistic approach at the theory with reference to its interpretation and application. To this extent he notes that there are various schools of thought that can be used to understand the theory. He is expressing the idea that there has not been a unanimous understanding of the theory in general. By noting the various ways in which the theory can be interpreted from different perspectives he is expressing a sound understanding of the theory.

Question three

The greatest flaw when it comes to the interpretation of Keynes work as presented by Gerrard lies in the approach that he takes. He takes the general theory as something that is very confusing and can only be explained in dualistic terms. These are the interpretation perspective and the application perspective. He mainly looks at the interpretation perspective and how it measures up when put against the application perspective. This is the entire premise of his analysis of Keynes work

Gerrard offers a very interesting outlook on the General Theory. However, he does not necessarily break down the General Theory into its intrinsic mechanics and systematically look at each mechanic. Rather he tales a holistic outlook that breaks down the General Theory into two main questions of meaning and interpretation. He does a very good job of his breakdown and explaining why the application perspective is superior to the interpretation perspective. However, he is very quick to dismiss the interpretation perspective. He only looks at the negatives of the interpretation perspectives and does not consider its positives as he does with the application perspective. It is also true that he focuses more on the positives of the application perspectives and does not out rightly look at some of the negatives of this perspective.

The interpretation by Gerrard can be described as being one dimensional in the sense that it takes more of a superficial look at the theory. A better outlook would entail breaking down the theory further and looking past just the questions of interpretation and application. Leijonhufvud also presents some weaknesses in his theory. He notes that some of the weaknesses in the General Theory presented by Keynes is that the theory neglects the influence of capital and real asset values on behavior. This is a very interesting point of view and is a massive criticism of the work by Keynes. However, he does not follow up with an explanation. There is no breakdown of how the General Theory neglects the influence of capital and real asset values of behavior. This leads to the impression that his is an unsubstantiated claim.

The main weakness in the analysis by Leijonhufvud is that he makes a massive claim at a weakness in the Keynesian frame of thought but does not go ahead to defend this claim. He just notes that it is widely believed that the neglect of the influence of capital and real asset values on behavior are massive weaknesses of the Keynesian theory. However, he also fails to cite where these beliefs come from. To this effect he is expressing a criticism of the theory and cites it to anonymous sources that he does not proceed to name. He also fails to analyze the validity of this criticism of the Keynesian theory. This is the main weakness in his works.

Question four

The lyric ‘does anybody really know what Keynes is talking about, does anyone really care?’ is take from a song by Chicago. The original lyric is ‘does anyone really know what time it is? Does anyone really care?’ The song is an indictment of the indifference with which people approach the concept of time. Time is presented as one of the most precious resources that human being collectively have. However, they approach it with a sense of indifference and are often not aware of the actual time. The insertion of Keynes into the lyric presents a very interesting outlook on his work and how it has been received by the world at large. It creates an impression that the theories presented by Keynes are very important in the current and future economic environment. It also creates an impression that knowledge of these theories can make quite a big difference in the macroeconomic environment. However, there is an indifference with which these theories are approached especially by the causal thinkers. It leads to the assertion that people have an invaluable resource in these theories. However, much like the resource of time they remain oblivious to the worth of these theories. They live in the economic environment without necessarily paying attention to these theories, their application and the difference that they can help to make in the greater economic environment.

References

Gerrard, B. (1991). Keynes's General Theory: Interpreting the Interpretations. The Economic Journal, 101(405), 276-287.

Leijonhufvud. (1967). Keynes and the Keynesians: A Suggested Interpretation. The American Economic Review, 57(2), 401-410.