Английский язык. Практический курс для решения бизнес-задач Пусенкова Нина

The Greatest Economist of the 20th Century: John Maynard Keynes

John M. Keynes is the world-famous author of The General Theory of Employment, Interest and Money, published in 1936.

In Keynes’s theory, macro-level trends can overwhelm the micro-level behavior of individuals. Instead of the economic process being based on continuous improvements in potential output, Keynes asserted the importance of the aggregate demand for goods as the driving factor. He argued that government policies could be used to promote demand at a macro level, and to fight unemployment and deflation.

Keynes stated that there was no strong automatic tendency for output and employment to move toward full employment levels. This conflicts with the principles of classical economics, and the supply-side economics, which assume a general tendency towards equilibrium in a restrained money creation economy.

Keynes questioned two of the dominant pillars of economic theory: the need for a gold standard, and the Say’s Law which stated that decreases in demand would only cause price declines, rather than affecting real output and employment.

It was his experience with the Treaty of Versailles that pushed him to break with previous theory. His book The Economic Consequences of the Peace (1920) recounted the general economics of the Treaty and the individuals involved in making it. The book established him as an economist who had the practical skills to influence policymakers. Keynes developed the idea of monetary policy as something separate from maintaining currency against a fixed peg. He believed that economic systems would not automatically right themselves to attain «the optimal level of production». He used to say «In the long run, we are all dead,» implying that it doesn’t matter that optimal production levels are attained in the long run, because it’ll be a very long run indeed.

In the late 1920s, the world economic system began to break down, after the shaky recovery that followed World War I. Critics of the gold standard, market self-correction, and production-driven paradigms of economics moved to the fore. Dozens of different schools contended for influence. Some pointed to the USSR as a successful centrally-planned economy; others pointed to the alleged success of fascism in Italy.

Keynes stepped into this chaos and promised not to institute revolution but to save capitalism. He circulated a simple thesis: there were more factories and transportation networks than could be used at the current ability of individuals to pay and the problem was on the demand side.

Keynes and the Classics

Keynes explained the level of output and employment in the economy as being determined by effective demand. In a reversal of Say’s Law, Keynes in essence argued that «man creates his own supply,» up to the limit set by full employment.

In «classical» economic theory, adjustments in prices would automatically make demand tend to the full employment level. Keynes, pointing to the sharp fall in employment and output in the early 1930s, argued that whatever the theory, this self-correcting process had not happened.

Wages and Spending

Even in the worst years of the Depression, the classical theory defined economic collapse as simply a lost incentive to produce. Mass unemployment was caused only by high and rigid real wages. The proper solution was to cut wages.

To Keynes, the determination of wages is more complicated. He argued that it is not realbut nominal wages that are set in negotiations between employers and workers. It is not a barter relationship. First, nominal wage cuts would be difficult to put into effect because of laws and wage contracts. Even classical economists admitted that these exist; unlike Keynes, they advocated abolishing minimum wages, trade unions, and long-term contracts, increasing labor-market flexibility. However, to Keynes, people will resist nominal wage reductions, even without unions, until they see other wages falling and a general drop of prices.

He also argued that to boost employment, real wages had to go down: nominal wages would have to fall more than prices. However, it would reduce consumer demand, so that the aggregate demand for goods would drop. This would in turn reduce business sales revenues and expected profits. Investment in new plant and equipment would then become more risky. Instead of raising business expectations, wages cuts could make matters much worse. If wages and prices were falling, people would start to expect them to fall. This could make the economy spiral downward as those who had money would wait as falling prices made it more valuable – rather than spending.

Excessive Saving

To Keynes, excessive saving, i.e. saving beyond planned investment, was a serious problem encouraging recession, even depression. Excessive saving results if investment falls due to falling consumer demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step.

The classical economists argued that interest rates would fall due to the excess supply of «loanable funds». The first diagram from The General Theory shows this process. Assume that fixed investment in plant and equipment falls from «old I» to «new I» (step a). Step b: the resulting excess of saving causes interest-rate cuts, abolishing the excess supply: so again we have saving (S) equal to investment. The interest-rate fall prevents that of production and employment.

Keynes argued against this laissez faire response. The graph shows his argument, assuming again that fixed investment falls (step A). First, saving does not fall much as interest rates fall, since the income and substitution effects of falling rates go in conflicting directions. Second, since planned investment in plant and equipment is mostly based on long-term expectations of future profitability, that spending does not rise much as interest rates fall. So S and I are drawn as inelastic in the graph.

Given the inelasticity of both demand and supply, a large interest-rate fall is needed to close the saving/investment gap. As drawn, this requires a negative interest rate at equilibrium (where the new I line would intersect the old S line). However, this negative interest rate is not necessary to Keynes’s argument.

Third, Keynes argued that saving and investment are not the main determinants of interest rates. Instead, the supply of and the demand for money determine interest rates in the short run. Neither change quickly in response to excessive saving to allow fast interest-rate adjustment.

Finally, because of fear of capital losses on assets besides money, Keynes suggested that there might be a «liquidity trap» setting a floor under which interest rates cannot fall. (In this trap, bond holders, fearing rises in interest rates (because rates are so low), fear capital losses on their bonds and thus try to sell them to attain money (liquidity).) Even economists who reject this liquidity trap now realize that nominal interest rates cannot fall below zero. The equilibrium suggested by the new I line and the old S line cannot be reached, so that excess saving persists.

Even if this «trap» does not exist, there is a fourth element to Keynes’s critique. Saving involves not spending all of one’s income. It means insufficient demand for business output, unless it is balanced by other sources of demand. Thus, excessive saving corresponds to an unwanted accumulation of inventories. This pile-up of unsold goods and materials encourages businesses to decrease both production and employment. This in turn lowers people’s incomes – and saving, causing a leftward shift in the S line in the diagram. For Keynes, the fall in income did most of the job ending excessive saving and allowing the loanable funds market to attain equilibrium. Instead of interest-rate adjustment solving the problem, a recession does so.

Whereas the classical economists assumed that the level of output and income was constant at any one time (except for short-lived deviations), Keynes saw this as the key variable that adjusted to equate saving and investment.

Finally, a recession undermines the business incentive to engage in fixed investment. With falling incomes and demand for products, the desired demand for factories and equipment (not to mention housing) will fall. This accelerator effect would shift the I line to the left again. This recreates the problem of excessive saving and encourages the recession to continue.

Active Fiscal Policy

The classicals wanted to balance the government budget through slashing expenditures or raising taxes. To Keynes, this would exacerbate the underlying problem: following either policy would raise saving and thus lower the demand for products and labor. Keynes saw H. Hoover’s June 1932 tax hike as making the Great Depression worse.

Keynes’s ideas influenced Franklin D. Roosevelt’s view that insufficient buying power caused the Depression. Something similar to Keynesian expansionary policies had been applied earlier by both social-democratic Sweden and Nazi Germany. But to many the true success of Keynesian policy can be seen at the onset of World War II, which provided a kick to the world economy, removed uncertainty, and forced the rebuilding of destroyed capital. Keynesian ideas became almost official in social-democratic Europe after the war and in the U.S. in the 1960s.

Keynes’s theory suggested that active government policy could be effective in managing the economy. Keynes advocated counter-cyclical fiscal policies, that is policies which acted against the tide of the business cycle: deficit spending when a nation’s economy suffers from recession or when recovery is long-delayed and unemployment is persistently high – and the suppression of inflation in boom times by either increasing taxes or reducing government outlays. He argued that governments should solve short-term problems rather than waiting for market forces to do it.

This contrasted with the classical and neoclassical economic analysis of fiscal policy. Deficit spending could stimulate production. But to these schools, there was no reason to believe that this stimulation would outrun the side-effects that «crowd out» private investment: first, it would increase the demand for labor and raise wages, hurting profitability. Second, a government deficit increases the stock of government bonds, reducing their market price and encouraging high interest rates, making it more expensive for business to finance fixed investment. Thus, efforts to stimulate the economy would be self-defeating. Worse, it would be shifting resources away from productive use by the private sector to wasteful use by the government.

The Keynesian response is that such fiscal policy is only appropriate when unemployment is persistently high. In that case, crowding out is minimal. Further, private investment can be «crowded in»: fiscal stimulus raises the market for business output, raising cash flow and profitability, spurring business optimism. To Keynes, this accelerator effect meant that government and business could be complements rather than substitutes in this situation. Second, as the stimulus occurs, GDP rises, raising the amount of saving, helping to finance the increase in fixed investment. Finally, government outlays need not always be wasteful: government investment in public goods that will not be provided by profit-seekers will encourage the private sector’s growth. That is, government spending on basic research, public health, education, and infrastructure could help the long-term growth of potential output.

In Keynes’ theory, there must be significant slack in the labor market before fiscal expansion is justified. It is important to distinguish between mere deficit spending and Keynesianism. Governments had long used deficits to finance wars. But Keynesian policy is not merely spending: it is the proposition that sometimes the economy needs active fiscal policy. Keynesianism recommends counter-cyclical policies, for example raising taxes when there is abundant demand-side growth to cool the economy and to prevent inflation, even if there is a budget surplus. Classical economics argues that one should cut taxes when there are budget surpluses, to return money to private hands. Because deficits grow during recessions, classicals call for cuts in outlays. Keynes encourages increased deficits during downturns. In the Keynesian view, the classical policy exacerbates the business cycle. In the classical view, Keynesianism is almost literally fiscal madness.

The «Multiplier Effect»

The «Keynesian multiplier» has important implications for policy. The effect on demand of any exogenous increase in spending, such as an increase in government outlays is a multiple of that increase – until potential is reached. Thus, a government could stimulate a great deal of new production with a modest outlay: if the government spends, the people who receive this money then spend most on consumption goods and save the rest. This extra spending allows businesses to hire more people and pay them, which in turn allows a further increase in consumer spending. This process continues. At each step, the increase in spending is smaller than in the previous step, so that the multiplier process tapers off and allows the attainment of equilibrium.

Source: Wikepedia

Essential Vocabulary

1. macro-level – макроуровень

2. micro-level – микроуровень

3. aggregate demand – совокупный спрос

4. goods n – товар, изделие (в основном продукты производства)

5. deflation n – дефляция

6.supply-side economics – экономика предложения

7. gold standard – золотой стандарт

8. treaty n – договор

9. currency n – валюта

10. peg n – база, ориентир, точка отсчета

pegging n – привязка, индексация

peg v – привязывать, индексировать

11. centrally-planned economy – плановая экономика

12. effective demand – эффективный (фактический) спрос

13.interest rate – процентная ставка

14. real wage – реальный уровень зарплаты (зарплата с поправкой на инфляцию)

15. nominal wage – номинальная зарплата

16. barter n – бартер

barter v – осуществлять бартерный обмен

17. trade (labor) union – профсоюз

18. depression n – депрессия (период вялой деловой активности)

19. laissez faire – экономическая доктрина, проповедующая минимальное вмешательство государства в экономику

20. inelasticity n – неэластичность (спроса или предложения)

inelastic a – неэластичный

elasticity n – эластичность (спроса или предложения)

elastic a – эластичный

21. liquidity trap – «ликвидная ловушка»

22. floor n – пол (зд. торговый зал биржи, торговые площади магазина или самый низкий уровень цен либо процентной ставки)

23. bond holder – владелец облигаций

24. deviation n – отклонение

deviate v – отклоняться

25. accelerator effect – эффект акселератора (ускорителя) (взаимосвязь темпов экономического роста и уровня инвестиций)

26. tax (price) hike – повышение налогов (цен)

27. buying (purchasing) power – покупательная способность

28. expansionary policy – политика экономического роста

29. counter-cyclical – антициклический

30. deficit spending – дефицитное расходование

31. outlay n – расходы, ассигнования, затраты, издержки

32. crowding out n – вытеснение

crowd out v – вытеснять

33. government bond – правительственная облигация

34.public goods – товары и услуги, которые служат пользе всех и являются общедоступными

35. slack n – зазор, люфт, спад (деловой активности), простой; наличие избыточных производственных мощностей, резерв

slack a – застойный, вялый, бездействующий

36. demand-side – на стороне спроса

37. cooling n – сдерживание (экономики), замедление, охлаждение

38. multiplier n – мультипликатор

multiplier a – мультипликативный

39. exogenous a – экзогенный, внешний

Exercise 1. Answer the following questions.

1. What is the most famous book by John M.Keynes? 2. What is the driving factor of the economic process according to Keynes? 3. In what way did Keynes’ theory conflict with the supply-side economics? 4. How did Keynes explain the level of output and employment in the economy? 5. How did Keynes regard the determination of wages? 6. What was the problem with excessive savings in Keynes’ views? 7. What is the «liquidity trap»? 8. How did Keynes justify the active government policy? 9. Why did the classic economists regard Keynesianism as «fiscal madness»? 10. What is Keynesian multiplier?

Exercise 2*. Find terms in the text that match definitions given below and make sentences of your own with each term.

1. the theory that excessive central government borrowing on capital markets will consume funds otherwise available for private investment

2. notes and coins that are the current medium of exchange in a country

3. a form of international exchange practiced until the 1930s. Each country’s national currency was linked by a fixed rate to gold and varied in volume with the amount of gold held

4. a fall in the purchasing power of money, reflected in a persistent increase in the general level of prices as measured by the retail price index

5. the proportion of a sum of money that is paid over a specified period of time in payment for its loan

6. the act of placing monetary resources into the creation of assets in the manufacturing and service sectors of the economy

7. a monetary situation in which interest rates fall so low that only a rise can be anticipated. Since any rise would only depress the price of bonds, the compulsion to remain in cash persists. At this point, no increase in the money supply can increase people’s preference for cash or therefore have any effect on incomes.

8. the quantity of money in circulation in economy

9. to maintain a national currency at a fixed exchange value in terms of another

10. income not spent on consumption

Exercise 3. You are a journalist writing for Fortune and you are asked to interview John Kenneth Galbraith. Make a dialogue between these two individuals using the following briefing materials.

John K. Galbraith (born October 15, 1908) is a widely read 20th century economist, from the American Institutional Economics school. The Canadian-born author of four dozen books and over one thousand articles was on the faculty of Harvard University from 1934 to 1975. He served in the administrations of Franklin Roosevelt, Harry Truman, John F. Kennedy and Lyndon B. Johnson. In 1961, Kennedy appointed him ambassador to India, where he served until 1963.

Galbraith is considered something of an iconoclast by many economists because he uses non-technical political economy instead of mathematical modeling. Additionally certain economists have alleged that he does not base his conclusions on solid research. In some of his books on economic topics he describes ways in which economic theory does not always mesh with real life.

In American Capitalism: The Concept of Countervailing Power published in 1952, Galbraith outlined how the American economy would be managed by a triumvirate of big business, big labor, and an activist government. He contrasted this with the previous pre-depression era where big business had relatively free rein over the economy.

In his most famous work, The Affluent Society (1958), Galbraith outlined his view that to be successful the United States would need to make large investments in items such as highways and education using funds from general taxation. He also criticized the assumption that continually increasing material production is a sign of economic and societal health. The Affluent Society contributed (given that Galbraith had the ear of President Kennedy) to the «war on poverty», the government spending policy first brought on by the administrations of Kennedy and Johnson.

In The New Industrial State (1967), Galbraith argues that very few industries in the United States fit the model of perfect competition. A third related work was Economics and the Public Purpose (1973), in which he expanded on these themes by discussing, among other issues, the subservient role of women in the unrewarded management of ever-greater consumption, and the role of the technostructure in the large firm in influencing perceptions of sound economic policy aims.

In A Short History of Financial Euphoria (1990), he traces financial bubbles through several centuries, and cautions that what currently seems to be «the next great thing» may not be that great and may have quite irrational factors promoting it.

Source: Wikipedia

Exercise 4*. Fill in the blanks using terms given below.

Milton Friedman

Milton Friedman (born July 31, 1912) is a US economist, known primarily for his work on………………., economic history, statistics, and for his advocacy of…….. capitalism. In 1976, the Royal Swedish Academy of Sciences awarded him the……. Prize in……. «for his achievements in the fields of……. analysis, monetary history and theory and for his demonstration of the complexity of……. policy».

After working for the…….. government and for Columbia University, he received a Ph.D. from that…….. in 1946. He then served as Professor of Economics at the University of Chicago from 1946 to 1976, where he……… significantly to the intellectual tradition of the so-called……. of economics. Since 1977, Friedman has been……. with the Hoover Institution.

Friedman is widely regarded as the leading proponent of the…….. school of economic thought. He maintains that there is a close and stable link between inflation and the………, mainly that the……… of inflation is to be regulated by controlling the amount of money poured into the national economy by the……. He rejects the use of……… as a tool of demand management, and he holds that the government’s role in the guidance of the economy should be severely…….. Friedman wrote extensively on the……… arguing that it had been caused by an ordinary……… whose duration and seriousness were greatly increased by the subsequent…….. of the money supply caused by the misguided policies of the directors of the Federal Reserve. Friedman also argued for the cessation of government………. in currency markets, as well as promoting the practice of………. exchange rates.

Friedman made headlines by proposing a……… to replace the existing…….. system and then opposing the…… to implement it because it merely supplemented the existing system rather than replacing it.

Friedman visited Chile in 1975 during the military dictatorship of Augusto Pinochet. Invited by a private………, he gave a series of lectures on economics. Several professors from the University of Chicago became……… to the Chilean government. Friedman was accused of supporting a regime whose policies included torture and the killing of political opponents.

Critics have remarked that Chile’s dictatorship used its power to implement……., thus contradicting the……. that Friedman claims exists between free markets and political freedom. Friedman defends his role in Chile on the grounds that the move towards open market policies not only improved the……. in Chile but also contributed to the softening of Pinochet’s rule and to its eventual replacement by a democratic government in 1990.

Source: Wikepidia

Terms:

Great Depression, freely floating, advisors, phenomenon, Federal Reserve Bank, bill, stabilization, contraction, intervention, macroeconomics, Nobel, foundation, free market policies, institution, relationship, microeconomics, laissez-faire, Economics, consumption, federal, contributed, affiliated, monetarist, money supply, restricted, financial shock, negative income tax, welfare, economic situation, fiscal policy, Chicago School

Exercise 5. Translate into English.

Уроки экономики: Переделать страну

Разговоры о роли институтов в функционировании экономики сегодня весьма популярны как среди академических экономистов, политиков, реформаторов, так и в широком обывательском сообществе. Если до недавнего времени панацеей от неэффективной работы экономической системы считались «правильные цены» («Установите правильные цены, – говорили неоклассики, – и все сразу начнет работать эффективно»), то теперь практически повсеместно заговорили о «правильных институтах». Но как определить, какой институт «правильный», или, иными словами, эффективный? Имеет ли вообще смысл такое понятие? Действительно ли все дело в правильных институтах? С какими критериями следует подходить к их оценке?

Правильные институты

Институты суть правила, которые дополнены механизмами принуждения к их исполнению. Можно рассматривать институт как структуру, минимизирующую транзакционные издержки (transaction costs), и оценивать его по этому критерию. Однако институт способен обеспечивать локальную минимизацию транзакционных издержек и вместе с тем создавать глобальную неэффективность (подобным свойством обладает, например, институт бартерного обмена). Можно анализировать, сколь эффективно институт помогает решить или по крайней мере смягчить проблему ограниченной рациональности. Так, предприятия с разной формой организации бизнеса по-разному справляются с последствиями ограниченной рациональности своих работников. Аналогично и различные институты с разной степенью эффективности могут добиваться смягчения последствий ограниченной рациональности.

Однако неоднозначность трактовки пользы института имеет место при любых критериях. Скажем, Франклина Рузвельта, который ввел в США систему социального страхования, одни считают гением, спасшим страну, а другие – недалеким злодеем, совершившим гибельный для нее шаг. Институт государственной собственности тоже вызывал и вызывает горячие споры. Может ли государство быть эффективным собственником? Нужно ли ему оставаться владельцем частот вещания и естественных монополий? На эти и многие другие вопросы есть разные ответы и, как следствие, разная государственная политика.

Чем сложнее институт, тем менее однозначен вектор его влияния на общество. Попытки упорядочить всю систему вкупе противоречили бы элементарным законам физики. Если вам кажется, что все довольны нововведением, вы просто учитываете не все факторы. Соответственно, и конкретным институтом не могут быть довольны абсолютно все. Какой бы институт мы ни взяли – систему высшего образования, обязательную вакцинацию новорожденных, Уголовно-процессуальный кодекс или правила дорожного движения, – всегда найдутся люди, которых не устраивает его устройство.

Итак, определить универсальные критерии качества, которые были бы применимы к отдельным институтам, практически невозможно. Необходим анализ экономической системы в целом, и о правильных институтах можно говорить только тогда, когда само общество устроено правильно.

Источник: Ведомости, 13.02.06. (отрывок)

U.S. Fiscal Imbalance Biggest Since 1959

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