🏴 The Keynesian revolution

A complete break with the neoclassicals

A moral revolution

He was aware that he was writing in a difficult political and economic time (rise of Nazism and the Great Depression). He hoped to give the economy back to politicians to help them govern.

Keynes thought that in around a hundred years, the economic problem would be solved. Humans would not have to work for them, thanks to technical progress. Thus, humans could use their free time for other things, such as philosophy and art. In the future, the challenge would be to use our free time wisely. Losing the tradition of working would be difficult (as people are conditioned). He thought people are sick of money.

To achieve these goals, we need to achieve these four goals first:

1. Control Demography evolution
2. Bring Peace to the world
3. Have Faith in Science
4. Growth under conditions

Then, economists would be like dentists: they would look at the problems of the economy and heal them.

The models built by the neoclassicals were not good enough for the crisis: so we need to build a new one. We need to create a model that can understand the big institutions of capitalism, two in particular: money and wage labor. (Explaining deflation + unemployment).

A Monetary Production Economy (MPE)

The vision of the economy will also be revolutionized. He almost called his book "Monetary Theory of Production" because of its importance. Studying only production is the limit of neoclassical theory, especially during a crisis. As we have deflation and unemployment, we need to study the money & labor markets. Money NEEDS to be studied.

First and foremost, money has a central role. Money is not neutral. Money is the preferred means for agents to hold wealth. Because people want to be wealthy, they desire money. So they want money to be richer, not just to buy things.

Franck Van de Velde, a Keynesian economist working on wage labor, notes that employees are paid in money, not in goods. This means there is a gap between production and the appropriation of production's wealth. He proposes a fourth criterion: money is used to pay workers.

Functions of money:

1. Unit of account
2. Medium of exchange
3. Store of value
4. Remuneration of workers

When you invest money, you kind of know what happens to it. But when you pay an employee, you never know if this money will be stored or spent.

Thus, there is maybe a disequilibrium between supply & demand ($S\ne D$). It opposes Say's Law, but it is the most important hypothesis.

Producers can be considered as entrepreneurs who anticipate the future to make present decisions. This anticipation was never taken into account by neoclassicals.

In the end, with non-neutral money, people may or may not want money for itself. Production is an anticipation of the future, and sometimes it can fail. This is why Keynes uses the term General Uncertainty.

In Chapter 12 of the General Theory, he discusses radical uncertainty using the metaphor of the beauty contest. People do what everyone else does, so we follow the crowd. But if it collapses, the system fails. We are losing the idea of the rational human to "animal spirits" (as humans have limited mindpower, they acknowledge they will make mistakes and prefer to follow others).

Neoclassical Market	Keynesian Market
Self-regulating markets	Markets can fail (disequilibrium)
Supply creates its own demand (Say's Law)	Demand drives production (Effective Demand)
Prices and wages are flexible	Prices and wages are rigid (sticky)
Money is neutral	Money is active (store of value, speculation)
Unemployment is voluntary	Unemployment can be involuntary
Homo Economicus	Moutons
Anticipation Parfaite	Incertitude Radicale