Financial Barriers to Demand-led Growth

Abstract

Keynes disagreed strongly with the laissez faire view that market economies possess strong homeostatic properties and if only prices were flexible would tend in the long run towards full employment equilibrium. Keynes emphasized that the future is unknowable and economic behavior nondeterministic. Continuously changing expectations of future aggregate demand (AD) and future profitability drive current investment spending, and govern current AD. He characterized agents’ expectations about future AD as “animal spirits,” self-fulfilling waves of optimism and pessimism about the unknown future state of the economy. This expectations process generates unpredictable fluctuations in future economic activity.

The outstanding faults of the economic society in which we live are its failure to provide full employment, and its arbitrary and inequitable distribution of wealth and incomes.

John Maynard Keynes, 1936: 372

It is the policy of an autonomous rate of interest unimpeded by international pre-occupations, and of a national investment programme directed to an optimum level of domestic employment which is twice blessed, in the sense that it helps ourselves and our neighbours at the same time. And it is the simultaneous pursuit of these policies by all countries together which is capable of restoring economic health and strength internationally, whether we measure it by the level of domestic employment or by the volume of international trade.

John Maynard Keynes, 1936: 349

We should not conclude from this that everything depends on waves of irrational psychology. … The state of long term expectations is often steady. … We are merely reminding ourselves human decisions affecting the future, whether personal, or political, or economic, cannot depend on strict mathematical expectations, since the basis for making such calculations does not exist. … it is our innate urge to activity which makes the wheels go round.

John Maynard Keynes, 1936: 162–3

At the time of his death [April 21, 1946] he was beginning a post-budget memorandum for the Chancellor, arguing that a gradual and controlled rise in prices and wages desirable. … He also prohphesied that in the future inflation was more likely to be caused by changes in costs than by excess demand. He offered no solution.

Moggidge, 1992: 835