The rise in popularity of Keynes as an economist coincided with greater application of his theory to international economics. This shift in approach to international economics is evident from the following statistic,
“John Cunningham Wood reprinted 110 journal articles written on Keynes between 1946 and 1981 in the four volumes of John Maynard Keynes: Critical Assessments, while Mark Blaug included another 73 published from 1981 to 1989 in the Keynes volumes of Pioneers of Economics. By contrast, one volume of Pioneers of Economics comprising nine articles suffices for Irving Fisher, Arthur Hadley, Ragnar Frisch, Friedrich Hayek, Allyn Young, and Ugo Mazzola.” (Snowdon & Vane, 1995)
Joseph Stiglitz and Bruce Greenwald are two contemporary economists affiliated to the Keynesian school. They support the old Keynesian position that increasing wage and price flexibility may worsen a recession. On the other hand, the new Keynesians would suggest that natural economic processes can exaggerate economic shocks that are in reality quite small and that prevailing price rigidities might decrease the intensity of the fluctuations as stated by Keynes. New Keynesian economics have crucial policy implications, especially when every presumption regarding non-interventionist theories come under heavy scrutiny. Nation-states drawing up fiscal policies can take heart from the fact that empirical evidence shows how their timely interventions have stabilized the economy more often than not. Discretionary ad hoc measures on part of the government are highly relevant today, for “changing economic circumstances require changes in economic policy, and it is impossible to prescribe ahead of time what policies would be appropriate” (Snowdon & Vane, 1995). Also, it would be impractical for any government to adhere to a set of predetermined rules for if the rate of unemployment soars, the government will have to intervene irrespective of what was planned before. However, it has to be kept in mind that moderation is the key to good governance. In the context of interference in the national economy, ambition should be pursued with caution and restraint.
Since international economy is dominated by large business corporations, their decisions can have cascading economic effects. Usually, most firms are cautious during an economic downturn as they are attuned to risk minimization. This implies that “a negative aggregate demand shock could translate itself into a leftward shift of the aggregate supply schedule” (Mcdermott, 1993). Other factors such as generic volatility associated with all imperfect markets, asymmetric information equity and limited risk diversification options, etc, make business corporations susceptible to bankruptcy, especially when the level of output is high. Further,
“Risk-averse firms will be less willing to supply at every price when the environment becomes less favourable and increasingly uncertain. When in an economic downturn firms observe a shift in their demand curve they must either reduce their output or their price. Risk-averse firms prefer to adjust their output because the uncertainties associated with changing prices may be much greater…The important implication is that the resultant risk-based aggregate supply curve will shift leftwards following an economic downturn initiated by an aggregate demand shock. This results in the non neutrality of money even if prices are perfectly flexible” (Hazlitt, 1984).
A fitting conclusion to this essay would require us to compare the importance of Keynes’ work with that of other legendary economists of the past. As early as within the first decade subsequent to the publication of John Maynard Keynes’ The General Theory of Employment, Interest and Money it had become a corner stone of modern economic thought and “has had more influence upon the thinking of professional economists and public policy makers than any other book in the whole history of economic thought in a comparable number of years”. Similar to Adam Smith’s Wealth of Nations, which was the most significant work on economics to be published during the eighteenth century and Karl Marx’s Das Capital the following century, Keynes’ General Theory has aroused admiration and disagreement alike. While Smith’s work was a critique of mercantilism, Marx’s book was an analytical discourse on the deficiencies of capitalism. Even those economists who were initially quite critical of Keynes’s theories have come to accept the validity of the Keynesian position.