But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Taken from The General Theory of Employment, Interest and Money pg 383 by John Maynard Keynes
As far as I am concerned what you are about to read can only be described (in the British vernacular) as ‘brilliant’. Brian manages to bring to life the times and importance of Keynes in his introduction to The General Theory taught as a 4th year seminar course at the University of Guelph. It should be read by all who love or hate Keynesian economics. (Those who don’t really care are of course exempt.) If you are interested at all, you will find this text a pleasure to read.
Lectures on Keynes’ General Theory by Professor Brian Ferguson winter 2013:
Lecture 1: Chapter One, Background and Historical Setting
John Maynard Keynes’ General Theory of Employment, Interest and Prices is one of those rare books which actually deserves to be labeled revolutionary. Regardless of one’s take on Keynesian macroeconomics, the publication of the General Theory marked a major change in the way economists thought about macroeconomic issues. Indeed, Keynes can be credited with (or slammed for) creating the concept of macroeconomics. Arguably, prior to the General Theory, most professional economists thought of the macroeconomy in a general equilibrium sense, as an aggregate of a large number of individual markets, and they assumed that the analysis of how individual markets behaved could be carried over pretty much unchanged to the collection of markets which constituted the economy as a whole. There was, it seemed, no need to think of the economy as anything other than the sum of its parts, and an understanding of how those parts worked was sufficient to understand how the economy as a whole worked. After the General Theory, that no longer held. Economists started to think in terms of aggregates.
Guest blogger BF continues
After the bit about the bull and bear brigades, Keynes goes on to say: “As a rule, we can suppose that the schedule of liquidity-preference relating the quantity of money to the rate of interest is given by a smooth curve which shows the rate of interest falling as the quantity of money is increased.”, which sounds as if he’s summarizing the relation between the demand for money and the rate of interest, holding income constant. In fact he’s going off in a different, more empirical direction. He goes on to say that as the rate of interest falls we would expect cash holdings to increase because of the transactions motive, arguing that a drop in the rate of interest will increase national income and that increase in income will increase the transactions demand for money. So he’s not describing a theoretical liquidity preference function, with money on the horizontal axis and the interest rate on the vertical, rather he’s discussing the curve you’d get if you took actual data on money holdings and the interest rate and plotted the one against the other. Then, in addition to the transactions demand operating through the effect of the interest rate on the level of national income, JMK goes on to say that a drop in the rate of interest will cause some individuals to hold more money in anticipation of its rising (and bond prices falling) again.
More from Guest blogger BF
When JMK is talking about the demand for money he is, as we’ve said, really thinking of the individual’s portfolio allocation decision, and the individual he’s thinking of is basically himself. Contrary to the idea that Keynes’ saver is myopically driven by the amount of his current income and not looking to the future of his asset holdings, he’s actually thinking about a guy who devotes a fair bit of attention to the financial markets (incidentally, forget that stuff about Keynes making his money by reading the financial pages and spending half an hour on the phone with his broker before he got out of bed in the morning – he actually put quite a bit of effort into managing his, and other people’s, finances). This is very much the guy he’s got in mind when he talks about the speculative motive for holding cash.