As the global economic crisis continues to cause damage, some policy makers have called for a more Keynesian approach to current economic problems. In this book, the economists Peter Temin and David Vines provide an accessible introduction to Keynesian ideas that connects Keynes's insights to today's global economy and offers readers a way to understand current policy debates. They survey economic thinking before Keynes and explain how difficult it was for Keynes to escape from conventional wisdom. They also set out the Keynesian analysis of a closed economy and expand the analysis to the international economy, using a few simple graphs to present Keynes's formal analyses in an accessible way. Finally, they discuss problems of today's world economy, showcasing the usefulness of a simple Keynesian approach to current economic policy choices. Keynesian ideas, they argue, can lay the basis for a return to economic growth.
Keynes
Keynes Useful Economics for the World Economy
Peter Temin and David Vines
The MIT Press Cambridge, Massachusetts London, England
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[email protected] Set in Sabon by the MIT Press. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Temin, Peter. Keynes : useful economics for the world economy / Peter Temin and David Vines. pages cm Includes bibliographical references and index. ISBN 978-0-262-02831-8 (hardcover : alk. paper) 1. Keynes, John Maynard, 1883–1946. 2. Economists—Great Britain. 3. Economics— Great Britain—History—20th century. 4. Keynesian economics. I. Vines, David. II. Title. HB103.K47T49 2014 330.15'6—dc23 2014010637 10 9 8 7 6 5 4 3 2 1
for Charlotte and Jane
The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again. John Maynard Keynes, A Tract on Monetary Reform (1923), chapter 3
Contents
Preface xi 1 Economics before Keynes, I: Hume 1 2 Keynes at Versailles 9 3 Keynes and the Macmillan Committee 19 4 Economics before Keynes, II: Marshall 31 5 The General Theory 41 6 IS-LM Curves 53 7 The Liquidity Trap 65 8 Bretton Woods and the Swan Diagram 75 9 The Keynesian Age: Crises and Reactions 89 10 An International Paradox of Thrift 97 Glossary of Economic Terms 107 Sources and Further Readings 113 Index 115
Preface
John Maynard Keynes was an intellectual giant of the twentieth century. He created a new branch of economics now known as macroeconomics, and he played a major role in the reconstruction of Europe and of the world economy after the Second World War. We have written this short introduction to Keynesian economics because his contributions are too often neglected. In addition, they are relegated to the understanding of a single economy; his contributions to an understanding of the global economy are ignored. In a time of global macroeconomic crisis, these insights are important. This book provides a short survey of Keynesian economics that allows readers to apply its tools to current policy debates. The exposition is set within an account of Keynes’ life that locates his innov