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Posted on May 4th, 2014, by

It is necessary to consider the difference between the so-called real and the monetary analysis for the purpose to give Keynes’ theory its rightful place in the development of economic thought. In the first case, the economic problems arise solely from decisions based on the relationship between people and goods. Money in the economic system of equations is simply a means of accounting and facilitates transactions. Usually money does not affect the economic situation as a modern economy is nothing like an extended system of barter. Thus, money is a dark veil, which must be removed to reveal the real exchange relations behind the monetary expression of the price. Income is defined as the flow of goods and services exchanged for labor, while saving an actual accumulation of productive forces and their transformation into a physical hardware. At the same time, real analysis emphasizes the non-monetary aspects of economic behavior.

The main aspect of Keynes theory is based on the notion of effective demand. Keynes was interested in the fact how many people were going to spend their costs because this category determined the level of consumption and investment. The desire to spend has been interpreted as aggregate demand, which was more a psychological than technological factor. It is true that Keynes made a lot of interesting assumption, but Keynesian system, of course, suffered criticism. According to Helburn, S. & Bramhall (1986), Arthur F. Burns abruptly opposed the theories of Keynes during one of his rare fits of theoretical inspiration. He questioned whether this theory was sufficient to ensure that governments could use it to counteract the cyclicality. This opinion can be attributed to Burns, his over-enthusiasm for the categorical denial of the facts and theories in general. Burns objected also against a common approach on the grounds that not all firms are alike. He argued that the unexpected can upset the balance of profits according to Keynes, the consumption function has the form, which it attributed to the General Theory’, and there is no guarantee that costs were always breathe life into the slumbering economy; Keynes’ theory has had a vice, and according to Burns, this vice was in its mechanistic method, due to which it is completely unable to understand the true dynamics of the business world. However, these objections reveal a complete misunderstanding of goals of theoretical research by Burns; while he could equally hotly debate Ricardo’s and Marshall’s economic ideas, as he debated Keynes’ theory.

To add, a more serious critical argument is that Keynes is not too far away from the classical theory. A picture of a stable economic equilibrium, which was presented by the last, corresponds to a period of full employment and as soon as a similar situation is more or less reached, the classical method of analysis is as useful as other methods. Keynes’ theory, according to realist critique presented in Helburn, S. & Bramhall (1986), is a special case of a more general theory of Marshall (having no special relation to the current conditions of prosperity). As one researcher stated, Keynes simply established diplomatic relations between the conventional theory and the economic cycle.

To sum up, Keynes was also accused in the arbitrary choice of variables and constants which really were the most important elements in any theory. For instance, if he put the propensity to save rather than consume analysis in the base of his theory, he would not have so many followers. The way how Keynes formulated the General Theory allowed him to adjust its positions to the current political and social changes. His theory allowed economists, without abandoning their own views, to take a fresh look at how capitalism operates. It was a convenient procedure, and many supporters of Keynes were grateful to him for that. However, they did not recognize that the characteristics of capitalist society have led to a contradiction between full employment in peacetime and a system of free enterprise. A full employment is possible only in those spheres where the government spending is reaching astronomical values. If to get to the root of Keynes’ theory, one can not conclude that Keynes firmly adhered to the principle of private enterprise.

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