October 06, 2018 Saturday
Bedtime Story
Keynes on the 'Paradox of Thrift'
In Keynes economics ideally a society
should be saving only that much as that can be invested profitably meaning that
the investment must have a high (or perhaps significant would be the correct
word) interest rate thereby generating profit.
Since the aggregate demand is very crucial
to the foundations of Keynesian economics, the propensity to consume thereby
also becomes of paramount importance.
In his magnum opus of 1936 ‘The General Theory’
John Maynard Keynes states the paradox of thrift in the page 84 of chapter 7 as
follows:
“For although the amount of his own saving
is unlikely to have any significant influence on his own income, the reactions
of the amount of his consumption on the incomes of others makes it possible for
all individuals simultaneously to save any given sums.
Every such attempt to save more by reducing
consumption will so affect incomes that the attempt necessarily defeats itself.
It is, of course, just as impossible for
the community as a whole to save less than the amount of current investment,
since the attempt to do so will necessarily raise incomes to a level at which
the sums which individuals choose to save add up to a figure exactly equal to
the amount of investment.”
To show that Keynes was a mathematician
(which is relatively less known about him), I shall quote a passage from the
Book 1, Chapter 2, Section 4, page 16 where he makes the comparison of classical
economists with Euclidean geometers:
“The classical theorists resemble Euclidean
geometers in a non-Euclidean world who, discovering that in experience straight
lines apparently parallel often meet, rebuke the lines for not keeping straight
– as the only remedy for unfortunate collisions which are occurring.
Yet, in truth, there is no remedy except to
throw over the axioms of parallels and to work out a non-Euclidean geometry.”
And at the same time he was sober enough to
understand that economics based on too much of pure-mathematical models is
bound to collapse in the real world:
“Too large a proportion of recent
“mathematical” economics are mere concoctions, as imprecise as the initial
assumptions they rest on, which allow the author to lose sight of the
complexities and interdependencies of the real world in a maze of pretentious
and unhelpful symbols.”
And finally to those who perceive Keynes as
some sort of Marxist there is this interesting quote of his from Book 6 Chapter
23 which contradicts such a view of his economics:
“I believe that future will learn more from
the spirit of Gesell than from that of Marx.”
This Gesell that Keynes is referring to is
Silvio Gesell an unknown German merchant, theoretical economist and a
libertarian socialist who was born in 1862 in the Kingdom of Prussia and dies
in 1930 when Hitler was all set to take over Germany.
He surely was an original thinker (but no
professor of any subject whatsoever and definitely an economics outsider) who
had managed to impress Keynes with his treatment of money, interest, land
ownership and social reform.
Stay tuned to the voice of an average story storytelling
chimpanzee or login at http://panarrans.blogspot.com
Good night Mon Ami and my fellow cousin ape.
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Another great educator and a teacher that I am aware of is
Professor Subhashish Chattopadhyay in Bangalore, India.
While I narrate stories, Professor Subhashish an electronic
engineer and a former professor at BARC, does and teaches real mathematics and
physics.
He started the participation of Indian students at the
International Physics Olympiad.
Do visit him here:
All his books can be downloaded for free through this link:
For edutainment and English education of your children, I
recommend this large collection of Halloween Songs for Kids:
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