The current crisis of capitalism our country and world is going through was not one which could not have been foreseen. All one had to do was to page through John Maynard Keynes’ The General Theory of Employment, Interest and Money, read the section of the chapter, “Notes on the Trade Cycle”, concerning crises. These five pages sum up succinctly not only the current financial meltdown, but also are indicative of the problems that our economy has been facing since 1973, the year the post-World War II sustained boom ended. John Maynard Keynes’ analysis of crises was prescient and still sustains its legitimacy.Keynes defines a crisis as “a sudden collapse in the marginal efficiency of capital” (Keynes, p.315), this marginal efficiency of capital being “the rate of return expected to be obtainable on money if it were invested in a newly produced asset” (Keynes, p. 136). This is to say, the marginal efficiency of capital is is the amount of profit expected from the use of said capital in new investment. A crisis, then, is the result of a sudden and violent change, in the negative direction, of this marginal efficiency. A crisis is not, to be clear, a lower than expected rate of return on investment and capital expenditure, though this could precipitate a crisis. Instead, a crisis involves a lower than expected prediction of the future returns of investment and capital expenditure.
Keynes and the theory of crises
Keynes and the theory of crises
Keynes and the theory of crises
The current crisis of capitalism our country and world is going through was not one which could not have been foreseen. All one had to do was to page through John Maynard Keynes’ The General Theory of Employment, Interest and Money, read the section of the chapter, “Notes on the Trade Cycle”, concerning crises. These five pages sum up succinctly not only the current financial meltdown, but also are indicative of the problems that our economy has been facing since 1973, the year the post-World War II sustained boom ended. John Maynard Keynes’ analysis of crises was prescient and still sustains its legitimacy.Keynes defines a crisis as “a sudden collapse in the marginal efficiency of capital” (Keynes, p.315), this marginal efficiency of capital being “the rate of return expected to be obtainable on money if it were invested in a newly produced asset” (Keynes, p. 136). This is to say, the marginal efficiency of capital is is the amount of profit expected from the use of said capital in new investment. A crisis, then, is the result of a sudden and violent change, in the negative direction, of this marginal efficiency. A crisis is not, to be clear, a lower than expected rate of return on investment and capital expenditure, though this could precipitate a crisis. Instead, a crisis involves a lower than expected prediction of the future returns of investment and capital expenditure.