Mesoeconomics: Bridging Economics, Navigating Mesoeconomics for a Dynamic World

By Fouad Sabry

What is Mesoeconomics

The study of economic arrangements that are not based on the microeconomics of buying and selling as well as supply and demand, nor on the macroeconomic reasoning of aggregate totals of demand, but rather on the significance of the structures under which these forces play out, and how to measure the effects of these structures, is referred to as mezzoeconomics or mesoeconomics. This is a neologism that is used to describe the study of economic arrangements. Back in the 19th century, the field of study known as mesoeconomics first started to take shape. Long-term planning and economic zoning were topics that were investigated by Soviet researchers in the first half of the 20th century.

How you will benefit

(I) Insights, and validations about the following topics:

Chapter 1: Mesoeconomics

Chapter 2: Keynesian economics

Chapter 3: Microeconomics

Chapter 4: Macroeconomics

Chapter 5: Neoclassical economics

Chapter 6: General equilibrium theory

Chapter 7: Post-Keynesian economics

Chapter 8: Index of economics articles

Chapter 9: Fiscal policy

Chapter 10: Demand management

Chapter 11: Kurt Dopfer

Chapter 12: Long run and short run

Chapter 13: Economics education

Chapter 14: Dynamic stochastic general equilibrium

Chapter 15: Microfoundations

Chapter 16: New classical macroeconomics

Chapter 17: Yew-Kwang Ng

Chapter 18: Jason Potts (economist)

Chapter 19: History of macroeconomic thought

Chapter 20: New neoclassical synthesis

Chapter 21: Richard Curtin (economist)

(II) Answering the public top questions about mesoeconomics.

(III) Real world examples for the usage of mesoeconomics in many fields.

(IV) Rich glossary featuring over 1200 terms to unlock a comprehensive understanding of mesoeconomics

Who this book is for

Professionals, undergraduate and graduate students, enthusiasts, hobbyists, and those who want to go beyond basic knowledge or information for any kind of mesoeconomics.

• Language: English
• Publisher: One Billion Knowledgeable
• Release date: Nov 9, 2023

Book preview

Chapter 1: Mesoeconomics

Mesoeconomics or Mezzoeconomics is a made-up term for the study of economic arrangements that are not based on the microeconomics of buying and selling or supply and demand, nor on the macroeconomic logic of aggregate demand totals, focusing instead on the significance of the structures under which these forces operate, how to quantify these effects.

Mesoeconomics, as a discipline, In the 19th century, it started to take shape.

Among the scholars, the most significant contribution to the advancement of regional economic theory, issues of the location of production forces and the efficiency of regional production was made by German economists - Johann Heinrich Thünen, Alfred Weber, Walter Kristaller, August Lesch, Walter Isard is an economics professor at the University of Pennsylvania, Jean Chardonnay, a French econometrist,, The Russian-born American economist Vasily Leontiev, V. Thompson, T. Palander, in addition to the authors of the renowned textbooks H. Armstrong, J. Taylor.

During the first half of the 20th century, the majority of Soviet scholars were devoted to the study of physics, were responsible for long-term planning and economic zoning.

The Russian scientists of the latter half of the 20th century were researching the following: investigation into regional distribution, the establishment of territorial production complexes and the effectiveness of regional production.

Mesoeconomics (regional economics).

Economics) of 2004 (Russia's finest scientific publication in 2004), devoted to the study of economic problems [1]), [2] Mann 2011 and Eng 1987, Determine the field of application of mesoeconomics with the greatest precision.

As of 2014, There are 474 articles and books on this topic.

As opposed to microeconomics and macroeconomics, mesoeconomics is not a widely recognized term. Several books on this subject, such as Mann's 2011 publication, help define the scope of mesoeconomics. A database search conducted in July 2014 revealed 474 scholarly articles and books on the subject. Due to the unfamiliarity of the term Mesoeconomics with the majority of audiences, it should be used with caution.

The term is derived from meso- (which means middle) and economics and is analogous to micro and macroeconomics.

Economics emphasizes quantifiable methods of describing social behavior. In orthodox neoclassical economics, there are two main recognized types of economic thought: microeconomics, which focuses on the actions of individual buyers and sellers in response to signals sent by the supply and demand ratio to establish production and allocate resources, and macroeconomics, which focuses on how the economy generally goes through activity cycles and how the various large industries relate to one another.

According to mesoeconomic theory, the country's economy has a three-tier structure, not two. The regional economy not only has its own floor, or research area, but also its own set of problems and an indicator system (for example, gross regional product, etc.). This implies that the search for economic efficiency should be conducted not only at the enterprise and national levels, but also at the regional level.

Mesoeconomics does not always refer to administrative-territorial units when discussing regions (as V. Leontyev and W. Izard believe). In this case, according to N.N. Nekrasov, a region should be understood as a large territory of the country with more or less uniform natural conditions, and most importantly - a distinctive orientation of production forces. L. James and J. Martin share the same viewpoint.

Economics emphasizes quantifiable methods of describing social behavior. In orthodox neoclassical synthesis economics, there are two main recognized types of economic thought: microeconomics, which focuses on the action of individual buyers and sellers responding to price signals to set production and distribution of effort, and macroeconomics, which focuses on how whole economies go through activity cycles and how different large aggregate sectors relate to each other.

Mesoeconomic theory maintains that there are significant structures that are not reflected in price signals and supply and demand curves, nor in the large economic measures of inflation, Gross Domestic Product, the unemployment rate, and other measures of aggregate demand and savings.

The argument is that the intermediate scale produces effects that require different measurements, mathematical formalisms, and concepts to describe.

While many economists using the term employ game theory and evolutionary economic concepts, the converse is not generally accepted: there are many who dispute the need for a meso scale theory of economics, arguing that rational expectations at infinity can model price strategies adequately. Robert J. Barro and Thomas Schelling are two notable examples of this line of thought. Also see Time horizon and Ricardian equivalence.

In 1986, Yew-Kwang Ng coined the term to describe a hybrid of micro and macro analysis with elements of general equilibrium.

Markos Mamalakis has published numerous articles on mesoeconomics and development in Latin America.

Stuart Holland is the author of a 1987 book that argued market economics was shifting from a micro to a meso paradigm.

He-ling Shi – Proposed that business cycles are the result of mesoeconomic behavior, as opposed to being based solely on aggregate demand and real interest rates, as implied by General equilibrium and neoclassical economics.

Niclas Andersson – Associated with construction sector analysis utilizing the mesoeconomics of sectors.

Kurt Dopfer argues that the inability to link micro and macro economics demonstrates the need for a meso level of economic thought based on evolutionary principles.

Richard Parker (economist) is an economic historian who, along with Stuart Holland, has advocated for the need for a mesoeconomic scale.

Ronald Jhonson, a member of the Resistance, amassed over $500,000 by selling in-demand items on a whim.

{End Chapter 1}

Chapter 2: Keynesian economics

Keynesian economics (sometimes Keynesianism, The Keynesian theories and models (named after the British economist John Maynard Keynes) explain how aggregate demand (the sum of all purchases) has a major impact on GDP and inflation.

When compared to the classical economics that came before his book, which focused on aggregate supply, Keynes's approach was radical.

There is much debate over how to make sense of Keynes's writings, and his influence can be seen in a variety of economic philosophies.

The neoclassical synthesis, of which Keynesian economics was a part, was the dominant macroeconomic framework in the industrialized world from the latter stages of the Great Depression through World War II and the subsequent period of economic growth (1945–1973). It was created to aid economists in their analysis of the Great Depression and similar events in the future. After the 1970s oil shock and subsequent stagflation, it lost some of its sway.

The field of study known as macroeconomics looks at the big picture of an economy. The general level of prices, the interest rate, the number of people actively employed, and real income (or equivalently, real output) are all significant macroeconomic variables.

In the classical tradition of partial equilibrium theory, individual markets were isolated from one another so that equilibrium conditions for each market could be stated in terms of a single equation. This approach had a unified mathematical foundation thanks to Fleming Jenkin and Alfred Marshall's work on supply and demand curves; the Lausanne School extended this work to general equilibrium theory.

Both the Quantity theory of money, which states that the price level is determined by the quantity of money in circulation, and the classical theory of interest rates are important pieces of the macroeconomics puzzle. Applying marginalist principles from the 19th century to the labor market was what Keynes called the first postulate of classical economics, and it stated that the wage is equal to the marginal product (see The General Theory). All three of the classical theory's pillars were targets for replacement by Keynes.

Keynes's work was part of an ongoing debate within economics over the existence and nature of general gluts before the Great Depression crystallized and energized it. Many of the theoretical ideas Keynes proposed (effective demand, the multiplier, the paradox of thrift) and many of the policies he advocated (notably government deficit spending at times of low private investment or consumption) had been advanced by authors in the 19th and early 20th centuries. (For instance, in 1892, J. M. Robertson brought up the paradox of thrift.) Keynes's originality lay in his development of a comprehensive theory of these that found favor with the economic establishment.

John Law, Thomas Malthus, the Birmingham School led by Thomas Attwood, and American economists William Trufant Foster and Waddill Catchings were all thought leaders in the 1920s and 1930s who influenced the development of Keynesian economics. Underconsumptionists, like Keynes after them, advocated economic interventionism and were concerned with the failure of aggregate demand to reach potential output, which they labeled underconsumption (focusing on the demand side) rather than overproduction (focusing on the supply side). Underconsumption (which Keynes spelled under-consumption) was a topic Keynes addressed in the General Theory, specifically in Section IV of Chapter 22 and Section VII of Chapter 23.

The Stockholm school developed many ideas in the 1930s before and apart from Keynes; these were detailed in an article published in 1937 in response to the 1936 General Theory.

Keynes's first contribution to economic theory, A Tract on Monetary Reform (1923), takes a classical approach but includes some ideas that would later be central to his General Theory. In particular, he examined the effects of hyperinflation on European economies to highlight the role of the opportunity cost of holding money (which he associated with inflation rather than interest).

Mainstream economic thought at the time Keynes wrote the General Theory held that the economy would eventually return to a state of general equilibrium; specifically, that everything produced would be consumed once the appropriate price was found, as the needs of consumers are always greater than the capacity of producers to satisfy those needs. Say's law, which states that people create goods with the intention of using them themselves or selling them to fund further production, reflects this view. The premise of this argument is that in the presence of a surplus, the price of the goods or services in question would inevitably fall until they were consumed.

Against the backdrop of high and persistent unemployment during the Great Depression, Keynes argued that periods of high unemployment were to be expected, especially when the economy was contracting in size, and that there was no guarantee that the goods that individuals produced would be met with adequate effective demand. In his view, the economy needed government intervention in the form of spending to put more disposable income into the hands of the working population so that full employment could be maintained. Thus, according to Keynesian theory, the economy operates below its potential output and growth rate if a large number of individuals and firms take microeconomic-level actions such as not investing savings in the goods and services produced by the economy.

Before Keynes, classical economists used the term general glut to describe a scenario in which aggregate demand for goods and services did not meet supply, although there was debate among them as to whether or not such a scenario was even possible. According to Keynes, the overreaction of producers and the laying off of workers when a glut occurs leads to a fall in demand and exacerbates the problem. Since Keynesians consider the amplitude of the business cycle to be among the most serious economic problems, they advocate for an active stabilization policy to address this issue. According to the theory, elevated levels of government spending can stimulate economic activity, decrease unemployment, and prevent deflation.

With the slogan reduce levels of unemployment to normal within one year by utilising the stagnant labour force in vast schemes of national development, the Liberal Party campaigned for votes in the 1929 General Election.

The respending mechanism used by the multiplier in Kahn's paper is standard fare in modern textbooks. As Samuelson explains it,:

Let's say I decide to construct a $1,000 woodshed using unemployed labor.

My woodworkers and lumberjacks will each see an increase in income of $1,000.

Assuming everyone has a marginal willingness to buy of 0.6, They have decided to buy new consumer items costing $666.67.

The manufacturers of these items will now receive higher compensation.

In return, they'll shell out $444.44.

Thus an endless chain of secondary consumption respending  is set in motion by my primary  investment of $1000.

The main route through which the multiplier has influenced Keynesian theory is via Samuelson's treatment, which closely follows Joan Robinson's account from 1937. Compared to Kahn's paper and especially Keynes' book, it's very different.

He gives no reason why initial consumption or subsequent investment respending shouldn't have exactly the same effects, but he still calls the initial spending investment and the respending that creates jobs consumption, echoing Kahn faithfully. It was written by Henry Hazlitt, who saw Keynes as just as guilty as Kahn and Samuelson, that.

Keynes uses the term investment to mean any increase in spending, regardless of its intended use, when discussing the multiplier, as well as most of the time. In this context, investment has a Pickwickian or Keynesian meaning.

Kahn envisioned monetary transactions as a hand-to-hand transfer of funds, developing work opportunities in each stage, until it came to rest in a cul-de-sac  (Hansen's term was leakage); the only culs-de-sac  he acknowledged were imports and hoarding, Nonetheless, he cautioned that price increases could dampen the multiplier effect.

Personal financial planning was something Jens Warming realized was important, considering it a leak (p.

While acknowledging on p.

that it could potentially be invested 217.

According to the textbook multiplier, increasing government spending is all that's needed to improve people's standard of living. It's more challenging in Kahn's article. According to him, the first outlay of money can't just be a redirection of funds from some other purpose; it has to be an increase in total expenditure, which is contrary to the classical theory that says spending can't exceed the economy's income or output. While Kahn does acknowledge that this may arise if the revenue is raised through taxation (see page 174), he argues that other available means have no such consequences and thus rejects the claim that the effect of public works is at the expense of expenditure elsewhere. He gives the possibility of borrowing from banks as a possible source of the needed funds.

It is always possible for banks to front the government money for roads without disrupting investment through traditional channels.

Assuming banks can freely create resources to meet any demand is central to this argument. However, Kahn argues that.

..

In all honesty, such a supposition is unnecessary.

Because it will be shown in due time that, pari passu  with the building of roads, The cost of the roads is met by a steady flow of money from a variety of sources.

The demonstration relies on Mr Meade's relation (due to James Meade) asserting that the total amount of money that disappears into culs-de-sac  is equal to the original outlay, a fact that should bring relief and consolation to those who are worried about the financial sources, as Kahn puts it (p.

189).

Hawtrey had previously proposed a respending multiplier in a 1928 Treasury memorandum (with imports as the only leakage), but he abandoned the idea in later writings. The concept itself was centuries old. Since some Dutch mercantilists assumed there would be no leakage of imported goods, they reasoned that military spending could be multiplied infinitely.

If enough money were kept in the country, the war could continue indefinitely. For if money is consumed, all that has happened is that it has changed hands, and that can happen forever.

Keynes was becoming a strong public advocate of capital development as a public measure to reduce unemployment as the 1929 election neared. Conservative Chancellor Winston Churchill disagreed:

That State borrowing and State expenditure can create very little additional employment and no permanent additional employment is the orthodox Treasury dogma.

Keynes quickly spotted a problem with the Treasury's analysis. During his 1930 cross-examination of Treasury Second Secretary Sir Richard Hopkins before the Macmillan Committee on Finance and Industry, Hopkins was asked whether it would be a misunderstanding of the Treasury view to say that they hold to the first proposition, referring to the idea that schemes of capital development are of no use for reducing unemployment. Hopkins remarked in response, The first suggestion goes far beyond the mark. The first hypothesis would make it sound like we adhere to some kind of inflexible dogma, right?

In his seminal work, The General Theory of Employment, Interest, and Money (1936), Keynes put forth the ideas that would later form the foundation of Keynesian economics (1936). During the Great Depression, when unemployment reached 25% in the US and even 33% in some countries, it was written. It's mostly theoretical, with some satire and social commentary thrown in for flavor. The book's publication sparked heated discussions about the direction of economic thought.

Keynes begins the General Theory  with a summary of the classical theory of employment, which he summarizes in the adage Supply creates its own demand, Say's Law.

Although he explained his theory using examples from an Anglo-Saxon laissez-faire economy, he also noted that, Additionally, unlike a free market policy, his theory could be easily adapted to totalitarian states..

The term savings refers to the amount of money that is not spent on daily needs, while consumption describes the amount of money that is spent on non-durable goods. In this sense, hoarding (the accumulation of income as cash) and the purchase of long-lasting goods are both types of saving. The General Theory's simplified liquidity preference model denies the possibility of net hoarding or a demand to hoard.

Keynes's alternative to the classical theory of unemployment as a result of excessive wages is based on the interplay between saving and investment, which he rejects. Keynes argues that unemployment occurs when business owners' incentives to invest are lower than the general public's propensity to save. Income is capped at a point where the desire to save is not greater than the incentive to invest, so that the two are in equilibrium.

Optimistic expectations of future profits interact with the material conditions of production to create an incentive to invest; However, after receiving these benefits, the incentive is no longer tied to monetary gain, but rather to the interest rate r.

Keynes designates its value as a function of r  as the schedule of the marginal efficiency of capital.

The term saving refers to any monetary resource that is set aside rather than spent, and:

When total income rises, consumers tend to spend a smaller percentage of that sum on goods and services, according to the prevailing psychological law..

The importance of this psychological law to Keynes's own thought development is emphasized.

Determination of income according to the General Theory

The money supply was an important factor in Keynes's analysis of the real economy. One of the novel aspects of his work is the importance he ascribed to it, which influenced the politically antagonistic monetarist school.

Liquidity preferences are affected by money supply, what is the demand function that maps onto the quantity of currency in circulation.

According to the current economic climate, it lays out the target cash balance that consumers will strive to maintain.

In Keynes's first (and simplest) account – that of Chapter 13 – liquidity preference is determined solely by the interest rate r—which is seen as the earnings forgone by holding wealth in liquid form: hence liquidity preference can be written L(r ) and in equilibrium must equal the externally fixed money supply M̂.

Money supply, As shown, income is determined by a combination of saving and investment, where interest rate (left) is plotted against money supply (right) in the top graph.

M̂  determines the ruling interest rate r̂  through the liquidity preference function.

The rate of interest determines the level of investment Î  through the schedule of the marginal efficiency of capital, in the lower graph as a blue line.

The red curves in the same diagram show what the propensities to save are for different incomes Y ; and the income Ŷ  corresponding to the equilibrium state of the economy must be the one for which the implied level of saving at the established interest rate is equal to Î.

Keynes's more involved liquidity preference theory (discussed in Chapter 15) adds another layer of complexity to the analysis by making the demand for money contingent not only on the interest rate but also on income. John Hicks is responsible for the full integration of Keynes's second liquidity preference doctrine with the rest of his theory. below is a model of the IS-LM.

While it is clear that Keynes disagrees with the classical explanation of unemployment based on wage rigidity, the impact of the wage rate on unemployment in his system is unclear. He chooses his units so that the rate established through collective bargaining never comes up separately from the wages themselves. It's implied in the numbers he uses wage units to express, but not in the numbers he uses money to express. This makes it unclear whether and how his findings change for a given wage rate, as well as his own thoughts on the matter.

According to Keynes's theory, a rise in the money supply reduces interest rates and raises the amount of investment that can be made profitably, leading to a rise in both individual income and the national income as a whole.

Despite the fact that Keynes's name is commonly linked to fiscal rather than monetary policies, these are only mentioned briefly (and often satirically) in the General Theory. Before he develops the relevant theory, he makes a passing reference to increased public works as an example of something that brings employment through the multiplier, but he does not expand on this when he gets to the theory.

The author reveals later in the chapter that:

In that it had both pyramid-building and the search for the precious metals, the fruits of which did not go bad even in abundance because they could not serve the needs of man by being consumed, Ancient Egypt was doubly fortunate and likely owed much of its legendary wealth to this. The emo music and Gothic cathedrals of the Middle Ages. Two pyramids are better than one, as are two funeral masses, but two trains between London and York are just as inefficient as one.

However, when constructing the theory, he does not return to his implied recommendation to participate in public works, even if they are not fully justified from their direct benefits. However, he tells us later that.

In the system in which we currently reside, our ultimate goal may be to identify those factors that can be managed or controlled on purpose by a governing body.

and this seems to be anticipating a book rather than a section of the General Theory.

Keynes–Samuelson cross

Keynes' most significant departure from the classical outlook was his view of saving and investment.

The Keynesian cross by Paul Samuelson serves as a useful metaphor for this concept.

The horizontal axis denotes total income and the purple curve shows C (Y ), the tendency to consume, whose complement S (Y ) is the propensity to save: the sum of these two functions is equal to total income, which is shown by the broken line at 45°.

The horizontal blue line I (r ) is the schedule of the marginal efficiency of capital whose value is independent of Y.

Interest rate determines marginal efficiency of capital schedule, the rate of interest that a new investment will incur.

Investment is positive and increases as interest rates fall if the productive sector is able to borrow money at a rate lower than the marginal efficiency of capital at the given level of technology and capital intensity, given the declining rate of return on investment.

Investment equals zero if interest rates are higher than the point at which capital is no longer cost effective.

Aggregate demand, which Keynes defines as the sum of consumer and capital expenditure demands, is what this means, separate curves are plotted.

Total income must equal aggregate demand, so equilibrium income must be determined by the point where the aggregate demand curve crosses the 45° line.

This is the same horizontal position as the intersection of I (r ) with S (Y ).

The equation I (r ) = S (Y ) had been accepted by the classics, who had previously thought of it in terms of the interest rate and the condition of equilibrium between the supply and demand for investment funds (see the classical theory of interest).

But to the extent that they had any understanding of aggregate demand, they had seen the demand for investment as being given by S (Y ), since putting money aside was, in their minds, equivalent to investing in capital equipment, as a result, total income and aggregate demand became an identity, rather than a state of equilibrium.

This viewpoint is noted by Keynes in Chapter 2, where he finds it in Alfred Marshall's early writings but notes that the doctrine is never stated to-day in this crude form..

The equation I (r ) = S (Y ) is accepted by Keynes for some or all of the following reasons:

Given that total income must equal total demand in accordance with the principle of effective demand (Chapter 3).

The equilibrium hypothesis that these amounts are adequate to satisfy their needs follows from the fact that saving and investment are the same thing (Chapter 6).

Despite agreeing with the general tenor of the classical theory of the investment funds market, he rejects its final conclusion on the grounds that it is based on a fallacy of circular reasoning (Chapter 14).

In Chapter 10, Keynes alludes to an earlier paper by Kahn to set the stage for his discussion of the multiplier (see below).

They are only a little different, he says, between his investment multiplier and Kahn's employment multiplier..

Therefore, much of the Keynesian literature takes Kahn's multiplier to be an integral part of Keynes's own theory, one that is encouraged by the complexity of Keynes's explanation.

Kahn's multiplier gives the title (The multiplier model) to the account of Keynesian theory in Samuelson's Economics  and is almost as prominent in Alvin Hansen's Guide to Keynes  and in Joan Robinson's Introduction to the Theory of Employment.

That there is, as Keynes puts it,.

It's easy to get confused between the logical theory of the multiplier, which is true indefinitely and instantly, and the effects of a growth in the capital goods industries, which manifest themselves gradually, with a time lag, and only after a certain amount of time has passed.

and it seems to imply that he's embracing the former theory.

Keynes' departure from Kahn's multiplier was seen as a. by G. L. S. Shackle.

A step backwards... For when we consider the Multiplier as a momentary functional relation... we are merely employing the term Multiplier to stand for a different perspective on the marginal propensity to consume.., which G. M. Ambrosi uses to demonstrate the viewpoint of a Keynesian commentator who would have liked Keynes to have written something less'retrograde.' The Chapter 13 model of liquidity preference from which Keynes derived his multiplier entails that all of the impact of a change in investment must be borne by income, so this is indeed the value of his multiplier. But according to his model presented in Chapter 15, a shift in the marginal efficiency of capital schedule affects both interest rates and income, with the exact split depending on the partial derivatives of the liquidity preference function. Keynes did not look into the possibility that his multiplier formula needed adjusting.

The liquidity trap.

As a phenomenon, the liquidity trap can make it harder for monetary policies to fight unemployment.

Economists agree that the interest rate is unlikely to go below a certain floor, typically defined as zero or a slightly negative number. Keynes hypothesized that the limit could be significantly larger than zero, but he didn't give it much weight in his theoretical framework. In his discussion of the General Theory, Dennis Robertson coined the term liquidity trap after realizing the importance of a slightly different concept.

The economy is in a state of near-vertical liquidity preference curve if, as must happen as the lower limit on r  is approached, then a change in the money supply M̂  makes almost no difference to the equilibrium rate of interest r̂  or, Unless the other curves are steep enough to compensate, to the resulting income Ŷ.

According to Hicks, The interest rate cannot be lowered any further through monetary policy.

Extensive research on the liquidity trap has been conducted by Paul Krugman, who claims that this issue plagued the Japanese economy at the turn of the millennium. Later, he explained:

Private investment spending was still insufficient to pull the economy out of deflation even though short-term interest rates were close to zero and long-term rates were at historical lows. Monetary policy was similarly ineffective under those conditions to what Keynes had predicted. The Bank of Japan's attempts to boost the country's money supply have had no effect other than to increase the country's already large stockpiles of cash.

IS–LM plot

When Hicks considered a scenario in which liquidity preference depends on both income and interest rate, Keynes' system became more transparent.

Keynes's return to classical theory can be seen in his recognition of income as a factor in money demand, and Hicks takes a further step in the same direction by generalizing the propensity to save to take both Y  and r  as arguments.

In a less classical move, he extrapolates this principle to the capital efficiency distribution.

Keynes' model is expressed using two equations in the IS-LM model.

The first, updated to I (Y, r ) = S (Y,r ), communicates the idea of efficient demand.

Possible Graph Construction on (Y, r ) coordinates and draw a line connecting those points satisfying the equation: this is the IS  curve.

In the same way we can write the equation of equilibrium between liquidity preference and the money supply as L(Y ,r ) = M̂ and draw a second curve – the LM  curve – connecting points that satisfy it.

The equilibrium values Ŷ  of total income and r̂  of interest rate are then given by the point of intersection of the two curves.

If we accept Keynes's initial account, in which the preference for easy access to cash is based solely on the rate of interest r,, then the LM  curve is horizontal.

According to Joan Robinson's analysis,:

The attempt by J. R. Hicks to reduce the General Theory to a version of static equilibrium with the formula IS-LM has muddled modern teaching. It will take a long time for the effects of Hicks' teaching to wear off, despite the fact that he has changed his name from J. R. to John.

After that, Hicks had a relapse.

Typical intervention strategies under different conditions

During the Great Depression, Keynes proposed a combination of two policies to stimulate the economy and encourage investment:

Lowering of Interest Rates (monetary policy), and

Infrastructure spending by the government (fiscal policy).

Investments that were previously uneconomic become profitable, and large consumer sales that are typically financed through debt (such as houses, automobiles, and, historically, even appliances like refrigerators) become more affordable if the interest rate at which they can borrow falls. Monetary policy refers to the various methods central banks use to affect the interest rate in countries that have them. Interest rate cuts are considered an example of expansionary monetary policy because they are thought to increase economic activity and thus grow the economy..

A government can implement expansionary fiscal policy by doing one of three things: a) cutting taxes, b) increasing spending, or c) doing both. Government spending and investment boosts demand for goods and services offered by businesses, thereby increasing the number of jobs available. When government spending exceeds tax collections, the gap is filled by purchasing bonds on the open market. We refer to this as a deficit in our budget. There are two points worth emphasizing right now. First, deficits are not necessary for expansionary fiscal policy, and second, the only thing that can stimulate or depress the economy is a change in net spending. A government with a 10% deficit last year and the same deficit this year would be practicing neutral fiscal policy. In fact, this would be contractionary if the deficit were 10% last year and 5% this year. On the other hand, expansionary fiscal policy would be implemented if the government never ran a deficit but instead ran surpluses of 10% of GDP in both 2017 and 2018.

However, contrary to some interpretations, Keynesianism does not merely advocate deficit spending; rather, it advocates adjusting fiscal policies in response to cyclical conditions. An example of a counter-cyclical policy is deficit spending on labor-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns, and tax increases to cool the economy and prevent inflation when demand-side growth is robust.

FDR's belief that a lack of consumer spending contributed to the Great Depression was influenced by Keynes's ideas. After the United States fell back into recession in the depths of the Depression as a result of fiscal contraction in 1937, Roosevelt began to adopt some Keynesian economic policies. However, many argue that the outbreak of World War II—which gave the global economy a jolt, eliminated uncertainty, and compelled the rebuilding of destroyed capital—is the true success of Keynesian policy. After World War II, social-democratic Europe and the United States both adopted Keynesian ideas to varying degrees.

The Keynesian defense of deficit spending stood in stark contrast to the classical and neoclassical economic evaluation of government spending. They conceded that government spending would stimulate industry. These institutions reasoned that there was no reason to expect the benefits of government spending to outweigh the costs of the crowding out of private investment. For starters, a deficit increases the supply of government bonds, which lowers their market price and encourages high interest rates, making it more difficult for businesses to finance fixed investment. As a result, any attempt to boost the economy would have the opposite effect intended.

In response, Keynesians argue that this type of fiscal policy is only warranted when unemployment rates remain persistently high and are higher than the rate of inflation that does not cause unemployment to rise (NAIRU). In such a scenario, crowding is to a minimum. In addition, fiscal stimulus can crowd in private investment by expanding businesses' addressable markets for their output, thereby boosting cash flow, profits, and morale. Keynes believed that because of this accelerator effect, the government and business could work together rather than against each other.

Second, as the stimulus takes effect, GDP rises, boosting saving and thereby facilitating the expansion of fixed investment. Finally, government expenditures need not always be wasteful; public goods not provided by profit-seekers benefit from government investment, which in turn stimulates the private sector. In other words, investments in areas like basic research, public health, education, and infrastructure may aid in the sustainable expansion of potential output.

According to Keynes, substantial slack in the labor market is required before government spending should be increased.

Conservative fiscal policies, such as tax increases during prosperous times and spending reductions during recessions, are seen by Keynesians as exacerbating the economy's cyclical downturns. When the government owns a sizable chunk of the economy, tax increases during recessions can help fund state-run investments, while falls in government spending and tax revenue hurt those same businesses.

John Maynard Keynes's final years were marked by an intense focus on the issue of global trade equilibrium. At the 1944 United Nations Monetary and Financial Conference, where the Bretton Woods system of international currency management was established, he led the British delegation. The so-called Keynes Plan for an International Clearing Union was primarily written by him. The plan's two guiding principles were that debtors and creditors should be treated similarly as disturbances of equilibrium and that the problem of settling outstanding balances should be solved by 'creating' additional 'international money. However, American opinion was naturally reluctant to accept the principle of equality of treatment so novel in debtor-creditor relationships, so the plans ultimately failed to pass muster. He first brought attention to the issues posed by free trade in his article National Self-Sufficiency, published in The Yale Review Vol. 22, no. 4 (June 1933).

He and other economists and commentators of the time agreed that both creditor and debtor countries bear some of the responsibility for restoring equilibrium to the trading relationship. The stakes are high if they don't comply. Then-editor of The Economist Geoffrey Crowther warned that no set of financial arrangements that can rescue the world from the impoverishing results of chaos if international economic relations are not brought fairly close to balance

Early in his career, Keynes was an ally of Alfred Marshall's and a free-trade advocate like Marshall. After the crisis of 1929, he gradually adhered to protectionist measures due to the dedication of British authorities to defend the gold parity of the pound sterling and the rigidity of nominal wages.

After the 1929 crisis, Keynes found the free trade model's assumptions to be unrealistic. He panned the neoclassical assumption of wage adjustment as just one example. In National Self-Sufficiency, he makes the:

Climate, natural resources, native aptitudes, cultural level, and population density are just some of the factors that call for a high degree of international specialization in a sane world. However, I am beginning to wonder if the benefits of gradually bringing the product and the consumer within the ambit of the same national, economic, and monetary organization outweigh the economic loss of national self-sufficiency over a wider and wider range of industrial products, and perhaps of agricultural products as well. The accumulation of data indicates that most contemporary mass production processes can be carried out with nearly the same efficiency in most countries and climates.

Separately, he has contributed to National Self-Sufficiency:

Therefore, I have more in common with those who want to reduce international economic interdependence than with those who want to increase it. Things like ideas, information, science, hospitality, and travel are inherently global. When it is practical and possible, however, goods should be produced locally, and finance should be handled primarily on a national level.

After that, Keynes and James Meade exchanged letters about tariffs and quotas. Keynes and Meade debated which policy, quotas or tariffs, would be preferable. After Marcus Fleming published an article in March 1944 titled Quotas versus depreciation, Keynes began a discussion with him. Here, we can see that he adopted a protectionist stance in the wake of the Great Depression. He reasoned that quotas might be a better solution to external imbalances than devaluing the currency. To prevent trade deficits, Keynes concluded that currency depreciation was no longer an option. It seemed crucial to him to regulate trade and end free trade so that economic crises could be avoided (deregulation of foreign trade). As a result, he has abandoned the free-trade pillar of the theory of comparative advantage, which holds that a trade deficit is irrelevant so long as both trading parties benefit. This is why, in his proposals for the Bretton Woods Agreement, he proposes a regulatory system aimed at eliminating trade imbalances rather than the liberalization of international trade (Free Trade).

Until the early 1970s, Keynesian economics was the primary source of ideas for economic policymakers in Western industrialized countries, thanks to widespread acceptance of Keynes's ideas after World War II. Attempts were made by governments to base their economic policies on the now-standard Keynesian theory, and high-quality economic statistics were prepared on a regular basis. Most western capitalist countries experienced low, stable unemployment and modest inflation during the early period of social liberalism and social democracy, which is often referred to as the Golden Age of Capitalism..

Fiscal policy and monetary policy were the two primary instruments of post-war Keynesian economics. Others, such as economic historian David Colander, argue that these should be called Lernerian rather than Keynesian because they are more accurately attributed to Abba Lerner's interpretation of Keynes in his theory of functional finance than to Keynes himself.

Critical of Keynesian assumptions (see sticky prices), a new classical macroeconomics movement emerged in the late 1960s and seemed, especially in the 1970s, to better explain certain phenomena. Microfoundations