The significance he attributed to it is one of the innovative features of his work, and was influential on the politically hostile monetarist school. In the event, though, the plans were rejected, in part because "American opinion was naturally reluctant to accept the principle of equality of treatment so novel in debtor-creditor relationships".[77]. The first, now written I (Y, r ) = S (Y,r ), expresses the principle of effective demand. The idea comes from the boom-and-bust economic cycles that can be expected from free-market economies ... a confusion between the logical theory of the multiplier, which holds good continuously, without time-lag ... and the consequence of an expansion in the capital goods industries which take gradual effect, subject to a time-lag, and only after an interval ...[63], and implies that he is adopting the former theory. Kahn envisaged money as being passed from hand to hand, creating employment at each step, 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, although he also said that a rise in prices might dilute the multiplier effect. [27] This became the mechanism of the "ratio" published by Richard Kahn in his 1931 paper "The relation of home investment to unemployment",[28] described by Alvin Hansen as "one of the great landmarks of economic analysis". For him, the initial expenditure must not be a diversion of funds from other uses, but an increase in the total expenditure: something impossible – if understood in real terms – under the classical theory that the level of expenditure is limited by the economy's income/output. Money supply comes into play through the liquidity preference function, which is the demand function that corresponds to money supply. Classical economics is a theory that Sir Adam Smith introduced in the course of the late 18th century and later became developed in the works of David Ricardo and John Stuart Mill. For macroeconomics, relevant partial theories included the Quantity theory of money determining the price level and the classical theory of the interest rate. Beginning in the late 1950s new classical macroeconomists began to disagree with the methodology employed by Keynes and his successors. Keynesian economics may be theoretically untidy, but it certainly predicts periods of persistent, involuntary unemployment. This, too, can be many months. Yet, when the Federal Reserve and the Bank of England announced that monetary policy would be tightened to fight inflation, and then made good on their promises, severe recessions followed in each country. In fact, Keynesians typically see unemployment as both too high on average and too variable, although they know that rigorous theoretical justification for these positions is hard to come by. Expansionary fiscal policy consists of increasing net public spending, which the government can effect by a) taxing less, b) spending more, or c) both. Government investment in infrastructure (fiscal policy). [12], In 1930 he published A Treatise on Money, intended as a comprehensive treatment of its subject "which would confirm his stature as a serious academic scholar, rather than just as the author of stinging polemics",[13] and marks a large step in the direction of his later views. The Keynesian schools of economics are situated alongside a number of other schools that have the same perspectives on what the economic issues are, but differ on what causes them and how best to resolve them. The Middle Ages built cathedrals and sang dirges. Keynes implicitly rejected this argument, in "soon or late it is ideas not vested interests which are dangerous for good or evil. It is present implicitly in those quantities he expresses in wage units, while being absent from those he expresses in money terms. Prior to Keynes, a situation in which aggregate demand for goods and services did not meet supply was referred to by classical economists as a general glut, although there was disagreement among them as to whether a general glut was possible. 1. Keynes wrote about his theories in his book The General Theory of Employment, Interest and Money. He had a continuing interest in the subject of unemployment, having expressed the view in his popular Unemployment  (1913) that it was caused by "maladjustment between wage-rates and demand"[46] – a view Keynes may have shared prior to the years of the General Theory. If the economy is in a position such that the liquidity preference curve is almost vertical, 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 there is compensating steepness in the other curves, to the resulting income Ŷ. According to him, the intervention of governments is necessary for the economy to achieve its full capacity of employment. First, deficits are not required for expansionary fiscal policy, and second, it is only change in net spending that can stimulate or depress the economy. However, there are plenty of anti-inflation Keynesians. But – contrary to some critical characterizations of it – Keynesianism does not consist solely of deficit spending, since it recommends adjusting fiscal policies according to cyclical circumstances. 5. A principal function of central banks in countries that have them is to influence this interest rate through a variety of mechanisms collectively called monetary policy. Keynesian economists believe that adding to profits and incomes during boom cycles through tax cuts, and removing income and profits from the economy through cuts in spending during downturns, tends to exacerbate the negative effects of the business cycle. The equation I (r ) = S (Y ) is accepted by Keynes for some or all of the following reasons: Keynes introduces his discussion of the multiplier in Chapter 10 with a reference to Kahn's earlier paper (see below). "[122][123], Brad DeLong has argued that politics is the main motivator behind objections to the view that government should try to serve a stabilizing macroeconomic role. Keynesians also feel certain that periods of recession or depression are economic maladies, not, as in real business cycle theory, efficient market responses to unattractive opportunities. Martin Feldstein argues that the legacy of Keynesian economics–the misdiagnosis of unemployment, the fear of saving, and the unjustified government intervention–affected the fundamental ideas of policy makers. A Keynesian believes that aggregate demand is influenced by a host of economic decisions—both public and private—and sometimes behaves erratically. [118] He also argued that empirical evidence makes it pretty clear that Buchanan was wrong. In Keynes's theory, there must be significant slack in the labour market before fiscal expansion is justified. Keynesian economists believe that the economy is unstable and tends toward cyclical unemployment because: prices are sticky and prevent the economy from adjusting to full employment. Paul Krugman has worked extensively on the liquidity trap, claiming that it was the problem confronting the Japanese economy around the turn of the millennium. In his view, unemployment arises whenever entrepreneurs' incentive to invest fails to keep pace with society's propensity to save (propensity is one of Keynes's synonyms for "demand"). Unemployment may arise through friction or may be "voluntary," in the sense that it arises from a refusal to accept employment owing to "legislation or social practices ... or mere human obstinacy", but "...the classical postulates do not admit of the possibility of the third category," which Keynes defines as involuntary unemployment. Monetary policy can produce real effects on output and employment only if some prices are rigid—if nominal wages (wages in dollars, not in real purchasing power), for example, do not adjust instantly.