Post Keynesian Theory and Policy
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Post Keynesian Theory and Policy

A Realistic Analysis of the Market Oriented Capitalist Economy

  • New Directions in Post-Keynesian Economics series

Paul Davidson

How did economic “experts” worldwide fail to predict the financial crisis of 2007-2008? Eminent economist Paul Davidson discusses how mainstream economic theory may not be applicable to the world of experience. Post Keynesian theory is designed to be applicable to the real world, and this book demonstrates how applying it to policy formulation could help practically resolve economic problems. Davidson goes on to demonstrate how many Post Keynesian economists warned of the impending financial crisis as early as 2002.
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Chapter 4: Keynes–Post Keynesian theory: money and money contracts

Paul Davidson

Extract

The income principle behind Keynes’s theory is simple. Income is earned whenever a person or firm sells a newly produced good or service in the market place. For example, when a person spends money to buy this book new, the total purchase price contributes to the income of the book seller, who, in turn, has paid part of this purchase price to contribute to the income of the publisher, who uses part to pay income to its employees. The publisher has paid a sum to the income of the printer for printing the book. Furthermore, the publisher contributes to the author’s income by making a royalty payment equal to a contractual agreed upon percentage of the funds received from the book seller. Whenever people decide to save part of their income instead of spending it on newly produced goods and services, that portion of income that is saved is denying other people income that would be earned if the saver had decided not to save, but rather to spend all of their income on newly produced goods and services. In order for people and firms to earn income they must engage in the production of goods and services that someone else buys in the market place. Consequently, when workers cannot find employment, it is due to the fact that employers do not expect to be able to sell profitably the additional output that the unemployed workers, if hired, could help to produce.

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