165
Vast infrastructure projects, such as
the Three Gorges Dam, China, can create
thousands of jobs. The new workers’
wages then pour back into the economy,
creating a second round of spending.See also: The circular flow of the economy 40–45 ■ Gluts in markets 74–75 ■
Borrowing and debt 76–77 ■ Depressions and unemployment 154–61
WAR AND DEPRESSIONS
M
acroeconomics seeks
to explain the working
of entire economies. In
1758, the French economist François
Quesnay (p.45) demonstrated how
large amounts of spending by those
at the top of the economic tree—
the landlords—was multiplied as
others received money from them
and re-spent it.
In the 20th century British
economist John Maynard Keynes
looked specifically at why prices and
labor do not revert to equilibrium, or
natural levels, during depressions.
Classical economics—the standard
school of thought from the 18th to
the 20th centuries—says that this
should naturally occur through the
normal working of the free market.
Keynes concluded that the fastest
way to help an economy recover was
to boost demand through an increase
in short-term government spending.
A key idea here was that of the
multiplier, discussed by Keynes
and others, notably Richard Kahn,
and then developed mathematically
by John Hicks. This says that if
a government invests in large
projects (such as road building)
during a recession, employment will
rise by more than the number of
workers employed directly. National
income will be boosted by more than
the amount of government spending.
This is because workers on the
government projects will spend a
portion of their income on things
made by other people around them,
and this spending creates further
employment. These newly
employed workers will also spend
some of their income, creating yet
more employment. This process
will continue, but the effect will
lessen on each round of spending,
since each time some of the extra
income will be saved or spent on
goods from abroad. A standard
estimate is that every $1 of
government spending might create
an increase in income of $1.40
through these secondary effects.
In 1936, British economist
John Hicks devised a mathematical
model based on the Keynesian
multiplier, known as the ISLM model
(Investment, Savings, the demand
for Liquidity, and the Money supply).
It could be used to predict how
changes in government spending
or taxation would impact on the
level of employment through the
multiplier. During the post-war
period it became the standard
tool for explaining the working
of the economy.
Some economists have attacked
the principle of the Keynesian
multiplier, claiming that governments
would finance spending through
taxation or debt. Tax would take
money out of the economy and
create the opposite effect to that
desired, while debt would cause
inflation, lessening the purchasing
power of those vital wages. ■John Hicks
The son of a journalist, John
Hicks was born in Warwick,
England, in 1904. He received
a private-school education and
a degree in philosophy, politics,
and economics from Oxford
University, all funded by
mathematical scholarships.
In 1923, he began lecturing
at the London School of
Economics alongside Friedrich
Hayek and Ursula Webb, an
eminent British economist
who became his wife in 1935.
Hicks later taught at the
universities of Cambridge,
Manchester, and Oxford.
Humanitarianism lay at the
heart of all his work, and he
and his wife traveled widely
after World War II, advising
many newly independent
countries on their financial
structures. Hicks was
awarded the Nobel Prize in- He died in 1989.
Key works1937 Mr. Keynes and
the Classics
1939 Value and Capital
1965 Capital and GrowthBesides the primary
employment created by
the initial public works
expenditures, there would be
additional indirect employment.
Don Patinkin
US economist (1922– 95)