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Chapter 27: Problem 5

In The General Theory of Employment, Interest, and Money, , ohn Maynard Keynes wrote: If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise \(\ldots\) to dig the notes up again \(\ldots\) there need be no more unemployment and, with the help of the repercussions, the real income of the community \(\ldots\) would probably become a good deal greater than it is. Which important macroeconomic effect is Keynes discussing here? What does he mean by "repercussions"? Why does he appear unconcerned about whether government spending is wasteful?

Short Answer

Expert verified
Keynes is discussing the 'multiplier effect' in this scenario. By 'repercussions', he refers to the ripple effects of government spending throughout the economy. He does not appear concerned with wasteful government spending because he believes in the macroeconomic benefits of such spending, principally via the multiplier effect, which can stimulate economic growth regardless of the usefulness of the items purchased with the spent government funds.

Step by step solution

01

Identify the macroeconomic effect

In this scenario, Keynes is discussing the multiplier effect. The multiplier effect refers to the increase in final income that results from an initial spending boost. In Keynes's example, the government spending will create jobs (for those who dig up the bottles) and increase overall income (those workers would spend their earnings, creating even more jobs).
02

Explain 'repercussions'

The term 'repercussions' in this context refers to the ripple effects of government spending throughout the economy. This includes increased consumer spending as a result of increased income, businesses hiring more workers due to heightened demand for their products or services, and generally a boost to economic activity.
03

Understand concern over wasteful spending

Keynes appears unconcerned about wasteful government spending because he believes in the power of the multiplier effect. According to his view, even if the government spending does not result in the creation of something tangible or useful (like filling old bottles with banknotes and burying them), it still has value because it stimulates economic activity. As long as the money is flowing into the economy and being spent, it contributes to job creation and stimulates growth.

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