by Jean-Jacques COURTEY, Doctor in Economic Geography, Ph. D
Our character of the day is extremely famous worldwide.
At the moment, we just gave the title he received for his great achievements.
So, try to guess whom we are talking about, along the progression of our narration !
He didn't survive the twentieth century, but his renown is still very present and litteraly haunting world economics. He made a "theory of preference for Liquidity".
Our Baron to come in 1942, was a very successful speculator in London Stock Exchange.
But his life was also marked by Aesthetics, and his attraction for Art he even supported financially.
He became an influent member of Bloomsbury Group, and married with a beautiful Russian ballerina in 1925 as he loved opera.
He was also a passionate collector of books, as he was eager to enrich constantly his knowledge on everything. Hence, it has especially to be stressed he studied a lot ancient times.
The mysterious letter "k" we are talking about is important in economics, and it is equal to 1/1-c, where "c" is representing the propensity to consume.
Let's give a clear explanation : the propensity to consume is equal to 0.8 (80%), when the propensity to save is representing 0.2 (20%).
And in this case k = 5 .
But let's take the French example, as it is very interesting : from 1992 till 2016 , the propensity to save of households has decreased from 12.8 % to
11.7 %. With those new figures, c = 0.883, which shows at the same time the importance of Consumption in our national economy.
So k = 1/1-0.883 = 8.547. In fact, k increased as in 1992 it was equal to 7.812.
If the State was making an Investment or Injection of capital (I) in our economy of say 100 Euros - which would mean spending obviously, any kind of allowances included -, the resulting income generated for the overall economy (and its GDP) would be equal to 100 x 8.547, so 854.7 Euros.
As you can see, the equation "Y = I x k" is very important in economics and finance, as it implies a powerful "Leverage effect".
And to unveil the name of our character of the day, the mysterious letter "k" is called "the Keynesian multiplicator".
At this stage, you guessed we are talking about Lord John Maynard Keynes, Baron of Tilton (1883 - 1946) ! He warned about "The economic consequences of Versailles Treaty" in 1919, and published "The general theory of employment, interest and money" in 1936, with the idea to put an end to the Great Depression which started in 1929.
As a high representative of the British Treasure, he participated to the negociations of Bretton Woods (USA) in july 1944.
Unluckily for him, the new World Monetary System he dreamed with his creative idea of "Bancor" wasn't accepted by Americans : Dollar became the n°1 world money instead, the Pound staying a reserve currency of reference. Equally, the newly created institution of IMF (International Monetary Fund) was based in Washington, when he would have preferred New York, to be symbolically less dependent on the US Federal State.
To be comprehensive, the Leverage Effect is known empirically from Sumerian times, and the wealth of Babylon has been built upon it.
The opposite of a Leverage Effect is called a "Bludgeon Effect" : it can happen when you refuse to invest or to do the necessary spendings ! Instead of creating wealth and growth, you generate poverty and contraction of the economy, as an economy is working in a rather reverse way to a grocery !
The "Providence State" system set under the influence of Keynes in UK at the end of his life, and also in other Western Countries in search of full employment, has often been critized and even denied since the Eighties : this new contra-cyclic posture got along with the rise of new poverty wordlwide, and repetitive crashes and depressions, notwithstanding the illusions of Debt about virtual money.
And it is sure that if a political leader isn't interested in creating expanding wealth and prosperity - or misunderstand econometrics -, he will not encourage Keynesian economics. But if he wants to do opposite for the good of his country and its inhabitants, he can then use the magic letter "k", the "Keynesian multiplicator"...of Wealth for most people !
Coming back to Bronze Age and Iron Age - or even before -, it is amusing to realize that "Financial Magic" is needing to be rediscovered in present times, marked by a too much preconfigurated "Dark Age of Involution".
We call it this way, because "k" has long been unidentified in economic science as a key factor to enrich a country and its People.
Now we know it, it may look weird not to use it in a way or another. Anyhow, let's be smart and wise enough to praise Lord Keynes for his achievements !