Keynes Investing Wisdom

Keynes

I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and the management of which one thoroughly believes. It is a mistake to think that one limit one`s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.

— John Maynard Keynes, 1934 from John Wasik, Keynes`s way to wealth: Timeliness Investment Lessons from the Great Economist.  Keynesian Economics serves as a sort of yardstick that can define virtually all economists who came after him

There are three principal tenets in the Keynesian description of how the economy works:

Aggregate demand is influenced by many economic decisions—public and private – Private sector decisions can sometimes lead to adverse macroeconomic outcomes, such as reduction in consumer spending during a recession. These market failures sometimes call for active policies by the government, such as a fiscal stimulus package. Therefore, Keynesian economics supports a mixed economy guided mainly by the private sector but partly operated by the government.

Prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labor.

Changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending—consumption, investment, or government expenditures—cause output to change. If government spending increases, for example, and all other spending components remain constant, then output will increase. Keynesian models of economic activity also include a multiplier effect; that is, output changes by some multiple of the increase or decrease in spending that caused the change. If the fiscal multiplier is greater than one, then a one dollar increase in government spending would result in an increase in output greater than one dollar.

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