In economics Keynesianism (pronounced /ˈkeɪnziən/, also Keynesian economics and Keynesian Theory), is based on the ideas of twentieth-century British economist John Maynard Keynes. According to Keynesian economics the state should stimulate economic growth and improve stability in the private sector - through, for example, adjusting interest rates and taxation and funding public projects.
The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936.
In Keynes's theory, some micro-level actions of individuals and firms can lead to aggregate macroeconomic outcomes in which the economy operates below its potential output and growth. Many classical economists had believed in Say's Law, that supply creates its own demand, so that a "general glut" would therefore be impossible. Keynes contended that aggregate demand for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output. Keynes argued that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing high unemployment and deflation.
Keynes argued that the solution to depression was to stimulate the economy ("inducement to invest") through some combination of two approaches :
- a reduction in interest rates.
- Government investment in infrastructure - the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[1]
A central conclusion of Keynesian economics is that in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a general tendency towards an equilibrium. In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of General equilibrium allow for price adjustment to achieve this goal.
The New classical macroeconomics movement, which began in the late 1960s and early 1970s, criticized Keynesian theories, while New Keynesian economics have sought to base Keynes's idea on more rigorous theoretical foundations.
More broadly, Keynes saw his as a general theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.
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Comments: 13
Yes, money has to be spent, but when we say energy, produce scientists, and don't have to worry about another city getting flooded out or a bridge falling, how is that bad? We need to invest in the USA. Getting people back to work and educating the kids- how is that a bad thing?
We fixed this in the last depression by controlling corporations, by making sure that government was stronger than corporations and that the corporations maintained their responsibilities to the people.
Now, however, the people, are all the people in the world, in all the different systems and countries who work for all the different corporations. Corporations who are as big as nations in many cases - and bigger.
Ever since the last depression the very large immortal corporations and personal interest have put billions of thought and work into getting above governments.
We see their confidence in themselves by the refusal to really follow the governments recommendations, in banks of lending money out, or in executive compensation.
If the executives keep getting huge pay even when the companies are brought to the brink of destruction, can we assume they are getting paid for doing something else ... like stabbing their countryies in the back?
He basically just regurgitated all the old mercantilist fallacies, all of which had been thoroughly debunked many times over, and just updated them for the times, changing around the terminology here and there.
He was a totalitarian enabler. His doctrine appeals to those who are interested in exercising dictatorial control over society. It is of course appealing to politicians, because a society indoctrinated under Keynesianism is accepting of near-absolute political domination of the individual. And it is appealing to intellectuals (Krugman comes immediately to mind) who like to believe that they are smart enough to control an economy, if only they had the ear of those who exercise political power or better yet, if they themselves had a hand in the reigns of political power).
"In Keynes's theory, some micro-level actions of individuals and firms can lead to aggregate macroeconomic outcomes in which the economy operates below its potential output and growth."
Case in point. Who is qualified to say what, exactly, at any given time, is the full "potential output and growth" of an economy, and thhus whether or not the economy is operating below it, and then pinpoint exactly what are the "micro-level actions" of which individuals which are apparently holding up economic progress, and then presume to have the right and authority to use the coercive force of the state to positively interfere with the otherwise voluntary, non-intrusive actions and decisions of individuals, to attempt to bring about the desired effects as determined by the presumptuous, totalitarian-minded people who arbitrarily decide how the economy should be operating (according to them), what the interest rate should be, etc.? (Answer: Nobody.)
"Many classical economists had believed in Say's Law, that supply creates its own demand, so that a "general glut" would therefore be impossible"
Say's Law is axiomatic. The misguided Keynesian disciples who asserted that their idol had refuted Say's Law, did not (and do not) properly comprehend Say's Law.
It's not really that "supply creates it's own demand," it's that supply and demand are one and the same; or rather two sides of the same coin. In a market economy, what one person produces, what they "supply," constitutes their "demand" for the goods and services produced by others. The "demand" that a person accrues, to exercise in the purchase of goods and services on the market, is wholly derived via the subjective valuation ascribed upon what they "supply," by all the other producers with whom they will be exchanging with.
The point that Dr. Say was getting at can be summed up in the simple statement: "Markets clear." If left alone, the free functioning of the price system (and more to the point, the way people respond to the incentives inherent in the price system) will work best to channel the allocation of scarce productive resources in such a way as to best serve the most urgent needs and demands of society. Prices will always tend to an "equlibrium," because people who produce strictly for the purpose of exchange (as opposed to producing for the purpose of direct consumption of what they themselves produce) will lower their prices to clear their stock, if demand is not sufficient to meet the existing supply at the existing price (a lower price for their goods is better then not selling at all), and consumers will always bid up the prices of goods if the supply is not sufficient to meet demand at the existing price.
Given this fundamental fact of economic reality, people will not continue to produce goods for which the already-existing state of supply and demand renders the equlibrium price too low to be a profitable undertaking (given the existing costs of production in the the particular line). Investors and entrepreneurs will shift their resources to those lines of production where they anticipate the market demand to be most urgent (and thus profitably met), and will do so without being coercively directed by a government planner.
"Keynes contended that aggregate demand for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output."
And this is where Keynes was able to slip in his fallacy, largely undetencted at that time, because there was not much understanding at that point about exactly what it is that causes cyclical economic downturns.
As it happens, Keynes' "solution" turns out to be more of the poison that causes the illness he was claiming to know how to cure. Cyclical recessions are a consequence of artificial money and credit expansion, and the correlating manipulation of interest rates; not a way to solve them.
Manipulation of interest rates ought to be publicly viewed as what they really are: sabotaging the economy. It is a sabotaging of one of the most vital of all the vital signals of the market. The clusters of entrepreneurial errors that derive from the false signals which constitute the artificially-reduced rate of interest, eventually become apparent, and a necessary period of correction and liquidation of malinvestment must follow -- this is the origin of what is known as "recession."
Government cannot stop this from happening once the process has been initiated -- no matter how ingenius the central planners in Washington or at the Fed think they are. It must be allowed to run its course, and obstructing or inhibiting it can only prolong and exacerbate the period of correction. Attempting to cure the ills brought about by inflation with more inflation, will only make things worse -- as was demonstrated during the Great Depression. The Great Depression was also a great example of how political meddling in markets -- particularly price-fixing -- has a way of spawning mutiple new problems for every one perceived problem that the political planners are trying to address.
And here we are, with a government beginning the process of making many of the same mistakes made back then, all over again -- and many new mistakes on top of them.
Get ready for the Greater Depression.