Keynesian Economics
April 8, 2009
Keynesian economics can also be referred to as Keynesianism and Keynesian Theory. It is an economic theory known by the name of the British economist John Maynard Keynes who established it to explain the Great Depression. Keynesian economics states that active government involvement in monetary policy and the marketplace in general is the best viable way to ensure economic growth and stability.
In other words, Keynes argue that some decisions made by the private sectors can lead to unproductive macroeconomic outcome; thus he believes that if the public sector responded actively, comprising fiscal and monetary policy actions by the government and the Central Banks respectively, production will be stabilized above the business cycle. Conversely, government intervention to smoothen the business cycle should be in the form of tax breaks and government spending to motivate and rouse the economy, and tax hikes and government spending cuts to restrain inflation.
Keynesian economics is based on a sort of circular money flow in that one individual’s spending goes towards another individual’s earnings, and the individual’s spending of the earnings, as a result supports another’s earning. The circle thus helps support normal economic functioning. In such economic downturns like the Great Depression, naturally, people would save their money.
According to Keynesian theory; Great Depression stopped the circular money flow, consequently keeping the economy or financial systems at a standstill. Therefore, in such a time when the economy is at a standstill, Keynes’s theory argues that the government ought to step up and increase the money supply or purchase things from the market itself hence increase spending.
Further, Keynesian economics discourages excessive saving (under-consumption) and insufficient consumption (spending) in any given economy. Keynes’s advocate for substantial wealth redistribution if need be. He argues there is a realistic reason for massive wealth redistribution in that if the poorer sections of an economy are given sums of money, they will most likely spend it instead of saving it, hence promoting economic growth.
Keynesian economics contradicts a well known economic thought that preceded it, which stated that a free market would attain balance on its own hence the public sector should be excluded in the market. Other critics argued that Keynesian theory required a centralized planning, which ultimately leads to an authoritarian abuse. Keynes in response to this criticism cited that the theory of aggregated output (the overall theory of employment, interest and money) is easily adaptable to conditions of an authoritarian state than in a free competitive economy.
Another criticism leveled against Keynesian economics was that it is fallacious to study an economy by relating aggregates and that such thing as recession are purely caused by micro-economic factors. The claim states that what begins as a temporary government fix becomes permanent and an expansion on government programs would smother the civil society and private sectors.
By and large, today’s Keynesian economics is based on microeconomic models which indicate that prices and nominal wages are ‘sticky’; hence do not change quickly or easily with slight changes in supply and demand, for quantity adjustment to succeed. Thus, according to Keynesian economics, resources utilization could be high or low.
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