Keynesian Economic Theory

In: Business and Management

Submitted By tajelly
Words 1124
Pages 5
Visit the Virtual Economy Home page
Keynesians - Introduction
Keynesian economists are, not surprisingly, so named because they are advocates of the work of John Maynard Keynes (if only all economics was that easy!). Much of his work took place at the time of the Great
Depression in the 1930s, and perhaps his best known work was the 'General Theory of
Employment, Interest & Money' which was published in 1936.
In this section we look more generally at the work of Keynesian economists. Follow the links below or at the foot of the page to find out more detail about what they believed in and the policies they proposed.
* Beliefs
* Theories
* AS & AD
* Policies
* Virtual Economy policies
Keynesians - Beliefs
Keynes didn't agree with the Classical economists!! In fact the easiest way to look at
Keynesian theory is to see the arguments he gave for Classical theory being wrong. In essence
Keynes argued that markets would not automatically lead to full-employment equilibrium, but in fact the economy could settle in equilibrium at any level of unemployment. This meant that Classical policies of non-intervention would not work. The economy would need prodding if it was to head in the right direction, and this meant active intervention by the government to manage the level of demand. Follow the links in the navigation bar at the foot of the page or in the side panel to find out more detail on the sort of policies this may involve.
Keynesian beliefs can be illustrated in terms of the circular flow of income. If there was disequilibrium between leakages and injections, then classical economists believed that prices would adjust to restore the equilibrium. Keynes, however, believed that the level of output (in other words National Income) would adjust. Say, for example, that there was for some reason an increase in injections (perhaps…...

Similar Documents

Critique of Classical Theory & the Rise of Keynesian Theory Classical Economic Theory

...Critique of Classical Theory & The Rise of Keynesian Theory Classical Economic Theory Classical theory of economics states that a free market economy is self-regulating and that with full employment, the economy would reach equilibrium. The classical theory is fundamentally based on the Say's Law which states that "Supply creates its own Demand". This also made the classical economists believe that there was nothing to prevent an economy from growing and hence attaining a state of full employment. This would be achievable as long as employees are willing to work for a wage that was no more than their productivity and in this situation, the profit-seeking businesses would want to employ everyone. According to the Classical economists, full employment of real GDP stays the same regardless of the price level. During a recession or a depression, the aggregate demand in the economy would fall and in the current price levels, consumption reduces and thus there would be an excess of goods in the market. This excess supply would result in the fall of the prices as well as wage rates and hence go back to the state of equilibrium. The Great Depression & critique on the classical economic theory But this theory was proven wrong by the Great Depression as it was seen that when output is below the full employment level, price levels did not fall because wages and resource prices did not fall as they were sticky. In order to have more employees, the employers needed to......

Words: 759 - Pages: 4

Abuse of Keynesian Economics

...| The Abuse of Keynes’ Theory of Government Spending | And Why Government Spending Needs to Stop | | Chase Cooper | 12/13/2012 | Political Economy Dr.Ramos Abstract: The goal of my research paper is to analyze and present how John Maynard Keynes’ theory on government spending is being abused by the American government insofar that the American government is not following the guidelines and foundations that premised Keynes’ theory, and instead are picking the parts of the theory that allow them to spend at unsustainable levels, creating problems that, one way or another, eventually have to be resolved. My research will prove how the American government is conducting fiscal policy in a way that abuses Keynes’ theory on government spending, and, as a result, why Keynes would not support the American government in their spending endeavors, despite using his theory as their justification. I will be critiquing the application of Keynes’ theory from the Austrian, specifically the works of Friedrich A. Hayek, and Monetarist perspectives, supported by arguments given by Milton Friedman. Section 1: Keynes’ Theory on Government Spending John Maynard Keynes published his famous work, The General Theory of Employment, Interest, and Money, in 1936, during the Great Depression. Economies all over the world were suffering severely from the Great Depression, and there was little hope of economic recovery in the near future. Keynes agreed with the classical economist’s......

Words: 5554 - Pages: 23

Keynesian Economics

...John Maynard Keynes’ influence and ideology Even today John M. Keynes’ ideas remain crucial to the most important debate of our time: how can we escape from the economic crisis? Should governments borrow and spend their way out of trouble or slash spending and reduce the national debt? Despite Keynes’ avid support for the free market, his theory is one strongly based on the mixed-market economy. “Keynes said it was possible for governments to come in and make markets work better... Keynes saved capitalism from the capitalists.” - Prof. Joseph Stiglitz Keynes’ theory opposed Adam Smith’s metaphor of “the invisible hand” – which envisages a self-correcting economy, in the form of the self-regulating behaviour of the market - due to individuals' efforts to maximize their own gains in a free market which benefits society, even if original ambitions include no benevolent intentions. Instead Keynes said that capitalism doesn’t always work on its own accord, but that government intervention is sometimes necessary (especially during periods of recession – which Keynesians see as an “economic malady” rather than a normal part of the business/trade cycle. Keynesian theory in modern macro-economics Alistair Darling MP, Chancellor of the Exchequer, 2007-2010 – “The dominant thinking in Europe at the moment is exactly repeating the mistakes (I believe) that were made at the end of the First World War”. This statement was......

Words: 1016 - Pages: 5

Keynesian Economics

...Keynesian Economics, Helping the US Economy Keynesian philosophy states that in order to manage economic downturns, government intervention in the economy is imperative. It was Keynesian Economic Philosophy that kept America out of another depression during the Great Recession due to the fiscal and monetary stimulus (Seidman 32-53, 22p). By examining the government’s need for spending money on welfare, cutting taxes, regulating and monitoring the financial markets, and government spending on military, America sees how a Keynesian approach is a necessity. The American Government needs to continue using the Keynesian model in order to enhance the performance of the economy. Keynesian Philosophy provides government assisted programs to those who qualify. One form of assistance is Welfare. Welfare provides benefits and economic assistance to low or no income Americans. With the dismal economy, there are now over 100 million people on welfare according to the Census Bureau; and this doesn’t include those receiving Social Security or Medicare (GOPUSAStaff). Food Stamps are one of many divisions of welfare. The food stamps program, also known as the Supplementary Nutrition Assistance Program (SNAP), helps low or no income citizens buy food. There are over 46 million people on SNAP as of June, 2012 (Luhby). That is more than one in seven Americans and more than 25% of eligible Americans do not participate in the food stamps program. There are millions of low-income seniors......

Words: 2071 - Pages: 9

Keynesian Economics

...prominent during the Great Depression in the 1930s when he tried to create an economical revolution in economic thinking with his ideas of intervention in markets. The idea is also generally; that in the short run productive activity is very much influenced by aggregate demand, (aggregate demand is the total spending in the economy with the equation; Consumption + Investment + Government Expenditure + (Exports - Imports)) and that aggregate demand does not equal the productive capacity of the economy. Keynes believed strongly that Government Intervention would strongly help the economy to succeed and grow. His three main argument points concerning the Government were : The Government has a role to play in moderating the business cycle. Government can use short term monetary policy to engineer the economy. During economic hardship the government should spend to try and 'spur' on economic growth. In the second point I mentioned monetary policy, but what is it? It involves changes in the base rate of interest to influence the growth of aggregate demand, the money supply and price inflation. A short goal would be set for the economy to achieve this by changing the base rate. If the economy is doing well, the government should stop spending money, or spend less, but if the economy is bombing, the government should spend and help economy out. Keynes also had another theory that the if the government borrowed money to create jobs, people would spend more, consumer......

Words: 1112 - Pages: 5

Economics Classical vs Keynesian

...Homework 3 * Explain differences between Keynesian and Classical Economics. The differences between Keynesian and Classical Economics are as follows: Keynesian economics believe that when the economy is in a recession that price and wage remain the same and are inflexible. Wages are unable to be lowered beyond a certain point due to union contracts and minimum wage laws and will not be raised due to the supply of unemployed workers willing to work at the prevailing wages and the price of goods remain fixed due to steady supply and no change in demand. In order to jump start the economy Keynesian economics suggest that increased government spending will increase the GDP thereby shifting the aggregate demand curve which can help jumpstart the economy by creating more demand and resulting in the demand for labor to meet that demand. The classical economics viewpoint is that the economy will self-regulate over time and the government should take hands off approach. They believe that price and wage will remain flexible and increase or decrease as needed to maintain equilibrium in the economy. * In your opinion when (if ever) should the government use Keynesian economic policy? I believe the government should follow the Keynesian economic policy in times of recession such as they did in the most recent one in 2009. The Keynesian policy will help increase the aggregate demand by raising the GDP which will create the need for workers to meet that demand. This......

Words: 385 - Pages: 2

Keynesian Economics

...KEYNESIAN ECONOMICS: Preamble:: As early as 1848, Karl Marx indicated the inherent weakness of uncontrolled capitalist system guided by ruthless exploitation of labour. In the then prevailing ‘Mercantilist’ system combined with the ‘Gold Standard’, country’s wealth and power was dependent on export surplus. Export prices had to be kept low by low wages. Marx argued that creating supply while not creating purchasing power would lead to creation of ‘surplus value’. Economies would experience excess production, stock piling, down turn and periodic unemployment. Over time, the down turn would get worse. For labour, having a job or being unemployed made little difference. Marx believed that periodic recession and crisis of capitalism would lead to the self destruction of the system and its eventual downfall. He called on labour to revolt. ‘You have nothing to lose but your chains’ he said. His clarion call was ‘workers of the world unite’. It is an irony of history that Marx, a great philosopher, proved to be poor prophet, precisely because of his own advocacy. Had Marx not said what he did say, his prophecies would have come true. His ideas resulted in significant system reforms in Britain. Publication of Marx’s Communist Manifesto in 1948 put the British society and polity on guard. In 1850s British Parliament enacted a number of laws aimed at labour reforms. Trade Unions were recognized. Minimum wages were instituted. Limitations were prescribed on hours of work,...

Words: 3780 - Pages: 16

Keynesian Economics

...According to Forbes.com, Obama has taken our economy back to the discredited Keynesian economics. John Maynard Keynes believed that in order to stimulate the economy, government needed to spend more money and increase deficits, which would in turn rejuvenate the economy and increase production. One journalist writes, “Keynesian economics is the false vision of human action which says the way to promote economic recovery and renewed growth is through increased government spending, deficits and debt. If that sounds nuts, that’s because it is.” (Obamanomics: The Final Nail In the Discredited Keynesian Coffin, 2012) As we have seen, the yearly deficit in the United States is steadily increasing, and there has been no turn around in the deficit as predicted by Keynes. This shows that Keynes belief in restoring the government by increasing deficits has failed. “Keynesian economics arose in the 1930s in response to the Depression. It never worked then, as the recession of 1929 extended into the decade long Great Depression. And it never worked anywhere it’s been tried since then, in the U.S. or abroad.” (Obamanomics: The Final Nail In the Discredited Keynesian Coffin, 2012) The Keynesian beliefs have increased unemployment, raised inflation into the double digits, and greatly increased interest rates. According to Forbes, Obama is spending huge amounts of money, increasing the federal deficit, just as Keynes believed. “Obama’s first major act in office was to pursue the......

Words: 536 - Pages: 3

Review of Keynesian Economics

...Review of Keynesian Economics, Inaugural Issue, Autumn 2012, pp. 1–4 Statement of the Co-Editors Economics and the economic crisis: the case for change It is widely recognized that economic crises can sometimes trigger enormous change, with regard to both economic theory and the politics of governance. Today, the global economy is struggling with the fall-out from the financial crash of 2008 and the Great Recession of 2007–2009. The economic crisis that these events have generated, combined with the failure of the mainstream economics profession, has again put the question of change on the table. The economics profession stands significantly discredited owing to its failure to foresee the recession and the financial crash, its repeated over-optimistic forecasts of rapid recovery, and the lack of plausibility surrounding its attempts to explain events. Reasonable people do not expect economists to predict the daily movements of the stock market, but they do expect them to anticipate and explain major imminent economic developments. On that score, the profession failed catastrophically, revealing fundamental theoretical inadequacies. This intellectual failure has prompted us to launch the Review of Keynesian Economics. At a time of journal proliferation, some may wonder about the need for another journal. We would respond there is a proliferation of journals, but that proliferation is essentially within one intellectual paradigm. As such, it obscures the fact that the......

Words: 1862 - Pages: 8

Classical Economics vs. Keynesian Economics

...My research of Classical Economics and Keynesian Economics has given me the opportunity to form an opinion on this greatly debated topic in economics. After researching this topic in great lengths, I have determined the Keynesian Economics far exceeds greatness for America compared to that of Classical Economics. I will begin my paper by first addressing my understanding of both economic theories, I will then compare and contrast both theories, and end my paper with my opinions on why I believe Keynesian Economics is what is best for America.  Classical Economics is a theory that suggests by leaving the free market alone without human intervention; equilibrium will be obtained. This theory was the first school of thought for economists and one of the major theorists and founders of Classical Economics was Adam Smith. Smith stated, “By pursuing his own interest, he (man) frequently promotes that (good) of the society more effectually than when he really intends to promote it. I (Adam Smith) have never known much good done by those who affected to trade for the public good.”(Patil) Classical Economic theory assumes three basic ideas: Flexible Prices, Shay’s Law, and Savings-Investment equality. Flexible prices in Classical theory suggests prices will rise and fall as needed but is not always true, due to, the interference of government agencies including unions and laws. Smith stated in the Wealth of the Nation (1776), “Civil government, so far it is instituted for the......

Words: 1240 - Pages: 5

Classical Economics vs. Keynesian Economics

...My research of Classical Economics and Keynesian Economics has given me the opportunity to form an opinion on this greatly debated topic in economics. After researching this topic in great lengths, I have determined the Keynesian Economics far exceeds greatness for America compared to that of Classical Economics. I will begin my paper by first addressing my understanding of both economic theories, I will then compare and contrast both theories, and end my paper with my opinions on why I believe Keynesian Economics is what is best for America. Classical Economics is a theory that suggests by leaving the free market alone without human intervention; equilibrium will be obtained. This theory was the first school of thought for economists and one of the major theorists and founders of Classical Economics was Adam Smith. Smith stated, “By pursuing his own interest, he (man) frequently promotes that (good) of the society more effectually than when he really intends to promote it. I (Adam Smith) have never known much good done by those who affected to trade for the public good.”(Patil) Classical Economic theory assumes three basic ideas: Flexible Prices, Shay’s Law, and Savings-Investment equality. Flexible prices in Classical theory suggests prices will rise and fall as needed but is not always true, due to, the interference of government agencies including unions and laws. Smith stated in the Wealth of the Nation (1776), “Civil government, so far it is instituted for the......

Words: 1240 - Pages: 5

Keynesian Theory

...Why were Keynesian ideas revolutionary? The Great depression started from October 29, 1929 when the stock market crash and ended in early 1940s. It started with severe economic collapse rooted by over-extended and over-confident stock market. The most severe country that was affected was US and other countries are mildly affected. The government intervened directly and increased the productivity essential for the World War II to end the Great Depression. Classical Theory is based on free market concept therefore it requires minimum or zero government intervention. Individuals can decide depending on their own interest and this lets them manage the economic resources based on their interest. Classical Theory believes that consumer spending and business investment is a larger portion as compared to government expenditure plus the higher the government expenditure, it will reduce the private sector economic growth. Classical Theory believes the economy will get corrected by itself in the theory of invisible hand. Keynes theory is based on the aggregate demand which is influenced by the public and private sector. It is influenced and affected by fiscal policies which are changes in government expenditure and tax. Keynes believes prices are rigid which will only cause output to fluctuate when there are changes in consumption, investment and government expenditure. Even if consumer spending or business investment is absent, government......

Words: 515 - Pages: 3

Keynesian Theory

...Hannah Grace S. Bielza AC-301 The Keynesian Theory * In the depression of the 1930s democratic nations were concerned about the problem of inflation. Wherein, general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. * Because of inflation, workers are unwilling to accept further cuts in their wages for the reason that their earnings were already cut down by unemployment and part-time work. It is really hard to work, earning a small amount of money while having a huge amount of expenses that’s why a lot of workers don’t want to cut their wages. * Explanation of wages and wage changes in this kind of setting inevitably directed attention to general wage levels rather than to wage rates in the labor markets. This means that the employers focus on this average wage paid to employees rather than the rate per hour or based on production. * John Maynard Keynes advanced his full employment theory by publishing “General Theory of Employment, Interest, and Money” in 1936 which provides basic analysis on which the theory is based. * To many theorists in the classical tradition, Adam Smith’s, “Wealth of the Nations” provided rationalization for policies they thought necessary but could not embrace with clear conscience. There’s no scholarly document to prove that this will fit more closely to the needs of the times. Keyne’s Theory on Employment * Keynes admitted that the Classical and Neo......

Words: 873 - Pages: 4

Personal Reaction Keynesian Theory

...While researching, I ran across a small article titled A Review Of Keynesian Theory. This particular article is an overall review of Keynes theories of economics as well as arguments against his philosophy. The website intertwines the Great Depression with its causes and solutions which include controversies on which solutions were successful or failures. I’ve chosen the section in our text covering the Great Depression and the Keynesian Revolution found in Chapter 33 because it correlates with my career as a high school Social Studies teacher. Usually with constraints of time and curriculum to cover, I can teach significant events in history but there are topics that I would love to divulge a little more time and understanding to not only to teach of course, but also for my own learning. Keynesian economics is one of those topics. I discuss with my classes the basics of Keynes theories and how they were applied as well as points of success, but it is difficult to go much further than that. To summarize what I learned between our text and A Review of Keynesian Theory, Keynesian economics worked at the macroeconomic level. The theories stated that the trends at the macro-level could overpower individuals and their actions at the micro-level. It emphasized the significance of the aggregate demand for goods in driving the economy, especially economies in a slump. It was based on this that Keynes advocated the idea of government intervention through policies that could......

Words: 450 - Pages: 2

Relevance of Keynesian Theory to Underdeveloped Economies

...Assignment on “Relevance of Keynesian Theory to underdeveloped Economies” Submitted to : Dr. A.K Monaw-war Uddin Ahmed Course instractor Macroeconomics MBA-510 Submitted By: Chowdhury Omar Hasan Munna ID-1130657 Date of submission: 22nd November,2011 Independent University ,Bangladesh Keynesian theory and underdeveloped countries: Lord John Maynard Keynes wrote the General Theory of Employment, Interest and Money as a solution to the problem of periodic unemployment faced by developed industrial nations of the West during the great depression of the thirties. Keynesian theory singles out deficiency of effective demand as the major cause of unemployment and low level of income in industrial economy operations under a laissez faire system. Deficiency of effective demand is a prominent feature of economies undergoing depression and in order to improve the level of effective demand in an economy. Keynes suggested policy measures like cheap money policy, government’s compensatory investment spending, deficit financing and other fiscal methods. In essence, therefore, Keynesian economics turn out to be economics of depression applicable to developed countries. Its applicability in underdeveloped countries is very limited. To quote Joan Robinson: “ Keynes’s theory has little to say directly, to the underdeveloped countries, for it was framed entirely in the context of an advanced industrial economy, with highly developed financial institutions and a sophisticated......

Words: 1349 - Pages: 6