Keynesian Economics

12 Key excerpts on "Keynesian Economics"

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  eBook - ePub

  International Economics

  International Economics Unveiled, Navigating the Global Marketplace

  • Fouad Sabry(Author)
  • 2023(Publication Date)
  • One Billion Knowledgeable

    (Publisher)

  Chapter 4: Keynesian Economics

  Keynesian Economics (/ˈkeɪnziən/ KAYN-zee-ən; sometimes Keynesianism, The Keynesian theories and models (named after the British economist John Maynard Keynes) explain how aggregate demand (the sum of all purchases) has a major impact on GDP and inflation.

  When compared to the classical economics that came before his book, which focused on aggregate supply, Keynes's approach was radical. There is much debate over how to make sense of Keynes's writings, and his influence can be seen in a variety of economic philosophies.

  The neoclassical synthesis, of which Keynesian Economics was a part, was the dominant macroeconomic framework in the industrialized world from the latter stages of the Great Depression through World War II and the subsequent period of economic growth (1945–1973). It was created to aid economists in their analysis of the Great Depression and similar events in the future. After the 1970s oil shock and subsequent stagflation, it lost some of its sway.

  The field of study known as "macroeconomics" looks at the big picture of an economy. The general level of prices, the interest rate, the number of people actively employed, and real income (or equivalently, real output) are all significant macroeconomic variables.

  In the classical tradition of partial equilibrium theory, individual markets were isolated from one another so that equilibrium conditions for each market could be stated in terms of a single equation. This approach had a unified mathematical foundation thanks to Fleming Jenkin and Alfred Marshall's work on supply and demand curves; the Lausanne School extended this work to general equilibrium theory.

  Both the Quantity theory of money, which states that the price level is determined by the quantity of money in circulation, and the classical theory of interest rates are important pieces of the macroeconomics puzzle. Applying marginalist principles from the 19th century to the labor market was what Keynes called the "first postulate of classical economics," and it stated that the wage is equal to the marginal product (see The General Theory). All three of the classical theory's pillars were targets for replacement by Keynes.

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  21st Century Keynesian Economics

  • P. Arestis, P. Arestis, Kenneth A. Loparo, Malcolm Sawyer(Authors)
  • 2015(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  However, as also mentioned earlier, Keynes’s theory had much in common with the ear- lier dynamic theories of economists like Malthus and Marx, and, indeed, with some of his contemporaries, most notably Kalecki. Moreover, defining Keynesian growth theory in terms of its historical lineage from Keynes has the problem that we are not clear on what precisely is meant by Keynes’s economics. As developments in short-run macroeconomics suggest, Keynesian Economics has been characterized variously (and not necessarily equivalently) as the economics in which: aggregate demand plays a major role in determining output and employment; involuntary unemployment can persist; the economy is subject to economic fluc- tuations and instability; uncertainty and psychological factors have an important role in affecting the behavior of economic decision-makers; and fiscal and monetary policy can affect the level of output and employment. It therefore seems preferable to define Keynesian growth theory in terms of its analytical characteristics. All of these features of Keynesian Economics in general have some claim to capturing some key characteristics of Keynesian growth theory. The focus on aggregate demand – which depends on determi- nants of consumption and investment demand – distinguishes it from theories – both classical and neoclassical – which stress the role of aggre- gate supply, that is, determinants of the supply of factors of production like capital and labor, and their productivity. The existence of unem- ployment distinguishes it from neoclassical theories of growth in which growth occurs with full employment. Aggregate demand fluctuations 42 Keynesian Growth Theory in the 21st Century and instability have been emphasized in it, as compared to growth models with stable growth.

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  Rethinking Macroeconomics

  A History of Economic Thought Perspective

  • John F. McDonald(Author)
  • 2021(Publication Date)
  • Taylor & Francis

    (Publisher)

  2 Keynesian theory and policy

  Introduction: schools of thought in macroeconomics

  The field of macroeconomics can be broken down into several schools of thought, and this book provides an introduction to each of them. No doubt the scholars who have spent their lives developing and refining a particular school of thought will find that I have simplified things too much. I submit that simplification cannot be avoided in an introductory treatment. That is what textbooks do. The purpose of the book is to provide a sensible introduction to each theory, and to see how each theory stacks up against the data for various episodes. Most textbooks cover only one theory, and do not systematically assess how well that theory accounts for what actually happened. One textbook by Snowdon and Vane (2005) covers all of the schools of thought up to 2005 and includes interviews with important scholars associated with each one. Some discussion of actual events is included here and there. But the book is over 700 pages in length and is more appropriate for graduate students.

  The schools of thought presented in this book are as follows:

  • Keynesian theory, with discussion of financial instability and other additions to basic Keynesian theory made over the years. Keynesians emphasize the role of aggregate demand and its components as the source of fluctuations in the economy. The shift in the demand curve in Figure 1.1 gives the basic idea. They advocate the use of active monetary policy and fiscal policy (government spending and taxation) to influence aggregate demand and stabilize the economy.
  • Monetarism associated with Milton Friedman and others, with extension to include rational expectations (the idea that people form realistic expectations that influence their current behavior). Monetarists see changes in the supply of money as a principal cause of the ups and downs of the economy. Changes in the supply of money are thought mainly to influence the demand side of the economy. They argue that activist monetary policy is dangerous and should be avoided. They think that the supply of money should be governed by a simple rule.

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  Principles of Macroeconomics for AP® Courses 2e

  • Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
  • 2017(Publication Date)
  • Openstax

    (Publisher)

  Even if one accepts the Keynesian economic theory, a number of practical questions remain. In the real world, can government economists identify potential GDP accurately? Is a desired increase in aggregate demand better accomplished by a tax cut or by an increase in government spending? Given the inevitable delays and uncertainties as governments enact policies into law, is it reasonable to expect that the government can implement Keynesian Economics? Can fixing a recession really be just as simple as pumping up aggregate demand? Government Budgets and Fiscal Policy will probe these issues. The Keynesian approach, with its focus on aggregate demand and sticky prices, has proved useful in understanding how the economy fluctuates in the short run and why recessions and cyclical unemployment occur. In The Neoclassical Perspective, we will consider some of the shortcomings of the Keynesian approach and why it is not especially well-suited for long-run macroeconomic analysis. The Great Recession The lessons learned during the 1930s Great Depression and the aggregate expenditure model that John Maynard Keynes proposed gave the modern economists and policymakers of today the tools to effectively navigate the treacherous economy in the latter half of the 2000s. In “How the Great Recession Was Brought to an End", Alan S. Blinder and Mark Zandi wrote that the actions taken by today’s policymakers stand in sharp contrast to those of the early years of the Great Depression. Today’s economists and policymakers were not content to let the markets recover from recession without taking proactive measures to support Chapter 11 | The Keynesian Perspective 301 consumption and investment. The Federal Reserve actively lowered short-term interest rates and developed innovative ways to pump money into the economy so that credit and investment would not dry up.

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  Social Policy in a Changing Society

  • Maurice Mullard, Paul Spicker(Authors)
  • 2005(Publication Date)
  • Routledge

    (Publisher)

  This implied that governments had little or no autonomy in the conduct of economic policy, except to create a framework where markets could flourish. This was strongly associated with market liberalism, in its acceptance of the economic status quo. Keynes was dismissive of these arguments, which in his view were based on ignorance about economic processes. He wrote: ‘Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.’ 21 By contrast, Keynes argued that the major concern of government was to discover ways of improving welfare and general prosperity. ‘The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of income.’ 22 Societies are continuously faced with choices in responding to economic issues, so that although the economy appears as a series of exogenous factors, it is always within the sphere of political choice as to which policies are selected or prioritised. Economic policy alternatives always represent political choices. An essential element in Keynesian Economics is the assumption that individuals are capable of carrying out wider social contracts, and the recognition of interdependence rather than instrumental contracts based on self-interest. Keynesian Economics can therefore be seen as being founded on assumptions of mutuality, of the ability and willingness of individuals to relegate their self-interest to the wider social interest. A form of continuous contract can be constructed between the state and other key agencies in society. Implicit in the economics of Keynes are the concepts of civic virtue, social justice and democracy. In one sense, therefore, Keynes was committed to the concept of the Greek polis and the view that progress depends on dialogue and reason

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  A History of Economic Thought

  • William J. Barber(Author)
  • 2022(Publication Date)
  • Wesleyan University Press

    (Publisher)

  General Theory challenged Say’s Law. In the updated version the equilibrating tendencies of the rate of interest embrace the relationship between changes in capital values of paper assets and decisions to consume. A person who observes an appreciation in the value of his portfolio as interest rates fall, it is maintained, is likely to spend more freely than he would otherwise have done. This phenomenon, in turn, might more than offset tendencies for idle balances to accumulate (and for a liquidity trap to emerge). Keynes dealt with this line of criticism with the argument that the impact of interest rate variations on consumption was likely to be too limited and too delayed to forestall substantial fluctuations in economic activity. Moreover, when fluctuations occurred, the remedies of fiscal policy would be more effective than those of monetary policy. The neo-classical revivalists do not, of course, maintain that substantial underemployment can never exist. Instead it is asserted that the market system is sufficiently sensitive to assure full employment so long as wages and prices are perfectly flexible. In the world in which we live, this requirement would be extremely difficult to satisfy. Indeed the mere attempt to give it reality might have highly destabilizing consequences. However appealing the logical symmetry of the neo-classical system may be, its applicability to real problems is limited.

  In most Western economies Keynesian theory has laid the intellectual foundations for a managed and welfare-oriented form of capitalism. Indeed, the widespread absorption of the Keynesian message has in large measure been responsible for the generally high levels of employment achieved by most Western industrial economies since the Second World War and for a significant reorientation in attitudes toward the role of the state in economic life. It is not yet clear whether the extension of a Keynesian analytical framework to the underdeveloped economies will have consequences equally as fortunate. Keynes, of course, fixed his own sights on the problems of highly organized industrial economies and, even in this setting, his central concern was with short-period stabilization at full employment. Many of the special problems of the underdeveloped parts of the world can be brought into clearer focus with other types of models. In fact, some of the extensions of the Keynesian aggregative reasoning – such as those suggesting that all important economic problems in the underdeveloped countries will solve themselves if the ratio of net investment to national income is raised above a critical minimum percentage – have detracted attention from prevalent institutional rigidities and from the long-term consequences of unprecedented rates of population growth. After all, a Keynesian aggregative framework is not ideally suited for close contact with questions dealing with efficient resource allocation or with long-period dynamic growth.

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  Macroeconomic Policy

  • Alan Marin(Author)
  • 2005(Publication Date)
  • Routledge

    (Publisher)

  In the second section (pp. 9–14) we review the Keynesian answer. In line with our comments in the previous chapter, we consider the Keynesian interpretation of Keynes’ answer, rather than what were necessarily Keynes’ own views. Keynes’ General Theory is a complex and, arguably, not always self-consistent book. For our purposes what matters is not what Keynes ‘really meant’, but the model of the economy that was accepted by Keynesians at different times. In the third section (pp. 14–23) we deal with the implications of the Keynesian model for government policies concerning unemployment, and how it led to the belief that unemployment was curable and to the commitment by governments to cure it. Partly reflecting the period when Keynesian ideas were first adopted, their primary focus was initially on unemployment as the overriding macroeconomic problem, and the exposition here reflects this. In later chapters we shall consider the possible conflicts between ‘curing’ unemployment and other policy aims.

  To a greater extent than in succeeding chapters, the material in this chapter should already have been encountered by students who have read an introductory textbook on macroeconomics. Our treatment is therefore to be taken as a review, which emphasises the points which are salient for our subsequent discussion of policies towards macroeconomic policy.

  THE KEYNESIAN MODEL OF THE DETERMINATION OF OUTPUT AND EMPLOYMENT

  It is difficult to pick on any one point as the basic one that distinguishes the Keynesian model from alternatives. Like the alternatives, it is an interlocking whole in which the various components reinforce one another. One possible starting-point that seems to be taken for granted in the Keynesian way of looking at the world, is the notion that aggregate real demand for goods and services is determined by the components of desired expenditure—consumption, investment, government expenditure, and exports net of imports. If, for now, we concentrate on a closed economy so that we can ignore trade, then in standard symbols we have equation (2.1):

  The Keynesian approach relies on the notion that, if consistently defined, the Y on the left-hand side of equation (2.1) can refer both to expenditure and to income and output. In the early years following the publication in 1936 of The General Theory

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  Maynard's Revenge

  The Collapse of Free Market Macroeconomics

  • Lance Taylor(Author)
  • 2011(Publication Date)
  • Harvard University Press

    (Publisher)

  The only point to be added relates to the interest rate. Keynesians have always been in favor of easy money; a low cost of funds stimulates invest-ment and supports aggregate demand. Although the possibility that a low real interest rate could support a boom in asset prices with an associated 9 ■ Keynesianism and the Crisis 339 run-up in debt can be read into Keynes’s 1930 Treatise on Money and is ex-plicit with Kindleberger and Minsky, it was not a central theme. Rather the thought comes more from Austrian economists including Keynes’s friend and rival Friedrich von Hayek. It will figure importantly below. Keynesian Theory and the Data for the United States Keynesian analysis sheds light on how the decisions of different social groups shaped post–World War II developments in the U.S. and world economies, especially during the long-term liberal cycle that settled in after 1980. Much of the material has been covered in previous chapters. Now I pull it together, beginning with changes over time in the United States. The discussion begins on the real side of the economy, switches to the financial side, and then brings in international complications. A synthesis is pro-posed after the details have been set out. To interpret the data, it is crucial to follow Joan Robinson in drawing a key distinction between history and equilibrium, or between thinking in historical and logical time. Growth and cycle theories operate in the latter domain and do occupy space in this chapter. But the theory is useless un-less it can also shed light on observed historical changes and future pros-pects. Using theory and data together in such a fashion is precisely the goal. Labor Productivity and the Goodwin Cycle A good place to begin is with relationships between income distribution and economic activity.

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  Keynes's General Theory After Seventy Years

  • R. Dimand, R. Mundell, A. Vercelli, R. Dimand, R. Mundell, A. Vercelli(Authors)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  In the case of the Keynesian revolution, that proposition was the automatic ten- dency of the economy to full employment” (Johnson and Johnson 1978, 194). Johnson accepted that, in attacking that classical proposition, Keynes did genuinely set himself apart from the prevailing theoretical orthodoxy. Robert W. Dimand 301 The four building blocks of Keynes’s theory I have argued previously (Dimand 1988) that Keynes’s synthesis in The General Theory had four building blocks, and that, beyond the process of synthesis, Keynes made crucial contributions to each of these four building blocks, although he was by no means the only person to do so. First, the goods market equilibrium condition, with the level of income, not just the interest rate, bringing saving and investment into equal- ity, with the multiplier as the corollary for changes in spending and income. Second, the money market equilibrium condition, with money demand (liquidity preference) a function of national income and the interest rate. Third, the volatility of private investment, reflecting shift- ing long-period expectations about a fundamentally uncertain future. Fourth, Keynes analyzed why the labor market does not clear (includ- ing Chapter 19 of why flexible money wages may not clear the labor market). Taken together, Keynes’s synthesis yielded a theory of the role of aggregate demand in determining the level of employment and real output in a monetary economy, not just prices and nominal income. In A Treatise on Money (1930), Keynes followed Wicksell (1898) is treating the interest rate as the variable equating desired investment and saving. As long as the monetary authority and banking system set the market rate of interest at something other than the natural rate of interest, a cumulative inflation or deflation would continue.

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  David Laidler's Contributions to Economics

  • R. Leeson(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  In the Keynesian case the central proposition of orthodoxy had been the automatic tendency of the economy to full employment which with the concept Harry Johnson, Keynes, and Keynesian Economics 323 of unemployment equilibrium and the output-equilibrating mechanism of the consumption function and the multiplier Keynes had provided an alternative. Second, although it had to appear new, it had to absorb as much as possible of the non-disputed aspects of the old theory. This Keynes did by giving old con- cepts new names such as transforming the money/income ratio of the Cambridge quantity theory into an aspect of the theory of liquidity preference and empha- sise as crucial analytical steps that were previously regarded as unhelpful such as the ex post equivalence of savings and investment. Third, the new theory had to be so difficult to understand that senior academic col- leagues would find it neither easy nor worthwhile to study, so that they would waste their efforts on peripheral issues, and so offer themselves as easy marks for criticism by their younger and hungrier colleagues. At the same time, the new theory had to appear intellectually difficult to challenge the intellectual interest of younger colleagues, but actually easy enough for them to master adequately with a sufficient investment of intellectual endeavour. (1972a, 55) In Keynes’s case it put established scholars like Pigou and Robertson on the side- lines, allowed some middle-aged and younger scholars such as Alvin Hansen, 16 John Hicks, and Joan Robinson ‘to jump on and run the bandwagon’ and permitted the young to ignore the wisdom of the past and demolish the pretensions of their sen- iors. Fourth, it had to develop a methodology which was more appealing than that currently available. In this Keynesian Economics was able to take advantage of the recent spread of general equilibrium and mathematical skills and work in terms of the aggregative general equilibrium models such as IS-LM.

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  Monetary Economics

  Theories, Evidence and Policy

  • David G. Pierce, Peter J. Tysome(Authors)
  • 2014(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  Thus a fifth interpretation of the role of money and monetary variables in the Keynesian system is to see them influencing expenditure through their effects on the availability of loanable funds. 138 The Keynesian system reflected in changes in real output. Keynesian models of inflation in an open economy will be considered in Chapter 9. The approach adopted in this section was originally developed by Fleming (1962) and Mundell (1963) in the early 1960s essentially for the purpose of analysing the role of monetary and fiscal policies in the context of an open economy: thus it is sometimes referred to as the Fleming-Mundell analysis. The approach neverthe-less is essentially Keynesian and has entered the textbooks as the standard open-economy Keynesian model. Essentially we shall be adding to the conventional IS-LM analysis, a balance of payments constraint, so that the goods market, the money market, and the balance of payments are all interdependent. No one of these three can maintain a position of equilibrium unless it is simultaneously a position of equilibrium for the other two. For an economy engaging in international trade, injections include exports while leakages include imports. Goods market equilibrium prevails when total injections (investment + government expenditure -h exports) are equal to total leakages (savings, 4- taxes + imports). We will assume that exports are a function of two main variables: the level of real incomes in the rest of the world and the price competitiveness of exports (i.e. the ratio of the prices of export substitutes in the rest of the world to the prices of exports). This price ratio depends not only on the own-currency prices of the goods but also on the rate of exchange between currencies.

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  Keynes for the Twenty-First Century

  The Continuing Relevance of The General Theory

  • M. Forstater(Author)
  • 2008(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  3. Orthodox anti-inflationary policies, then, restrict growth rather than expand it, as indicated in (2) above. The best way to control inflation is to give incentives to important sectors lagging in productivity, and to exercise selective controls over wage and price increases in areas of administered pricing of crucial sectors—a point stressed by many Keynesians, institu- tionalists, and Post Keynesians (Keyserling 1973, 1976). 4. Low interest rates and permissive money supply growth are important for continued growth, welfare, and justice—a point of many Post Keynesians. 5. The Accord of 1951 between the Federal Reserve and the Treasury, which ended the 1946–51 pegging of U.S. interest rates at a low rate in favor of the resultant higher rates, was a crucial policy error—also a point expressed by many Keynesians and Post Keynesians (Keyserling 1964b; Brazelton 2001). LEON H. KEYSERLING, AMERICAN KEYNESIAN 47 6. The fiscal budget must be a Nation’s Economic Budget or a Freedom Bud- get for full employment output to balance the budget at full employment secularly—a policy later adopted by the Kennedy and Johnson administra- tions under economic advisor Walter Heller (Brazelton 2003) and included in the so-called Humphrey-Hawkins Act (Keyserling 1978; Pech- man and Simler 1982, especially the chapter by Walter Heller). 7. In terms of fiscal policy to support full employment, the money supply must grow to keep interest rates low, to permit further growth as needed for full employment via the public and the private sectors, and for social justice. 8. There must be a balance between the micro and the macro sectors of the economy. In the former, firms must get supplies to feed their needs for cur- rent output and expansion. In the latter, aggregate demand must grow with aggregate supply, and vice versa. Also, the money supply must be permis- sive for such secular and cyclical needs of the economy.

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