Why keynesian economics is right

Keynesian economics is considered a "demand-side" theory that focuses on changes in the economy over the short run. Based on his theory, Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression. Subsequently, Keynesian economics was used to refer to the concept that optimal economic performance could be achieved—and economic slumps prevented—by influencing aggregate demand through activist stabilization and economic intervention policies by the government.

Keynesian economics represented a new way of looking at spending, output, and inflation. Previously, what Keynes dubbed classical economic thinking held that cyclical swings in employment and economic output create profit opportunities that individuals and entrepreneurs would have an incentive to pursue, and in so doing correct the imbalances in the economy. A lower level of inflation and wages would induce employers to make capital investments and employ more people, stimulating employment and restoring economic growth.

Keynes believed that the depth and persistence of the Great Depression, however, severely tested this hypothesis. In his book, The General Theory of Employment, Interest, and Money and other works, Keynes argued against his construction of classical theory, that during recessions business pessimism and certain characteristics of market economies would exacerbate economic weakness and cause aggregate demand to plunge further. For example, Keynesian economics disputes the notion held by some economists that lower wages can restore full employment because labor demand curves slope downward like any other normal demand curve.

Instead he argued that employers will not add employees to produce goods that cannot be sold because demand for their products is weak. Similarly, poor business conditions may cause companies to reduce capital investment , rather than take advantage of lower prices to invest in new plants and equipment.

This would also have the effect of reducing overall expenditures and employment. Keynesian economics is sometimes referred to as "depression economics," as Keynes's General Theory was written during a time of deep depression not only in his native land of the United Kingdom but worldwide. Other economists had argued that in the wake of any widespread downturn in the economy, businesses and investors taking advantage of lower input prices in pursuit of their own self-interest would return output and prices to a state of equilibrium , unless otherwise prevented from doing so.

Keynes believed that the Great Depression seemed to counter this theory. Output was low and unemployment remained high during this time. The Great Depression inspired Keynes to think differently about the nature of the economy.

From these theories, he established real-world applications that could have implications for a society in economic crisis. Keynes rejected the idea that the economy would return to a natural state of equilibrium. Instead, he argued that once an economic downturn sets in, for whatever reason, the fear and gloom that it engenders among businesses and investors will tend to become self-fulfilling and can lead to a sustained period of depressed economic activity and unemployment.

In response to this, Keynes advocated a countercyclical fiscal policy in which, during periods of economic woe, the government should undertake deficit spending to make up for the decline in investment and boost consumer spending in order to stabilize aggregate demand. Keynes was highly critical of the British government at the time. The government greatly increased welfare spending and raised taxes to balance the national books. Keynes said this would not encourage people to spend their money, thereby leaving the economy unstimulated and unable to recover and return to a successful state.

Instead, he proposed that the government spend more money and cut taxes to turn a budget deficit, which would increase consumer demand in the economy. This would, in turn, lead to an increase in overall economic activity and a reduction in unemployment. Keynes also criticized the idea of excessive saving, unless it was for a specific purpose such as retirement or education.

He saw it as dangerous for the economy because the more money sitting stagnant, the less money in the economy stimulating growth.

This was another of Keynes's theories geared toward preventing deep economic depressions. Many economists have criticized Keynes's approach. They argue that businesses responding to economic incentives will tend to return the economy to a state of equilibrium unless the government prevents them from doing so by interfering with prices and wages, making it appear as though the market is self-regulating.

On the other hand, Keynes, who was writing while the world was mired in a period of deep economic depression, was not as optimistic about the natural equilibrium of the market. He believed the government was in a better position than market forces when it came to creating a robust economy.

According to Keynes's theory of fiscal stimulus, an injection of government spending eventually leads to added business activity and even more spending.

This theory proposes that spending boosts aggregate output and generates more income. If workers are willing to spend their extra income, the resulting growth in the gross domestic product GDP could be even greater than the initial stimulus amount. The magnitude of the Keynesian multiplier is directly related to the marginal propensity to consume.

Its concept is simple. Spending from one consumer becomes income for a business that then spends on equipment, worker wages, energy, materials, purchased services, taxes and investor returns.

That worker's income can then be spent and the cycle continues. Keynes and his followers believed individuals should save less and spend more, raising their marginal propensity to consume to effect full employment and economic growth. Children's rights. Children's rights matter - and deserve more attention. Digital technology is changing how we live. Forms and impacts of racism. The coronavirus pandemic is affecting societies and economies around the globe. Broad-based prosperity depends on more than purchasing power.

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Southeast Asia and Pacific. South Asia. To control financial markets in the interests of full employment and social justice lies squarely in the Keynesian tradition. That is why I expect Keynes to be a living presence 20 years from now, on the centenary of the General Theory, and well beyond. Robert Skidelsky , Member of Parliament,. This article is published in collaboration with Project Syndicate. The views expressed in this article are those of the author alone and not the World Economic Forum.

US consumer prices have risen to their highest rate since , with consumer prices up 6. Economists say the inflation could be long-lasting. World-renowned leadership expert, Michael Useem, has developed a checklist that includes 16 mission-critical principles to make good and timely decisions. I accept. Robert Skidelsky Member of Parliament,. Take action on UpLink. Explore context. Explore the latest strategic trends, research and analysis. License and Republishing.