FACTOID # 8: Bookworms: Vermont has the highest number of high school teachers per capita and third highest number of librarians per capita.
 
 Home   Encyclopedia   Statistics   States A-Z   Flags   Maps   FAQ   About 
   
 
WHAT'S NEW
 

SEARCH ALL

FACTS & STATISTICS    Advanced view

Search encyclopedia, statistics and forums:

 

 

(* = Graphable)

 

 


Encyclopedia > Keynesian economics

Keynesian economics (pronounced "kainzian", IPA /ˈkeɪnzjən/), also called Keynesianism, or Keynesian Theory, is an economic theory based on the ideas of the 20th-century British economist John Maynard Keynes. Keynesian economics promotes a mixed economy, in which both the state and the private sector are considered to play an important role. Keynesian economics markedly differs from, and sought to provide solutions to what some economists believed to be the failure of laissez-faire economic liberalism (which advocates that markets and the private sector operate best without state intervention). Image File history File links This is a lossless scalable vector image. ... Articles with similar titles include the NATO phonetic alphabet, which has also informally been called the “International Phonetic Alphabet”. For information on how to read IPA transcriptions of English words, see IPA chart for English. ... Articles with similar titles include the NATO phonetic alphabet, which has also informally been called the “International Phonetic Alphabet”. For information on how to read IPA transcriptions of English words, see IPA chart for English. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ... The word theory has a number of distinct meanings in different fields of knowledge, depending on their methodologies and the context of discussion. ... John Maynard Keynes, 1st Baron Keynes, CB (pronounced cains, IPA ) (5 June 1883 – 21 April 1946) was a British economist whose ideas, called Keynesian economics, had a major impact on modern economic and political theory as well as on many governments fiscal policies. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ... A mixed economy is an economy that has a mix of economic systems. ... < [[[[math>Insert formula here</math>The public sector is that part of economic and administrative life that deals with the delivery of goods and services by and for the [[government </math></math></math></math> Direct administration funded through taxation; the delivering organisation generally has no specific requirement to meet commercial... The private sector of a nations economy consists of all that is outside the state. ... Laissez-faire is short for laissez faire, laissez passer, a French phrase meaning to let things alone, let them pass. First used by the eighteenth century Physiocrats as an injunction against government interference with trade, it is now used as a synonym for strict free market economics. ... This article or section does not cite any references or sources. ...


In Keynes's theory, macroeconomic trends can overwhelm the micro-level behavior of individuals. Instead of the economic process being based on continuous improvement in potential output, as most classical economists had believed from the late 1700s on, Keynes asserted the importance of aggregate demand for goods as the driving factor of the economy, especially in periods of downturn. From this he argued that government policies could be used to promote demand at a macro level, to fight high unemployment and deflation of the sort seen during the 1930s. This is in contrast to supply-side economics. Keynes believed that the government was responsible for helping to pull a country out of a depression. If the government increases its spending, then the citizens are encouraged to spend more because more money is in circulation. People will start to invest more, and the economy will climb back up to normal. Circulation in macroeconomics Macroeconomics is a branch of Economics that deals with the performance, structure, and behavior of the economy as a whole. ... Microeconomics (or price theory) is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold. ... In economics, potential output (also referred to as natural real gross domestic product) refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. ... Classical economics is widely regarded as the first modern school of economic thought. ... Events and trends The Bonneville Slide blocks the Columbia River near the site of present-day Cascade Locks, Oregon with a land bridge 200 feet (60 m) high. ... In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... A good in economics is any physical object (natural or man-made) or service that, upon consumption, increases utility, and therefore can be sold at a price in a market. ... This article does not cite any references or sources. ... “Deflation” redirects here. ... The 1930s (years from 1930–1939) were described as an abrupt shift to more radical and conservative lifestyles, as countries were struggling to find a solution to the Great Depression, also known as the World Depression. ... Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively managed using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. ...


A central conclusion of Keynesian economics is that there is no strong automatic tendency for output and employment to move toward full employment levels. This conclusion conflicts with the tenets of classical economics, and those schools, such as supply-side economics or the Austrian School, which assume a general tendency towards a welcome equilibrium in a restrained money-creating economy. 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. In economics, full employment has more than one meaning. ... Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively managed using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. ... The Austrian School is a school of economic thought which rejects opposing economists reliance on methods used in natural science for the study of human action, and instead bases its formalism of economics on relationships through logic or introspection called praxeology. ... Price of market balance In economics, economic equilibrium is simply a state of the world where economic forces are balanced and in the abscence of external shocks the (equilibrium) values of economic variables will not change. ... Neoclassical synthesis refers to a postwar academic movement in economics which attempted to absorb the economic thought of John Maynard Keynes into the orthodox thought of the neoclassical economists. ... General Equilibrium (linear) supply and demand curves. ...


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.

Contents

Historical background

Keynes was very critical of rentiers and speculators, from a somewhat Fabian perspective.[citation needed] Speculation involves the buying, holding, and selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. ... The Fabian Society is a British socialist intellectual movement, whose purpose is to advance the socialist cause by gradualist and reformist, rather than revolutionary means. ...


His experience with the Treaty of Versailles pushed him to break with previous theories. His The Economic Consequences of the Peace (1920) not only recounted the general economics, as he saw them, of the Treaty, but the individuals involved in making it. The book established him as an economist who had the practical political skills to influence policy. In the 1920s, Keynes published a series of books and articles which focused on the effects of state power and large economic trends, developing the idea of monetary policy as something separate from merely maintaining currency against a fixed peg. He increasingly believed that economic systems would not automatically right themselves to attain "the optimal level of production." This is expressed in his famous quote, "In the long run, we are all dead," implying that it does not matter that optimal production levels are attained in the long run, because it would be a very long run indeed. This article is about the Treaty of Versailles of June 28 1919, which ended World War I. For other uses, see Treaty of Versailles (disambiguation) . The Treaty of Versailles (1919) was a peace treaty which officially ended World War I between the Allied and Associated Powers and Germany. ... The Economic Consequences of the Peace is a book published by John Maynard Keynes in 1919. ... 1920 (MCMXX) was a leap year starting on Thursday. ... The 1920s is a decade that is sometimes referred to as the Jazz Age or the Roaring Twenties, usually applied to America. ... It has been suggested that monetary theory be merged into this article or section. ...


In the late 1920s, the world economic system began to break down, after the shaky recovery that followed World War I. With the global drop in production, critics of the gold standard, market self-correction, and production-driven paradigms of economics moved to the fore. Dozens of different schools contended for influence. Further, some pointed to the Soviet Union as a supposedly successful planned economy which had avoided the disasters of the capitalist world and argued for a move toward socialism. Others pointed to the success of fascism in Mussolini's Italy. The world economy can be evaluated in various ways, depending on the model used, and this valuation can then be represented in various ways (for example, in 2006 US dollars). ... “The Great War ” redirects here. ... This article refers to an economy controlled by the state. ... Socialism refers to a broad array of doctrines or political movements that envisage a socio-economic system in which property and the distribution of wealth are subjfuck grapesect to control by the community[1] for the purposes of increasing social and economic equality and cooperation. ... Fascism is an authoritarian political ideology (generally tied to a mass movement) that considers individual and other societal interests subordinate to the needs of the state, and seeks to forge a type of national unity, usually based on, but not limited to, ethnic, cultural, or racial attributes. ... “Mussolini” redirects here. ...


Into this tumult stepped Keynes, promising not to institute revolution but to save capitalism. He circulated a simple thesis: there were more factories and transportation networks than could be used at the current ability of individuals to pay and that the problem was on the demand side.


But many economists insisted that business confidence, not lack of demand, was the root of the problem, and that the correct course was to slash government expenditures and to cut wages to raise business confidence and willingness to hire unemployed workers. Yet others simply argued that "nature would make its course," solving the Depression automatically by "shaking out" unneeded productive capacity.


Keynes and the Classics

For Keynes the level of output and employment in the economy was determined by aggregate demand or effective demand. In a reversal of Say's Law, Keynes in essence argued that "demand creates its own supply," up to the limit set by full employment. In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... Effective demand (in macroeconomics often seen as synonymous with aggregate demand), refers to the very simple economic idea that says that its not enough to want something such as food or luxuries. ... In economics, Say’s Law or Say’s Law of Markets is a principle attributed to French businessman and economist Jean-Baptiste Say (1767-1832) stating that there can be no demand without supply. ... In economics, full employment has more than one meaning. ...


In "classical" economic theory—Keynes's term for the economics prior to General Theory (and specifically that of Arthur Pigou)—adjustments in prices would automatically make demand tend to the full employment level. Keynes, pointing to the sharp fall in employment and output in the early 1930s, argued that whatever the theory, this self-correcting process had not happened. The current version of the article or section reads like an advertisement. ... Arthur Cecil Pigou (November 18, 1877 _ March 7, 1959) was an English economist, known for his work in many fields and particularly in welfare economics. ... In economics, full employment has more than one meaning. ...


In the neo-classical theory, the two main costs are those of labor and money. If there were more labor than demand for it, wages would fall until hiring began again. If there was too much saving, and not enough consumption, then interest rates would fall until people either cut their savings rate or started borrowing.


Wages and spending

During the Great Depression, the classical theory defined economic collapse as simply a lost incentive to produce. Mass unemployment was caused only by high and rigid real wages. The proper solution was to cut wages. This article does not cite any references or sources. ...


To Keynes, the determination of wages is more complicated. First, he argued that it is not real but nominal wages that are set in negotiations between employers and workers, as opposed to a barter relationship. First, nominal wage cuts would be difficult to put into effect because of laws and wage contracts. Even classical economists admitted that these exist; unlike Keynes, they advocated abolishing minimum wages, unions, and long-term contracts, increasing labor-market flexibility. However, to Keynes, people will resist nominal wage reductions, even without unions, until they see other wages falling and a general fall of prices. (His prediction that mass unemployment would be necessary to deflate sterling wages back to pre-war gold values had been proven right in the 1920s). In economics, the distinction between nominal and real numbers is often made. ... Barter is a type of trade that do not use any medium of exchange, in which goods or services are exchanged for other goods and/or services. ... “GBP” redirects here. ... The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. ... 1920 (MCMXX) was a leap year starting on Thursday. ...


He also argued that to boost employment, real wages had to go down: nominal wages would have to fall more than prices. However, doing so would reduce consumer demand, so that the aggregate demand for goods would drop. This would in turn reduce business sales revenues and expected profits. Investment in new plants and equipment—perhaps already discouraged by previous excesses—would then become more risky, less likely. Instead of raising business expectations, wage cuts could make matters much worse. In economics, consumption refers to the final use of goods and services to provide utility. ... In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ...


Further, if wages and prices were falling, people would start to expect them to fall. This could make the economy spiral downward as those who had money would simply wait as falling prices made it more valuable—rather than spending. As Irving Fisher argued in 1933, in his Debt-Deflation Theory of Great Depressions, deflation (falling prices) can make a depression deeper as falling prices and wages made pre-existing nominal debts more valuable in real terms. Irving Fisher (February 27, 1867 Saugerties, New York — April 29, 1947, New York) was an American economist, health campaigner, and eugenicist. ... “Deflation” redirects here. ...


Excessive saving

To Keynes, excessive saving, i.e. saving beyond planned investment, was a serious problem, encouraging recession or even depression. Excessive saving results if investment falls, perhaps due to falling consumer demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step. Image File history File links CLASSIX.png‎ Other versions w:Image:CLASSIX.jpg File links The following pages on the English Wikipedia link to this file (pages on other projects are not listed): Keynesian economics ... In macroeconomics, the definition of recession is a decline in any countrys Gross Domestic Product (GDP), or negative real economic growth, for two or more successive quarters of a year. ... WORLD OF WARCRAFT IS THE BEST GAME EVER INVENTED AND PLAY IT. IF YOU DONT PLAY WORLD OF WARCRAFT, YOU ARE A nOOb. ...


The classical economists argued that interest rates would fall due to the excess supply of "loanable funds." The first diagram, adapted from the only graph in The General Theory, shows this process. (For simplicity, other sources of the demand for or supply of funds are ignored here.) Assume that fixed investment in capital goods falls from "old I" to "new I" (step a). Second (step b), the resulting excess of saving causes interest-rate cuts, abolishing the excess supply: so again we have saving (S) equal to investment. The interest-rate fall prevents that of production and employment. Classical economics is widely regarded as the first modern school of economic thought. ...


Keynes had a complex argument against this laissez-faire response. The graph below summarizes his argument, assuming again that fixed investment falls (step A). First, saving does not fall much as interest rates fall, since the income and substitution effects of falling rates go in conflicting directions. Second, since planned fixed investment in plant and equipment is mostly based on long-term expectations of future profitability, that spending does not rise much as interest rates fall. So S and I are drawn as steep (inelastic) in the graph. Given the inelasticity of both demand and supply, a large interest-rate fall is needed to close the saving/investment gap. As drawn, this requires a negative interest rate at equilibrium (where the new I line would intersect the old S line). However, this negative interest rate is not necessary to Keynes's argument. Laissez-faire is short for laissez faire, laissez passer, a French phrase meaning to let things alone, let them pass. First used by the eighteenth century Physiocrats as an injunction against government interference with trade, it is now used as a synonym for strict free market economics. ... Consumer theory relates preferences, indifference curves and budget constraints to consumer demand curves. ... Consumer theory relates preferences, indifference curves and budget constraints to consumer demand curves. ... Fixed investment in economics refers to an increase in the amounts of real capital goods (real means of production) used in production or to the replacement of depreciated capital goods. ... In economics, elasticity is the ratio of the proportional change in one variable with respect to proportional change in another variable. ...

Third, Keynes argued that saving and investment are not the main determinants of interest rates, especially in the short run. Instead, the supply of and the demand for the stock of money determine interest rates in the short run. (This is not drawn in the graph.) Neither change quickly in response to excessive saving to allow fast interest-rate adjustment. Image File history File links KEYNES.png‎ The Keynesian view of Saving & Investment Author presumed to be Jdevine Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1. ... For other uses, see Money (disambiguation). ...


Finally, because of fear of capital losses on assets besides money, Keynes suggested that there may be a "liquidity trap" setting a floor under which interest rates cannot fall. (In this trap, bond-holders, fearing rises in interest rates (because rates are so low), fear capital losses on their bonds and thus try to sell them to attain money (liquidity).) Even economists who reject this liquidity trap now realize that nominal interest rates cannot fall below zero (or slightly higher). In the diagram, the equilibrium suggested by the new I line and the old S line cannot be reached, so that excess saving persists. Some (such as Paul Krugman) see this latter kind of liquidity trap as prevailing in Japan in the 1990s. In monetary economics, a liquidity trap occurs when the economy is stagnant, the real interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. ... In economics, the distinction between nominal and real numbers is often made. ... The zero interest rate policy (ZIRP) is Keynesian macroeconomics scheme for economies exhibiting slow growth with a very low interest rate, such as contemporary Japan. ...


Even if this "trap" does not exist, there is a fourth element to Keynes's critique (perhaps the most important part). Saving involves not spending all of one's income. It thus means insufficient demand for business output, unless it is balanced by other sources of demand, such as fixed investment. Thus, excessive saving corresponds to an unwanted accumulation of inventories, or what classical economists called a general glut[2]. This pile-up of unsold goods and materials encourages businesses to decrease both production and employment. This in turn lowers people's incomes—and saving, causing a leftward shift in the S line in the diagram (step B). For Keynes, the fall in income did most of the job ending excessive saving and allowing the loanable funds market to attain equilibrium. Instead of interest-rate adjustment solving the problem, a recession does so. Thus in the diagram, the interest-rate change is small. The General glut problem is a problem identified within the classical political economy of the era of Adam Smith and David Ricardo. ... In macroeconomics, the definition of recession is a decline in any countrys Gross Domestic Product (GDP), or negative real economic growth, for two or more successive quarters of a year. ...


Whereas the classical economists assumed that the level of output and income was constant and given at any one time (except for short-lived deviations), Keynes saw this as the key variable that adjusted to equate saving and investment.


Finally, a recession undermines the business incentive to engage in fixed investment. With falling incomes and demand for products, the desired demand for factories and equipment (not to mention housing) will fall. This accelerator effect would shift the I line to the left again, a change not shown in the diagram above. This recreates the problem of excessive saving and encourages the recession to continue. Fixed investment in economics refers to an increase in the amounts of real capital goods (real means of production) used in production or to the replacement of depreciated capital goods. ... The accelerator effect in economics refers to a positive effect on private fixed investment of the growth of the market economy (measured e. ...


In sum, to Keynes there is interaction between excess supplies in different markets, as unemployment in labor markets encourages excessive saving—and vice-versa. Rather than prices adjusting to attain equilibrium, the main story is one of quantity adjustment allowing recessions and possible attainment of underemployment equilibrium. This article does not cite any references or sources. ... In economics, the concept of quantity adjustment refers to one possible result of supply and demand disequilibrium in a market, either due to or in the absence of external constraints on the market. ... In Keynesian economics, underemployment equilibrium refers to a situation with a persistent shortfall relative to full employment and potential output so that unemployment is higher than at the NAIRU or the natural rate of unemployment. ...


Active fiscal policy

As noted, the classicals wanted to balance the government budget, through slashing expenditures or (more rarely) raising taxes. To Keynes, this would exacerbate the underlying problem: following either policy would raise saving (broadly defined) and thus lower the demand for both products and labor. For example, Keynesians see Herbert Hoover's June 1932 tax hike as making the Depression worse. Herbert Clark Hoover (August 10, 1874 – October 20, 1964), the thirty-first President of the United States (1929–1933), was a world-famous mining engineer and humanitarian administrator. ...


Keynes's ideas influenced Franklin D. Roosevelt's view that insufficient buying-power caused the Depression. During his presidency, Roosevelt adopted some aspects of Keynesian economics, especially after 1937, when, in the depths of the Depression, the United States suffered from recession yet again following fiscal contraction. Something similar to Keynesian expansionary policies had been applied earlier by both social-democratic Sweden and Nazi Germany. But to many the true success of Keynesian policy can be seen at the onset of World War II, which provided a kick to the world economy, removed uncertainty, and forced the rebuilding of destroyed capital. Keynesian ideas became almost official in social-democratic Europe after the war and in the U.S. in the 1960s. FDR redirects here. ... Social democracy is a political ideology emerging in the late 19th and early 20th centuries from supporters of Marxism who believed that the transition to a socialist society could be achieved through democratic evolutionary rather than revolutionary means. ... Nazi Germany, or the Third Reich, commonly refers to Germany in the years 1933&#8211;1945, when it was under the firm control of the totalitarian and fascist ideology of the Nazi Party, with the Führer Adolf Hitler as dictator. ... Combatants Allied powers: China France Great Britain Soviet Union United States and others Axis powers: Germany Italy Japan and others Commanders Chiang Kai-shek Charles de Gaulle Winston Churchill Joseph Stalin Franklin Roosevelt Adolf Hitler Benito Mussolini Hideki Tōjō Casualties Military dead: 17,000,000 Civilian dead: 33,000... Social democracy is a political ideology emerging in the late 19th and early 20th centuries from supporters of Marxism who believed that the transition to a socialist society could be achieved through democratic evolutionary rather than revolutionary means. ... The 1960s decade refers to the years from 1960 to 1969, inclusive. ...


Keynes's theory suggested that active government policy could be effective in managing the economy. Rather than seeing unbalanced government budgets as wrong, Keynes advocated what has been called countercyclical fiscal policies, that is policies which acted against the tide of the business cycle: deficit spending when a nation's economy suffers from recession or when recovery is long-delayed and unemployment is persistently high—and the suppression of inflation in boom times by either increasing taxes or cutting back on government outlays. He argued that governments should solve short-term problems rather than waiting for market forces to do it, because "in the long run, we are all dead." Countercyclical (or counter-cyclical) is a term that describes policies or economic effects that work against cyclical tendencies in the economy. ... // [edit] Introduction [edit] Definition If we were to take snapshots of an economy at different points in time, no two photos would look alike. ... This article or section does not cite its references or sources. ... In macroeconomics, the definition of recession is a decline in any countrys Gross Domestic Product (GDP), or negative real economic growth, for two or more successive quarters of a year. ...


This contrasted with the classical and neoclassical economic analysis of fiscal policy. Fiscal stimulus (deficit spending) could actuate production. But to these schools, there was no reason to believe that this stimulation would outrun the side-effects that "crowd out" private investment: first, it would increase the demand for labor and raise wages, hurting profitability. Second, a government deficit increases the stock of government bonds, reducing their market price and encouraging high interest rates, making it more expensive for business to finance fixed investment. Thus, efforts to stimulate the economy would be self-defeating. Worse, it would be shifting resources away from productive use by the private sector to wasteful use by the government. Classical economics is widely regarded as the first modern school of economic thought. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ... This article or section does not cite its references or sources. ... In economics, crowding out theoretically occurs when the government expands its borrowing to finance increased expenditure, or cuts taxes (i. ... In economics, the profit rate refers to the relative profitability of an investment project or of a capitalist enterprise or for the capitalist economy as a whole. ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... Fixed investment in economics refers to an increase in the amounts of real capital goods (real means of production) used in production or to the replacement of depreciated capital goods. ...


The Keynesian response is that such fiscal policy is only appropriate when unemployment is persistently high, above what is now termed the Non-Accelerating Inflation Rate of Unemployment, or "NAIRU". In that case, crowding out is minimal. Further, private investment can be "crowded in": fiscal stimulus raises the market for business output, raising cash flow and profitability, spurring business optimism. To Keynes, this accelerator effect meant that government and business could be complements rather than substitutes in this situation. Second, as the stimulus occurs, gross domestic product rises, raising the amount of saving, helping to finance the increase in fixed investment. Finally, government outlays need not always be wasteful: government investment in public goods that will not be provided by profit-seekers will encourage the private sector's growth. That is, government spending on such things as basic research, public health, education, and infrastructure could help the long-term growth of potential output. The term NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment. ... The accelerator effect in economics refers to a positive effect on private fixed investment of the growth of the market economy (measured e. ... A complement or complementary good is defined in economics as a good that should be consumed with another good; its cross elasticity of demand is negative. ... In economics, one kind of good (or service) is said to be a substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses. ... This article is about GDP in the context of economics. ... // This article does not cite any references or sources. ... In economics, a public good is one that cannot or will not be produced for individual profit, since it is difficult to get people to pay for its large beneficial externalities. ... In economics, potential output (also referred to as natural real gross domestic product) refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. ...


Invoking public choice theory, classical and neoclassical economists doubt that the government will ever be this beneficial and suggest that its policies will typically be dominated by special interest groups, including the government bureaucracy. Thus, they use their political theory to reject Keynes' economic theory. Public choice theory is a branch of economics that studies the decision-making behavior of voters, politicians and government officials from the perspective of economic theory, namely game theory and decision theory. ... A special interest is a person or political organization established to influence governmental policy or legislators in a specific area of policy. ... The Politics series Politics Portal This box:      This article is about the sociological concept. ...


In Keynes' theory, there must be significant slack in the labor market before fiscal expansion is justified. Both conservative and some neoliberal economists question this assumption, unless labor unions or the government "meddle" in the free market, creating persistent supply-side or classical unemployment. Their solution is to increase labor-market flexibility, i.e., by cutting wages, busting unions, and deregulating business. This article does not cite any references or sources. ... This article or section does not cite its references or sources. ... For the school of international relations, see Neoliberalism (international relations). ... A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy... This article does not cite any references or sources. ...


Deficit spending is not Keynesianism. Governments had long used deficits to finance wars. But Keynesian policy is not merely spending. Rather, it is the proposition that sometimes the economy needs active fiscal policy. Further, Keynesianism recommends counter-cyclical policies, for example raising taxes when there is abundant demand-side growth to cool the economy and to prevent inflation, even if there is a budget surplus. Classical economics, on the other hand, argues that one should cut taxes when there are budget surpluses, to return money to private hands. Because deficits grow during recessions, classicals call for cuts in outlays—or, less likely, tax hikes. On the other hand, Keynesianism encourages increased deficits during downturns. In the Keynesian view, the classical policy exacerbates the business cycle. In the classical view, of course, Keynesianism is topsy-turvy policy, almost literally fiscal madness. This article or section does not cite its references or sources. ... // [edit] Introduction [edit] Definition If we were to take snapshots of an economy at different points in time, no two photos would look alike. ...


"Multiplier effect" and interest rates

Two aspects of Keynes's model had implications for policy: In economics, the multiplier effect refers to the idea that an initial spending rise can lead to even greater increase in national income. ...


First, there is the "Keynesian multiplier", first developed by Richard F. Kahn in 1931. The effect on demand of any exogenous increase in spending, such as an increase in government outlays is a multiple of that increase—until potential is reached. Thus, a government could stimulate a great deal of new production with a modest outlay: if the government spends, the people who receive this money then spend most on consumption goods and save the rest. This extra spending allows businesses to hire more people and pay them, which in turn allows a further increase consumer spending. This process continues. At each step, the increase in spending is smaller than in the previous step, so that the multiplier process tapers off and allows the attainment of an equilibrium. This story is modified and moderated if we move beyond a "closed economy" and bring in the role of taxation: the rise in imports and tax payments at each step reduces the amount of induced consumer spending and the size of the multiplier effect. In economics, the multiplier effect refers to the idea that an initial spending rise can lead to even greater increase in national income. ... Exogenous (or exogeneous) (from the Greek words exo and gen, meaning outside and production) refers to an action or object coming from outside a system. ...


Second, Keynes re-analyzed the effect of the interest rate on investment. In the classical model, the supply of funds (saving) determined the amount of fixed business investment. That is, since all savings was placed in banks, and all business investors in need of borrowed funds went to banks, the amount of savings determined the amount that was available to invest. To Keynes, the amount of investment was determined independently by long-term profit expectations and, to a lesser extent, the interest rate. The latter opens the possibility of regulating the economy through money supply changes, via monetary policy. Under conditions such as the Great Depression, Keynes argued that this approach would be relatively ineffective compared to fiscal policy. But during more "normal" times, monetary expansion can stimulate the economy, mostly by encouraging construction of new housing. In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... It has been suggested that monetary theory be merged into this article or section. ... For other uses, see The Great Depression (disambiguation). ...


Keynes and redistribution

Keynesians and redistributionists tend to associate with each other. Keynes, in the twenties, wrote about a hydro-electric project. In his opinion it would have been better if the rewards of the project had gone to the worker-builders rather than to the investors who had financed the project.[citation needed]


Keynesians believe that fiscal policy should be directed towards the lower-income segment of the population, because that segment is more likely to spend the money, contributing to demand, than to save it. Keynesians also tend to go further than Keynes himself, believing all savings to be excessive.


However this part of Keynesian theory was later found incompatible with empirical findings. Evidence from a broad panel of recent academic studies shows the relation between redistribution and the rate of growth and investment is indeed robust however not linear. In his study Inequality and Growth in a Panel of Countries Robert J. Barro, Harvard University found that inequality tends to retard growth in poor countries and encourage growth in well developed regions. In their study for the World Institute for Development Economics Research , Giovanni Andrea Cornia and Julius Court (2001) reach analogous conclusions. The authors therefore recommend to pursue moderation also as to the redistribution and particularly to avoid the extremes. Both very high egalitarianism and very high inequality cause slow growth.


Excessive redistribution causing extreme egalitarianism leads to incentive traps, free-riding, high operational costs and corruption in the redistribution system, all reducing a country's growth potential. However also extreme inequality diminishes growth potential through the erosion of social cohesion, increasing social unrest and social conflict causing uncertainty of property rights. Therefore public policy should target an ‘efficient inequality range’. The authors claim that such efficiency range roughly lies between the values of the Gini coefficients of 25 (the inequality value of a typical Northern European country) and 40 (that of countries such as China and the USA). The precise shape of the inequality-growth relationship depicted in the Chart obviously varies across countries depending upon their resource endowment, history, remaining levels of absolute poverty and available stock of social programs, as well as on the distribution of physical and human capital.


Postwar Keynesianism

After Keynes, Keynesian analysis was combined with neoclassical economics to produce what is generally termed "the neoclassical synthesis" which dominates mainstream macroeconomic thought. Though it was widely held that there was no strong automatic tendency to full employment, many believed that if government policy were used to ensure it, the economy would behave as classical or neoclassical theory predicted.


In the post-WWII years, Keynes's policy ideas were widely accepted. For the first time, governments prepared good quality economic statistics on an ongoing basis and had a theory that told them what to do. In this era of new liberalism and social democracy, most western capitalist countries enjoyed low, stable unemployment and modest inflation. Combatants Allied powers: China France Great Britain Soviet Union United States and others Axis powers: Germany Italy Japan and others Commanders Chiang Kai-shek Charles de Gaulle Winston Churchill Joseph Stalin Franklin Roosevelt Adolf Hitler Benito Mussolini Hideki Tōjō Casualties Military dead: 17,000,000 Civilian dead: 33,000... New liberalism (also called modern liberalism or American liberalism) is a political philosophy that argues for the idea that society has the responsibility of guaranteeing equal opportunities for each of its citizens. ... Social democracy is a political ideology emerging in the late 19th and early 20th centuries from supporters of Marxism who believed that the transition to a socialist society could be achieved through democratic evolutionary rather than revolutionary means. ... In economics, a capitalist is someone who owns capital, presumably within the economic system of capitalism. ...


It was with John Hicks that Keynesian economics produced a clear model which policy-makers could use to attempt to understand and control economic activity. This model, the IS-LM model is nearly as influential as Keynes' original analysis in determining actual policy and economics education. It relates aggregate demand and employment to three exogenous quantities, i.e., the amount of money in circulation, the government budget, and the state of business expectations. This model was very popular with economists after World War II because it could be understood in terms of general equilibrium theory. This encouraged a much more static vision of macroeconomics than that described above.[citation needed] For other persons named John Hicks, see John Hicks (disambiguation). ... A diagram of the IS/LM model In economics, a model is a theoretical construct that represents economic processes by a set of variables and a set of logical and quantitative relationships between them. ... The IS curve moves to the right, causing higher interest rates and expansion in the real economy (real GDP). ... Exogenous (or exogeneous) (from the Greek words exo and gen, meaning outside and production) refers to an action or object coming from outside a system. ... For other uses, see Money (disambiguation). ... Combatants Allied powers: China France Great Britain Soviet Union United States and others Axis powers: Germany Italy Japan and others Commanders Chiang Kai-shek Charles de Gaulle Winston Churchill Joseph Stalin Franklin Roosevelt Adolf Hitler Benito Mussolini Hideki Tōjō Casualties Military dead: 17,000,000 Civilian dead: 33,000... General Equilibrium (linear) supply and demand curves. ...


The second main part of a Keynesian policy-maker's theoretical apparatus was the Phillips curve. This curve, which was more of an empirical observation than a theory, indicated that increased employment, and decreased unemployment, implied increased inflation. Keynes had only predicted that falling unemployment would cause a higher price, not a higher inflation rate. Thus, the economist could use the IS-LM model to predict, for example, that an increase in the money supply would raise output and employment—and then use the Phillips curve to predict an increase in inflation. [citation needed] Phillips curve The Phillips curve is a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy. ... This article does not cite any references or sources. ... In economics, the inflation rate is the rate of increase of the average price level (a measure of inflation). ...


Through the 1950s, moderate degrees of government demand leading industrial development, and use of fiscal and monetary counter-cyclical policies continued, and reached a peak in the "go go" 1960s, where it seemed to many Keynesians that prosperity was now permanent. However, with the oil shock of 1973, and the economic problems of the 1970s, modern liberal economics began to fall out of favor. During this time, many economies experienced high and rising unemployment, coupled with high and rising inflation, contradicting the Phillips curve's prediction. This stagflation meant that both expansionary (anti-recession) and contractionary (anti-inflation) policies had to be applied simultaneously, a clear impossibility. This dilemma led to the rise of ideas based upon more classical analysis, including monetarism, supply-side economics and new classical economics. This produced a "policy bind" and the collapse of the Keynesian consensus on the economy.[citation needed] The 1970s decade refers to the years from 1970 to 1979, also called The Seventies. ... Phillips curve The Phillips curve is a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy. ... This article uses excessive clichés and jargon. ... Monetarism is a set of views concerning the determination of national income and monetary economics. ... Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively managed using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. ... New Classical Economics emerged as a school in Macroeconomics during the 1970s. ...


Criticism

The strength of Keynesianism's influence can be seen by the wave of economists who have based their analysis on a criticism of Keynesianism.


One school began in the late 1940s with Milton Friedman. Instead of rejecting macro-measurements and macro-models of the economy, the monetarist school embraced the techniques of treating the entire economy as having a supply and demand equilibrium. However, they regarded inflation as solely being due to the variations in the money supply, rather than as being a consequence of aggregate demand. They argued that the "crowding out" effects discussed above would hobble or deprive fiscal policy of its positive effect. Instead, the focus should be on monetary policy, which was largely ignored by early Keynesians. Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. ... Monetarism is a set of views concerning the determination of national income and monetary economics. ... In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... It has been suggested that monetary theory be merged into this article or section. ...


Monetarism had an ideological as well as a practical appeal: monetary policy does not, at least on the surface, imply as much government intervention in the economy as other measures. The monetarist critique pushed Keynesians toward a more balanced view of monetary policy, and inspired a wave of revisions to Keynesian theory.


Another influential school of thought was based on the Lucas critique of Keynesian economics. This called for greater consistency with microeconomic theory and rationality, and particularly emphasized the idea of rational expectations. Lucas and others argued that Keynesian economics required remarkably foolish and short-sighted behavior from people, which totally contradicted the economic understanding of their behavior at a micro level. New classical economics introduced a set of macroeconomic theories which were based on optimising microeconomic behavior, for instance real business cycles. The Lucas Critique, named for Robert Lucass work on macroeconomic policymaking, says that its naive to try to predict the effect of a policy experiment based purely on correlations in historical data, especially high-level aggregated historical data. ... Microeconomics is the study of the economic behaviour of individual consumers, firms, and industries and the distribution of production and income among them. ... Rational expectations is a theory in economics originally proposed by John F. Muth (1961) and later developed by Robert E. Lucas Jr. ... New Classical Economics emerged as a school in Macroeconomics during the 1970s. ... In economics, the term microfoundations refers to the microeconomic analysis of the behavior of individual agents such as households or firms that underpins a macroeconomic theory (Barro, 1993, Glossary, p. ... // Business Cycles If we were to take snapshots of an economy at different points in time, no two photos would look alike. ...


Keynesian ideas were criticized by free market economist and philosopher Friedrich Hayek. Hayek's most famous work The Road to Serfdom, was written in 1944. Hayek taught at the London School of Economics from 1931 to 1950. Hayek criticized Keynesian economic policies for what he called their fundamentally collectivist approach, arguing that such theories, no matter their presumptively utilitarian intentions, require centralized planning, which Hayek argued leads to totalitarian abuses. Keynes seems to have been aware of the potential pitfalls of his economy theory, since, in the foreword to the German version of the 'The General Theory of Employment Interest and Money', he declared that "the theory of aggregated production, which is the point of ['The General Theory of Employment Interest and Money'], nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire." [1] Friedrich August von Hayek, CH (May 8, 1899 in Vienna – March 23, 1992 in Freiburg) was an Austrian-born British economist and political philosopher known for his defense of liberal democracy and free-market capitalism against socialist and collectivist thought in the mid-20th century. ... The Road to Serfdom is a book written by the economist Friedrich A. Hayek and originally published by University of Chicago Press on September, 1944. ... Mascot Beaver Affiliations University of London Russell Group EUA ACU CEMS APSIA Golden Triangle G5 Group Website http://www. ...


Another criticism leveled by Hayek against Keynes was that the study of the economy by the relations between aggregates is fallacious, and that recessions are caused by micro-economic factors. Hayek claimed that what start as temporary governmental fixes usually become permanent and expanding government programs, which stifle the private sector and civil society. Keynes himself described the critique as "deeply moving", which was quoted on the cover of the Road to Serfdom.


James Buchanan followed the criticism by noting that, since Keynes had roots in the classically liberal or free market economic tradition, he was more concerned with what was good policy, not on how it would be executed. In the book Democracy in Deficit, he notes that Keynes never thought out how, say, deficit spending would give a blank check to politicians to run deficits even when orthodox Keynesian analysis didn't find it proper. For other persons named James Buchanan, see James Buchanan (disambiguation). ... This article or section does not cite its references or sources. ...


Methodological Disagreement and Different Results that Emerge

Beginning in the late 1950s New Classical Macreconomists began to disagree with the methodology employed by Keynes and his successors. Keynesians emphasized the dependence of consumption on disposable income and, also, of investment on current profits and current cash flow. In addition Keynes posited a philips curve that tied nominal wage inflation to unemployment rate. To buttress these theories Keynesians typically traced the logical foundations of their model (using introspection) and buttressed their assumptions with statistical evidence. [2] New Classical theorists demanded that Macroeconomic be grounded on the same foundations as Microeconomic theory, profit-maximizing firms and utility maximizing consumers.[3] The Phillips curve is a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy. ...


The result of this shift in methodology produced several important divergences from Keynesian Macro economics: [4]

  1. Independence of Consumption and current Income (life-cycle permanent income hypothesis)
  2. Irrelevance of Current Profits to Investment (Modigliani-Miller theorem)
  3. Long run independence of inflation and unemployment (natural rate theory)
  4. The inability of monetary policy to stabilize output (rational expectations hypothesis)
  5. Irrelevance of Taxes and Budget Deficits to Consumption (Ricardian Equivalence)

To meet Wikipedias quality standards, this article or section may require cleanup. ... The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. ... Ricardian equivalence, or the Barro-Ricardo equivalence proposition, is a controversial economic theory which suggests that government budget deficits do not affect the total level of demand in an economy. ...

Keynesian responses to the critics

The heart of the 'new Keynesian' view rests on microeconomic models that indicate that nominal wages and prices are "sticky," i.e., do not change easily or quickly with changes in supply and demand, so that quantity adjustment prevails. This is a practice which, according to economist Paul Krugman "never works in theory, but works beautifully in practice."[citation needed] This integration is further spurred by the work of other economists which questions rational decision-making in a perfect information environment as a necessity for micro-economic theory. Imperfect decision making such as that investigated by Joseph Stiglitz underlines the importance of management of risk in the economy. New Keynesian economics developed partly in response to new classical economics. ... In economics, the concept of quantity adjustment refers to one possible result of supply and demand disequilibrium in a market, either due to or in the absence of external constraints on the market. ... Paul Krugman Paul Robin Krugman (born February 28, 1953) is an American economist. ... Joseph Stiglitz (born February 9, 1943) is an American economist, author and winner of Nobel Prize for economics ( 2001). ...


Over time, many macroeconomists have returned to the IS-LM model and the Phillips Curve as a first approximation of how an economy works. New versions of the Phillips Curve, such as the "Triangle Model", allow for stagflation, since the curve can shift due to supply shocks or changes in built-in inflation. In the 1990s, the original ideas of "full employment" had been replaced by the NAIRU doctrine, sometimes called the "natural rate of unemployment." NAIRU advocates suggest restraint in combating unemployment, in case accelerating inflation should result. However, it is unclear exactly what the value of the NAIRU should be—or whether it even exists. Many observers find it hard to distinguish the new Keynesianism from old monetarism, except that the latter's emphasis on the money supply has been dropped or downgraded. The IS curve moves to the right, causing higher interest rates and expansion in the real economy (real GDP). ... Phillips curve The Phillips curve is a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy. ... For the concept in cosmology, see cosmic inflation. ... A supply shock is an event that suddenly changes the price of a commodity or service. ... The term NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment. ...


See also

In underconsumption theory, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. ... Military Keynesianism is a government economic policy in which the government devotes large amounts of spending to the military in an effort to increase economic growth. ... The Keynesian Formula, developed by the British economist John Maynard Keynes. ... In economics, the term microfoundations refers to the microeconomic analysis of the behavior of individual agents such as households or firms that underpins a macroeconomic theory (Barro, 1993, Glossary, p. ... New Keynesian economics developed partly in response to new classical economics. ...

References

  1. ^ Keynes, John Maynard. Foreword to the General Theory. Foreword to the German Edition/Vorwort Zur Deutschen Ausgabe [1]
  2. ^ Akerlof, George A., American Economic Review, Volume 97, Number 1, March 2007 (citing Alban W. Phillips(1958)as an example)
  3. ^ Akerloff
  4. ^ Akerlof

Project Gutenberg, abbreviated as PG, is a volunteer effort to digitize, archive and distribute cultural works. ...

Critical links

  • Alan Greenspan Speech Alan Greenspan blames Keynesian economics for debilitating the US economy prior to the Reagan presidency.

  Results from FactBites:
 
Keynesian economics - Wikipedia, the free encyclopedia (4179 words)
Keynesian economics (pronounced ['kejnziən]), also called Keynesianism, is an economic theory based on the ideas of an English economist, John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s.
The rise of Keynesianism marked the end of laissez-faire economics (economic theory based on the belief that markets and the private sector could operate well on their own, without state intervention).
Instead of the economic process being based on continuous improvements in potential output, as most classical economists had believed from the late 1700s on, Keynes asserted the importance of aggregate demand for goods as the driving factor of the economy, especially in periods of downturn.
Keynesian economics - definition of Keynesian economics in Encyclopedia (3861 words)
Keynesian economics, or Keynesianism, is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s.
Instead of the economic process being based on continuous "supply side" improvements in potential output, as most classical economics had focused on from the late 1700s, Keynes asserted the importance of the aggregate demand for goods as the driving factor, especially in downturns.
The heart of the new Keynesian view rests on microeconomic models that indicate that nominal wages and prices are "sticky," i.e., do not change easily or quicky with changes in supply and demand, so that quantity adjustment prevails.
  More results at FactBites »

 
 

COMMENTARY     


Share your thoughts, questions and commentary here
Your name
Your comments

Want to know more?
Search encyclopedia, statistics and forums:

 


Press Releases |  Feeds | Contact
The Wikipedia article included on this page is licensed under the GFDL.
Images may be subject to relevant owners' copyright.
All other elements are (c) copyright NationMaster.com 2003-5. All Rights Reserved.
Usage implies agreement with terms, 1022, m