Keynesian economics

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Keynesian economics

An economic theory of British economist, John Maynard Keynes that active government intervention is necessary to ensure economic growth and stability.

Keynesian Economics

A theory stating that government intervention is necessary to ensure an active and vibrant economy. According to this theory, government should stimulate demand for goods and services in order to encourage economic growth. It thus recommends tax cuts and increased government spending during recessions to reinvigorate growth; likewise, it recommends tax increases and spending cuts during economic expansion in order to combat inflation. Many economists believe that Keynesian economic theory is more efficient than supply-side economics, though critics point to the theory's inability to explain stagflation in the United States during the 1970s.

KEYNESIAN ECONOMICS

The view held by KEYNES of the way in which the aggregate economy works, subsequently refined and developed by his successors.

Much of what is today called Keynesian economics originated from Keynes’ book The General Theory of Employment, Interest and Money (1936). Keynes gave economics a new direction and an explanation of the phenomenon of mass unemployment so prevalent in the 1930s. Economic doctrine before Keynes was based primarily upon what is now termed MICROECONOMICS. Keynes switched from the classical concentration on individual prices and markets and individual demand functions to aggregate analysis, introducing new concepts such as the CONSUMPTION FUNCTION.

The classical economists argued (and were officially supported by the monetary authorities, up to the time of accepting Keynes’ arguments) that FULL EMPLOYMENT is the result of a smooth-working PRIVATE-ENTERPRISE ECONOMY. If UNEMPLOYMENT occurred, then WAGES would fall (because of competition in labour markets) to such an extent that unemployed labour would be re-employed (the neoclassical analysis that marginal productivity of labour would now exceed or equal its marginal cost). Keynes introduced the possibility of ‘rigid wages’ in an attempt to explain what was inconceivable to classical and neoclassical economists, general equilibrium within the economy at less than full employment.

Keynes argued that INCOME depends upon the volume of employment. The relationship between income and CONSUMPTION is defined by the PROPENSITY TO CONSUME.

Consumption, therefore, is dependent upon the interrelated functions of income and employment. Anticipated expenditure on consumption and INVESTMENT is termed AGGREGATE DEMAND and, in a situation of equilibrium, equals AGGREGATE SUPPLY. Keynes is of the opinion that, in a state of equilibrium, the volume of employment was dependent upon the aggregate-supply function, the propensity to consume and the amount of investment. The level of employment would therefore increase if either the propensity to consume increased or the level of investment increased, i.e. greater demand for consumer and producer goods leads to an increase in supply. Increasing supply tends to lead to higher levels of employment.

The difficulty of reducing wages (because of trade union pressure to maintain living standards) means that ‘rigidity of wages’, or WAGE STICKINESS, may lead to a situation of equilibrium at less than full employment. Where this occurs, the government, as a buyer of both consumer and producer goods, can influence the level of aggregate demand in the economy. Aggregate demand may be increased by FISCAL POLICY or MONETARY POLICY. Keynes placed the emphasis on fiscal policy whereby the government spends more on investment projects than it collects from taxes. This is known as DEFICIT FINANCING and stimulates aggregate demand when the economy finds itself in a condition of DEPRESSION. Through the MULTIPLIER effect, the stimulus to aggregate demand is a number of times larger than the initial investment. The effect is to move the economy towards a situation of full employment.

Certain Western countries began to question Keynesian economic ideas in the 1970s as they embraced MONETARISM and began to revert to the classical economic idea that government intervention is unnecessary and that markets can ensure prosperity, provided that market rigidities are removed. See EQUILIBRIUM LEVEL OF NATIONAL INCOME, BUSINESS CYCLE, CIRCULAR FLOW OF NATIONAL INCOME, CLASSICAL ECONOMICS, DEFLATIONARY GAP, MONEY SUPPLY/ SPENDING LINKAGES, QUANTITY THEORY OF MONEY, I-S/L-M MODEL, SAY'S LAW, INFLATIONARY GAP, SUPPLY-SIDE ECONOMICS.

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He said: "We changed to a free market economy from state interventionism under Turgut Euzal.
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Carried out while the authors were both at the Economic Commission for Latin America & the Caribbean, this study examines lessons for this new Latin American state interventionism from the industrial policy experiences of 10 countries outside the region that have experienced processes of sustained economic catch-up or that have done better that Latin American countries with similar resource endowments.
Although Mill argues that the free market ought to be the general rule, he goes on to propose so many exceptions that it is appropriate to view him as the founder of the theory of market failures and state interventionism (Bowley 1967, 265; Schwartz 1972, 116; Platteau 1991, 121).
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In Latin America, inefficiency, state interventionism, partisan politics, excessive laws and regulations, and--in some countries--corruption, have undermined the principle of freedom under the law.
State Legislature is also a useful document of the American political landscape, circa 2005, presenting as it does a fundamentally conservative state government, wherein the definition of the term "conservative" manages to include positions that range from state interventionism to libertarianism.
For example, they point out that they are not writing about Europe as such but about a particular part of Europe--the old Europe of Rumsfeldian notoriety--which is experiencing decline as a result of state interventionism.
Hoffmann, whose careers began after the Cold War, have situated the early Soviet and Stalinist experience within a pan-European process of state interventionism rooted in the Enlightenment.
His study is divided into five parts: the late-eighteenth century's highly individualist capitalism (part 1); the modern corporations that emerged in the latter half of the nineteenth century (part 2); the heavy state interventionism that followed in the wake of Europe's twentieth-century wars (part 3); the years of Europe's extensive post-World War II reconstruction (part 4); and, last, the contemporary challenges of globalization (part 5).
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