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.


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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This encouragement of symbiotic fiscalism and the economically benign policies it suggested was reflected in the required texts for the all-important civil service exams.
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On the basis of the above results of the survey we can state that countries with a high level of fiscalism generate a lower economic growth rate.
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3) Or he may represent, as Walter Cohen has remarked, a "quasifeudal fiscalism," which would make him more a "figure from the past: marginal, diabolical, irrational, archaic, medieval," "an old man with obsolete values trying to arrest the course of history.
Like Keynesianism, fiscalism, or the "Treasury view," the particular set of propositions called monetarism does not fully describe the body of thought accepted by a loosely knit group of practicing economists any more than terms like Chicago, Cambridge or Austrian School describe the thought of all to whom the terms are applied.
Ellis's work (for example Ellis 1951) consistently indicates that he believed fiscalism had dominated Keynesian economics in the United States during the 1940s.
After the collapse of Keynsian fiscalism, caused by active state intervention, inefficiency, and corruption of the governments, the initial paradigm, of demand-and-supply-based market equilibrium has now been resurrected.
Fiscalism was the third of the economic policies adopted.
Carafa thus moves beyond the straightforward fiscalism of earlier south Italian governments towards the enunciation of a liberal economic policy based on the principle that the crown will reap more benefits the less it intervenes through heavy taxation in the economic life of the kingdom.
The whole PFS getting closer to an index of 55% means that there is a gap between public income and expenditure, the main sources of which are: world financial crisis, limiting the fiscalism index (from 35.