Keynesian economics

(redirected from Keynesian policies)
Also found in: Encyclopedia.

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.

References in periodicals archive ?
At the same time, Keynesian policies hurt the top 1%.
Because the New Keynesian models did not offer a sufficient basis for maintaining Keynesian policies once the economic emergency had been overcome, they were quickly abandoned.
Section 5 compares the time structure of production with full employment under Keynesian policies and under a free economy.
Policy makers may have no theoretical models that can provide them with proper guidance at this time but their experience in overseeing the consequences of what has been a full scale attempt to apply Keynesian policies have left them convinced that the application of Keynesian economic theory does not work.
The real debate is over whether Keynesian policies should be adopted along with monetary stimulus in a severe recession.
Keynesian policies can trap politicians into continuing excessive spending and chronic budget deficits even though they realize that doing so does little to stimulate the economy in the short nm and harms economic growth in the long run.
This provided the necessary sociopolitical base for the acceptance of Keynesian policies.
To solve the crisis, governments reverted to typical Keynesian policies, including buying assets to taking over financial companies.
Short term Keynesian policies should be for that time period, not going on over an extended length of time.
These recent Keynesian policies (enacted because it was "foolhardy" to even contemplate non-action), rather than helping, have actually prevented or postponed recovery.
In fact, economies continue to languish not in spite of Keynesian policies but because of them.
This is along run shift, which Keynesian policies are unable to correct.