Developments in Keynesian Economics
Keynesian economics is an economic theory based upon the analysis of macroeconomic aggregates with the use of Keynes’s General Theory of Employment, Interest and Money. Developed by British economist John Maynard Keynes during the 1930s, Keynesian economics focuses mainly on the forms of government intervention to help stabilize and promote economic growth. The goal is to keep the economy near its full employment equilibrium level (sometimes referred to as potential output). Keynesian economics is often considered the foundation stone of modern macroeconomics and also of globalization.
Keynesian economics is derived from the writings of John Maynard Keynes, who wrote about government intervention and its effects on economic activity in the 1930s during the Great Depression. Keynes proposed that given certain economic conditions, governments should intervene in the economy to promote greater economic activity to increase spending, employment and ultimately, economic growth. In addition, he believed that when economic activity falls short of its potential and the government fails to intervene, deflationary pressures will occur and lead to an economic downturn.
One of the main focuses of Keynesian economics is fiscal policy. Keynes identified the use of fiscal policy to help stimulate aggregate demand by influencing interest rates, and by targeting taxation and government spending. He argued that when consumer confidence is low, and businesses are not investing in new jobs, government should step in and provide stimulation through government-funded projects and other spending initiatives. The logic behind this form of intervention is that it will increase both consumer confidence and investment, thus providing the right environment for economic growth.
In contrast to the earlier classical economic thinking of the time, Keynesian economics views business cycles as being driven mainly by the expectations of businesses and consumers. Keynes argued that since these expectations are the main drivers of investment, consumption, and economic activity in general, the government should intervene to help reduce business cycles. He proposed that a combination of fiscal and monetary policies should be used to influence expectations, thus creating a positive environment for business activity and economic growth.
The Keynesian model of economics also differs from classical economic theory in its focus on short-term and long-term economic objectives. While classical economists believed that economic activity was self-regulating and could achieve equilibrium on its own, Keynes argued that beyond certain limits, economic activity could not self-regulate and needed external guidance from the government. As such, Keynesian economics argues that the goal of policy should be to use fiscal and monetary policy measures to bring the economy to its full potential.
A major development in the field of Keynesian economics came in the form of the Phillips Curve. This is a relationship between inflation and unemployment that suggests that as the rate of inflation decreases, the rate of unemployment will decrease as well. This theory formed the basis for the so-called stagflation of the 1970s, which refuted the classic economic wisdom that stagflation (inflation and slow economic growth occurring simultaneously) could not exist.
Since then, Keynesian economics have been further developed and refined, but the basic framework and principles remain the same. Along with its focus on stability and economic growth, the Keynesian model is also concerned with the redistribution of wealth, arguing that government policies should be used to promote equity as well as growth. These objectives are incorporated into many government policies today, such as progressive taxation and unemployment benefits.
In addition to its recognition in academic circles, Keynesian economics has had an influence in the political arena. Many politicians have embraced its principles, and the theory has been adopted by governments around the world, especially in times of economic distress. The New Deal program in the United States is an example of a major government initiative that was heavily influenced by Keynesian economics.
Keynesian economics remains an important part of modern economic analysis, and can be seen in the policy decisions of governments across the globe. Its central idea of using fiscal and monetary policy to promote stability and economic growth has been adopted by economists, governments and policymakers, and serves to demonstrate the enduring impact of Keynes on the economic thought of the modern world.
