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What is Keynesian Economics?

Nada Almutawa
27/05/2009 12:00 AM

Keynesian economics is an economic theory named after John Maynard Keynes (1883 - 1946), a British economist. It was his simple explanation for the cause of the Great Depression for which he is most well-known.

His ideas spawned a slew of interventionist economic policies during the Great Depression. Keynes` economic theory was based on an circular flow of money. One person`s spendings goes towards anothers earnings, and when that person spends her earnings she is, in effect, supporting anothers earnings. This circle continues on and helps support a normal functioning economy. When the Great Depression hit, people`s natural reaction was to hoard their money. However, under Keynes` theory this stopped the circular flow of money, keeping the economy at a standstill.

Keynes` solution to this poor economic state was to prime the pump. By prime the pump, Keynes argued that the government should step in to increase spending, either by increasing the money supply or by actually buying things on the market itself. In the times of the Great Depression, however, this was an understandably unpopular solution. It is said, however, that the massive defense spending that United States President Franklin Delano Roosevelt initiated helped cure the US economy.

Since Keynesian economics advocates for the public sector to step in to assist the economy generally, it is a significant departure from popular economic thought which preceded it — laissez-fair capitalism. Laissez-fair capitalism supported the exclusion of the public sector in the market. The belief was that an unfettered market would achieve balance on its own. Proponents of free-market capitalism include the Austrian School of economic thought, of which one of its earliest founders, Friedrich von Hayek, also lived in England alongside Keynes. The two had a public rivalry for many years because of their opposing thoughts on the role of the state in the economic lives of individuals.

Keynesian economics warns against the practice of too much saving (underconsumption) and not enough consumption (spending) in the economy, and it also supports considerable redistribution of wealth, when needed. Keynesian economics further concludes that there is a pragmatic reason for the massive redistribution of wealth: if the poorer segments of society are given sums of money, they will likely spend it, rather than save it, thus promoting economic growth. Another central idea of Keynesian economics is that trends in the macroeconomic level can disproportionately influence consumer behavior at the micro-level. Keynesian economics, also called macroeconomics for it`s macro look at the economy, remains one of the important schools in economic thought today.

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New: Discuss this Article

Posted by: anon32241
Just so you have a few facts straight about WWII. The treaty of Versialles, was written to bankrupt Germany, so that American corporations could come in and purchase the country for nothing. Rockefeller, actually sold the fuel additive needed for the Luftwafer to bomb Britain. Henry Ford adored Hitler and GM sold him engines and technology. Also do not forget that Preston Bush, helped the Thyssen corporation make purchases that otherwise would have been impossible.

So before you start writing, do a little research. Just so you know I am 23 and never went to university but even I have found this info, and this is just a scratch of the surface.

Posted by: anon30175
It seems to me that our cash has been spent on goods from "other" countries (imports) without the resulting payment of wages to our labor pool. This reminds me of the old time barber who "bled" people in order to lower fever. We have "bled" our currency to China and to Saudi Arabia. Fix that Mr. Keynes!
Posted by: anon29327
If you`re looking for "proof" that an economic theory like Keynes` can work, then you`ll never find it. Economics cannot be truly tested in a scientific manner - you can never establish a control group - so "proof" is not really forthcoming. Even if the current usage of Keynes` ideas work, it`s still not really proof. Economies can be influenced by too many things, sometimes from very obscure sources, and as is typical with economies - chaos abounds.

Posted by: anon28382
In today`s economy, currency wealth of individual/business consumerism forms the foundation for world economic wealth. The degree of separation between the amounts of currency distributed to each individual is not accounted for in modern economic theory. Some countries have attempted to address the issue of individual distributed monetary inequality with varying results, but there still remains great inequalities in many of these countries. The root of this vexing economic problem lies in assumption that the holders of the pools of currency, which are controlled by major economic institutions e.g large corporations, governments, banks, other financial lending businesses, will operate egaltarily with a minimum of regulation. The assumption of egalitarianism for profit across the full spectrum of the public has never been part of the economic history of the world. But that doesn`t mean that we shouldn`t try. 21st Century humans are evolutionarily capable of it. Past attempts, such as Sweden, come close, but fails in the long run because taxes limit personal/business accumulation of currency. The current pseudoism that "the market should/will regulate itself" has proven that egalitarianism has been left out of economic action on the marco scale. A true turn to build in egalitarianism into economic policy should be the foundation of any new economic efforts world wide. Large degrees of currency separation between the populace lie at the root of most social problems inflicting our world today. We need a new model, neither Keynesian nor Austrian.
Posted by: anon28167
The "pragmatic" redistribution of wealth theory here is insulting and degrading to the poor. It`s basically saying the poor are too stupid to save money, so spending it will boost the economy. (That`s all fine and good if they were purchasing U.S. made goods). At some point the poor are going to realize how the government views them and why it`s important for a segment of our population to remain poor.
Posted by: anon26841
No, it was not the spending of military goods during WWII that pulled us out of the Great Depression. Is was the sole fact that the good `ol USA was the only industrialized nation left untouched by the war in an infrastructure and manufacturing sense.

The world came to us for the recovery because we were the only ones capable at the time to rebuild the world.

The world bought our goods; we enjoyed a great economic boom, built the interstate, the middle class expanded, the Great Society polices created, etc.

Now, the world has caught up in the last twenty years and we must shrink our spending to a degree or be crushed under the budgets and entitlements created in the past. Unfortunately, Obama will not bring that change.

Posted by: pjabbers
What was WWII? It was a government spending program of a magnitude never seen before. It broke the back of the depression. The country devoted itself to defense and military (paid by the government).

After the war the industries created by the government defense spending converted to consumer goods (cars, appliances, etc.) to meet the pent up demand of the American people giving birth to a golden economic age that crashed and burned with Reaganomics and GWB. Maybe the bailout is not big enough.

Posted by: anon26221
Boom/bust was also a feature of the Golden age of Keynes, only less severe than it`s malevolent neo-liberal counterpart.

neither explain why crises occur....

Posted by: anon25152
I agree that the article is a good and simple brief introductory definition of Keynesian economics.

I do not agree with the oft-repeated nonsense that Roosevelt`s programs would not have allowed our citizens to dig themselves out of the Great Depression (--as opposed to what has not been done to date regarding the present Depression, and the mini-depression created by Reagan--) without the advent of WWII. It is clear that FDR`s Government WPA, CCC, etc., ignited a rebirth of art, science, theater (also cinema), knowledge of and appreciation of American culture and history--and allowed opportunities (i.e., Hope with Foundation)for many previously excluded economic and ethnic groups in our nation. We would have lost WWII without the abilities developed by these "interventionist" Programs.

A nation requires a government which serves its citizens to survive--and to thrive. Otherwise, we might as well have anarchy--a form of which is the "cycles" cited by academic economists and privileged politicians. It was the greed of the Robber-Barons, Bankers, and the very closed tier of the most wealthy and socially and politically connected individuals who caused the Great Depression in this country and the Depression--and, yes, it is a Depression-which is currently tormenting the working class. I also must point out that Obama and all the rest speak of a middle class that does not exist. Someone who has an income--not including assets other than current, liquid income of $250K plus has no relationship to the median income of around $50K for a family of 4. Nor does it speak to those who make much less than that, i.e., The People.

Capitalism without strict regulation will destroy any nation--including ours--and the real culprit, fundamentally, is that old enemy of any democratic country--COLONIALISM--what we mistakenly call Immigration, Out-sourcing, etc. Economists of any ilk--Keynesian or otherwise--have not faced this fact. If Obama doesn`t, our country will not survive with any ghost of our fundamental values and promise. We cut police, fire and we spend tens of millions on Colonialists. Colonialism is the twin of Genocide and no friend to any democratic, regulated capitalistic, just Nation--ours.

Posted by: anon25110
Keynesian economics is a joke. The notion that saving money for tomorrow is a bad thing is illogical. If you want to learn about real economics, study Austrian economics.
Posted by: anon24850
Keynesian economics have never worked. Never has this theory been able to rescue any foundering economy. Yet its detractors will argue that it "hasn`t been tried", or "the Government didn`t spend enough". So don`t expect its proponents to come up with any success stories.

An utter failure everywhere. And Keynesian economics didn`t get us out of the Great Depression. (economics 101) Hitler and Hirohito did. FDR made our economy worse.

Posted by: tsimmy688
24112: Obviously, the people that hoarded the money were the people who had some money to hoard. Elaborate on the idea that about how this theory makes it easier for banks. I fail to see how a bank is a required component of a Keynes transaction.
Posted by: anon24225
The Depression caused what is now known as a "liquidity trap", where the price of money is 0% interest and still no demand. GOVERNMENT came in and spent on work projects and then the war....that in turned created demand for goods and services which got up out of the depression: conclusion: Keynesian Economics works! and they can explain the real world conditions of the economy better then classical economics.
Posted by: anon24112
Who hoarded money? The banks, it`s called interest and credit. Keynesian economics makes the banks hoard money even easier, and hides inflation till the money finally hits the poor.
Posted by: anon22696
There is no proof it ever works.
Posted by: anon9876
Poor stays poor, rich gets richer, grand idea.
Posted by: anon9418
I really like this article on Keynesian economics, it is short and to the point. Exactly what I needed to get a general understanding of the main ideas of this theory. thanx!