Understand the importance of Keynesian Economics amid of new economic depression.

The global economy faces new threats and challenges. Economic recessions are not new because there is a natural cyclic tendency which produces ups and downs across global demand and supply. However, the beginning of 2020 has been confronting a new threat in the form of a pandemic  (covid-19). All the global indices are showing historical selloffs that we never have seen before. Investor optimism has lost, and the blood bath continues in Wall Street and all the markets. Is this a common economic recession that we have faced over time, or we need new methods to get recover from these situations, economic experts may give an answer. In the midst of new threats, I would like to reexamine the Keynesian Economics.

What is Keynesian Economics?

Keynesian economics is an economic theory of total outlay in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an effort to know the Great Depression. Keynes argued for increased government expenditures and lower taxes to encourage demand and pull the global economy out of the crisis.

Successively, Keynesian economics was used to mention the notion that maximum economic performance could be attained—and economic declines prevented—by inducing aggregate demand through activist balance and economic interference policies by the government. Keynesian economics is measured as a “demand-side” theory that focuses on changes in the economy over the short run. He empathized that government’s fiscal and monetary policies are the backbone of the market; stimulus packages are the best way to retrieve the economy from the plummets.

The main slat of Keynes’s theory, which has come to bear his name, is the assertion that aggregate demand—measured as the sum of spending by households, businesses, and the government—is the most significant driving force in an economy. Keynes further stated that free markets have no self-regulating mechanisms that lead to complete employment. Keynesian economists explain government intervention through public policies that aim to achieve full employment and price stability.

John Maynard Keynes.

Keynesian economics focuses on a new way of looking at outgoings, output, and inflation. Earlier, traditional economic thinking held that repetitive swings in employment and economic production would be submissive and self-regulating. According to this classical theory, if cumulative demand in the economy fell, the resulting feebleness in production and employment would precipitate decay in prices and wages. A minor level of inflation and wages would encourage owners to make capital investments and hire more people, motivating employment and reinstating economic growth. The depth and intensity of the Great Depression, however, severely verified this proposition.

Keynes advocated that poor overall demand could lead to prolonged periods of high joblessness. A countries economy’s output of goods and services is the totality of four components: consumption, investment, government purchases, and net exports (the difference between what a country sells to and buys from foreign countries). Any growth in demand has to come from one of these four components. But during a depression, strong forces often dampen demand as spending goes down. For instance, during the economic recession’s ambiguity often grind down consumer confidence, causing them to reduce their spending, especially on discretionary purchases like a house or a car. This decrease in spending by consumers can result in less investment spending by businesses, as firms respond to deteriorated demand for their products. This puts the task of increasing production on the shoulders of the government. According to Keynesian economics, government intervention is required to regulate the explosions and booms in economic activity, otherwise known as the business cycle.

Keynesian economics refuted the idea held by some economists that lesser wages can reinstate full employment, by disagreeing that owners will not hire workers to produce goods that cannot be sold because demand is feeble. Similarly, poor business conditions may cause companies to lessen capital investment, rather than take benefit of lower prices to invest in new plants and equipment. This would also have the effect of reducing overall outlays and work.

Keynesian Economics and the Great Depression

When he was framing the theory, the globe was under great depression. Keynes’s economic theory was advent on the onset of the Great Depression that was swallowing Britain and the other global economies. The well-known 1936 book was knowledgeable by straightly noticeable economic occurrences arising during the Great Depression, which could not be elucidated by classical economic theory.

In classical economic theory, it is claimed that production and values will ultimately return to a state of equilibrium, but the Great Depression seemed to refute this theory. Production was near to the ground and joblessness continued high during this time. The Great Depression inspired Keynes to think in his own way about the nature of the economy. From these theories, he has proven real-world applications that could have implications for a society in financial crisis.

Keynes rejected the notion that the economy would reoccurrence to a natural state of equilibrium. Instead, he claimed that once an economic decline sets in, for whatever reason, the dread and despair that it engenders among businesses and venture capitalist will tend to become self-fulfilling and can lead to a continued period of depressed economic activity and joblessness. When analyzing economic depression, he claimed that a countercyclical economic policy in which, during periods of economic decline, the government should undertake shortfall spends to make up for the weakening in investment and lift consumer spending in order to steady total demand.

Keynes was extremely critical of the British government at the time. The government cut public spending on welfare matters and elevated taxes. Keynes said this would not inspire people to spend their currency, thereby leaving the economy uninspired and unable to recover and return to a positive state. Instead, he suggested that the government spend more money, which would increase consumer demand in the economy. This would, in turn, lead to an upsurge in general economic activity, the natural result of which would be retrieval and a reduction in joblessness.

Keynes also criticized the idea of too much saving, unless it was for a specific purpose such as retirement or education. He saw it as dangerous for the economy because the more money sitting stationary, the less money in the economy motivating growth. This was another of Keynes’s theories geared toward checking deep economic depressions.

Both classical economists and free-market campaigners have negated Keynes’ approach. These two schools of thought claim that the market is self-regulating and businesses responding to economic inducements will certainly return it to a state of equilibrium. Keynes was writing while the world was stuck in a period of deep economic depression, was not as positive about the natural equilibrium of the market. He believed the government was in a better position than market forces when it came to making a healthy economy.

Keynesian Economics and Fiscal Policy

According to Keynes’s theory of fiscal inducement, an injection of government spending ultimately leads to added business activity and even more spending. This theory proposes that spending boosts total production and generates more income. If employees are willing to spend their additional income, the resulting growth in the gross domestic product (GDP) could be even better than the initial stimulus amount.

The greatness of the Keynesian multiplier is directly related to the marginal tendency to consume. Its concept is simple. Outgoings from one consumer become income for another worker. That employee’s income can then be spent and the cycle continues. Keynes and his supporters believed individuals should save a lesser amount and outlaying more, nurturing their minimal propensity to purchase to effect full employment and economic progression.

Keynesian Economics and Monetary Policy

A demand-side solution is the pillar of Keynesian economics. The involvement of the government in economic activities is an essential part of the Keynesian theory to tackle underemployment, joblessness, and low economic demand. Importance of government intervention in the market is the only way to stabilize the economic condition of a country. Cutting interest rates is one-way governments can ideally interfere in economic systems, thereby creating active economic demand. Keynesian theorists claim that economies do not steady themselves very quickly and require active intervention that boosts short-term demand in the economy. Wages and employment, they argue, are slower to respond to the requirements of the market and need governmental intervention to stay on track.

The global economic crisis of 2007-08 caused resurgence in Keynesian thought. Now, the beginning of 2020 is looking for reappearance because all the global treaties of the business lie on the lap of government. Even though Keynes died more than a half-century ago, his judgment of downturns and depressions remains the foundation of modern macroeconomics. Keynes wrote, ‘Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slave of some defunct economist.’ In 2020, no defunct economist is more significant than Keynes himself.”

By |2020-03-14T12:39:36+00:00March 14th, 2020|economic theory|0 Comments