Keynesian economics
Keynesian economics (/ˈkeɪnziən/ KAYN-zee-ən; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output and inflation.[1] In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy. It is influenced by a host of factors that sometimes behave erratically and impact production, employment, and inflation.[2]
Keynesian economists generally argue that aggregate demand is volatile and unstable and that, consequently, a market economy often experiences inefficient macroeconomic outcomes, including recessions when demand is too low and inflation when demand is too high. Further, they argue that these economic fluctuations can be mitigated by economic policy responses coordinated between government and central bank. In particular, fiscal policy actions taken by the government and monetary policy actions taken by the central bank, can help stabilize economic output, inflation, and unemployment over the business cycle.[3] Keynesian economists generally advocate a regulated market economy – predominantly private sector, but with an active role for government intervention during recessions and depressions.[4]
Keynesian economics developed during and after the Great Depression from the ideas presented by Keynes in his 1936 book, The General Theory of Employment, Interest and Money.[5] Keynes' approach was a stark contrast to the aggregate supply-focused classical economics that preceded his book. Interpreting Keynes's work is a contentious topic, and several schools of economic thought claim his legacy.
Keynesian economics, as part of the neoclassical synthesis, served as the standard macroeconomic model in the developed nations during the later part of the Great Depression, World War II, and the post-war economic expansion (1945–1973). It was developed in part to attempt to explain the Great Depression and to help economists understand future crises. It lost some influence following the oil shock and resulting stagflation of the 1970s.[6] Keynesian economics was later redeveloped as New Keynesian economics, becoming part of the contemporary new neoclassical synthesis, that forms current-day mainstream macroeconomics.[7] The advent of the financial crisis of 2007–2008 sparked renewed interest in Keynesian policies by governments around the world.[8]
Historical context[edit]
Pre-Keynesian macroeconomics[edit]
Macroeconomics is the study of the factors applying to an economy as a whole. Important macroeconomic variables include the overall price level, the interest rate, the level of employment, and income (or equivalently output) measured in real terms.
The classical tradition of partial equilibrium theory had been to split the economy into separate markets, each of whose equilibrium conditions could be stated as a single equation determining a single variable. The theoretical apparatus of supply and demand curves developed by Fleeming Jenkin and Alfred Marshall provided a unified mathematical basis for this approach, which the Lausanne School generalized to general equilibrium theory.
For macroeconomics, relevant partial theories included the Quantity theory of money determining the price level and the classical theory of the interest rate. In regards to employment, the condition referred to by Keynes as the "first postulate of classical economics" stated that the wage is equal to the marginal product, which is a direct application of the marginalist principles developed during the nineteenth century (see The General Theory). Keynes sought to supplant all three aspects of the classical theory.
Criticism[edit]
From the right[edit]
Keynesian economics has faced criticism from other schools of thought such as the Austrian School of Economics.[133] F.A. Hayek, an Austrian-style economist described Keynesianism as a system of "economics of abundance" stating it is, "a system of economics which is based on the assumption that no real scarcity exists, and that the only scarcity with which we need concern ourselves is the artificial scarcity created by the determination of people not to sell their services and products below certain arbitrarily fixed prices."[134] Ludwig von Mises, another Austrian economist, describes a Keynesian system as believing it can solve most problems with "more money and credit" which leads to a system of "inflationism" in which "prices (of goods) rise higher and higher."[135] Murray Rothbard wrote that Keynesian-style governmental regulation of money and credit created a "dismal monetary and banking situation," since it allows for the central bankers that have the exclusive ability to print money to be "unchecked and out of control."[136] Rothbard went on to say in an interview that, "There is one good thing about (Karl) Marx: he was not a Keynesian."[137]
From the left[edit]
Recently, Keynesian economics has been criticized from the left. The social historian C. J. Coventry demonstrates in Keynes from Below: A Social History of Second World War Keynesian Economics (2023) that Keynes and Keynesian economics was unpopular in the United Kingdom and Australia in the 1940s. Many workers and trades unions, as well as figures in the British Labour Party and Australian Labor Party, saw Keynesianism as a means of stopping socialism. Keynes was largely supported by business leaders, bankers and conservative parties, or tripartite third way Catholics eager to avoid socialism after the Second World War.[138] While Coventry accepts the considerable benefits of Keynesianism, he argues that these benefits arose from the next phase of capitalism with many of the disadvantages being forced onto peoples in the third world, such as in British Malaya where there was bloodshed for crucial resources.