The Keynesian Approach: Difference between revisions
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Before John Maynard Keynes, studies in economics were based on Adam Smith's idea of free market economies. Adam Smith proposed that government should not interfere in the free market in his ''An Inquiry into the Nature and Causes of the Wealth of Nations'', which he published in 1776. He believed that the invisible hand of an open market economy would maintain the equilibrium balance between goods supplied and demanded. Each individual trying to maximize his own benefits would produce the best outcome for the community. | Before John Maynard Keynes, studies in economics were based on Adam Smith's idea of free market economies. Adam Smith proposed that government should not interfere in the free market in his ''An Inquiry into the Nature and Causes of the Wealth of Nations'', which he published in 1776. He believed that the invisible hand of an open market economy would maintain the equilibrium balance between goods supplied and demanded. Each individual trying to maximize his own benefits would produce the best outcome for the community. | ||
Keynes believed that the government should strive to help control inflation and unemployment through fiscal policies aimed at stabilizing the economy during booms, recessions, and depressions. He helped to invent what we know today as Macroeconomics by encouraging economics to view Macroeconomic policies differently at their aggregate level than their Microeconomic counterparts. | Keynes believed that the government should strive to help control inflation and unemployment through fiscal policies aimed at stabilizing the economy during booms, recessions, and depressions. He helped to invent what we know today as Macroeconomics by encouraging economics to view Macroeconomic policies differently at their aggregate level than their Microeconomic counterparts. | ||
[[Image: | [[Image:KeynesInTime.jpg|thumb|Time Magazine Presents John Maynard Keynes]] | ||
Time Magazine says that Keynes' influence on modern economics mostly stems from his ''General Theory of Employment, Interest and Money'', which he published in 1936 during the Great Depression. Although it is, "convoluted, badly organized and in places nearly incomprehensible" it changed economists attitudes about laissez-faire style management of the economy (Reich 1999). Keynes argued that business investments will decrease as markets become saturated due to a slowing economy. Private investors will not be encouraged to invest at such a time, which will decrease GDP, leading to higher unemployment levels. According to Keynes, if nothing is done, although a free market economy will adjust itself, it will do so through increasing unemployment and "social misery" (Reich 1999). | Time Magazine says that Keynes' influence on modern economics mostly stems from his ''General Theory of Employment, Interest and Money'', which he published in 1936 during the Great Depression. Although it is, "convoluted, badly organized and in places nearly incomprehensible" it changed economists attitudes about laissez-faire style management of the economy (Reich 1999). Keynes argued that business investments will decrease as markets become saturated due to a slowing economy. Private investors will not be encouraged to invest at such a time, which will decrease GDP, leading to higher unemployment levels. According to Keynes, if nothing is done, although a free market economy will adjust itself, it will do so through increasing unemployment and "social misery" (Reich 1999). | ||
Revision as of 01:15, 3 December 2007
"So influential was John Maynard Keynes that an entire school of modern thought bears his name"
Before John Maynard Keynes, studies in economics were based on Adam Smith's idea of free market economies. Adam Smith proposed that government should not interfere in the free market in his An Inquiry into the Nature and Causes of the Wealth of Nations, which he published in 1776. He believed that the invisible hand of an open market economy would maintain the equilibrium balance between goods supplied and demanded. Each individual trying to maximize his own benefits would produce the best outcome for the community.
Keynes believed that the government should strive to help control inflation and unemployment through fiscal policies aimed at stabilizing the economy during booms, recessions, and depressions. He helped to invent what we know today as Macroeconomics by encouraging economics to view Macroeconomic policies differently at their aggregate level than their Microeconomic counterparts.
Time Magazine says that Keynes' influence on modern economics mostly stems from his General Theory of Employment, Interest and Money, which he published in 1936 during the Great Depression. Although it is, "convoluted, badly organized and in places nearly incomprehensible" it changed economists attitudes about laissez-faire style management of the economy (Reich 1999). Keynes argued that business investments will decrease as markets become saturated due to a slowing economy. Private investors will not be encouraged to invest at such a time, which will decrease GDP, leading to higher unemployment levels. According to Keynes, if nothing is done, although a free market economy will adjust itself, it will do so through increasing unemployment and "social misery" (Reich 1999).
Keynes' ideas were not widely accepted until the start of World War II. Keynes made a trip to the White House in 1934 to try to convince President Roosevelt to run a deficit in order to provide more purchasing power to the country, thereby restarting the economy. Since President Roosevelt had won the election by critizing Herbert Hoover for running a deficit during his term, he was not at all thrilled at Keynes' approach. It took him 4 years to abandon his attempts to balance the budget and try Keynes' approach."
"Yet not until the U.S. entered World War II did F.D.R. try Keynes' idea on a scale necessary to pull the nation out of the doldrums — and Roosevelt, of course, had little choice. The big surprise was just how productive America could be when given the chance. Between 1939 and 1944 (the peak of wartime production), the nation's output almost doubled, and unemployment plummeted — from more than 17% to just over 1%" (Reich 1999).
Until the 1960s and 1970s, Keynesian economics gained popularity, when a rise in inflation and unemployment led economists to believe that more than current disposable income affected consumption. Keynesian economics debated that current nominal cash flows affected current investments; therefore, the belief was that a dollar earned today would be the dollar spent today. The reality of the matter is that there is more to economics than the simple Phillips Curve could explain.
Other economists debated the validity of Keynesian economics and agreed that Macroeconomics should return to focus on the fundamental idea of profit maximization by both firms and individuals. This new idea lead to research, which discovered 5 separate neutrality results, which are outline below and discussed in further detail in other sections of this site.
2. 1. The independence of consumption and current income
3. The independence of investment and finance decisions
4. Inflation stability only at the natural rate of unemployment
5. The ineffectiveness of macro-stabilization policy with rational expectations
Back to Behavioral
Sources
Reich, Robert B. John Maynard Keynes: His radical idea that governments should spend money they don't have may have saved capitalism. Time Magazine March 29, 1999. Accessed at http://www.time.com/time/time100/scientist/profile/keynes.html on November 10, '07 at 11:25 am.
Quote from The Concise Encyclopedia of Economics accessed at http://www.econlib.org/LIBRARY/Enc/bios/Keynes.html on November 10, '07 at 12:04 pm.
