Background
Keynesian economics draws on the influential ideas of British economist John Maynard Keynes, primarily articulated in his seminal work “The General Theory of Employment, Interest, and Money,” published in 1936. This theory emerged during the Great Depression, a period of significant economic turmoil, and sought to provide explanations and solutions to severe economic downturns that classical economic theories struggled to address.
Historical Context
During the 1930s, prevailing economic theories were inadequate in addressing the prolonged unemployment and low demand that characterized the Great Depression. Keynes challenged the classical view that markets are always self-correcting and efficient, proposing instead that aggregate demand—comprising consumption, investment, government spending, and net exports—drives economic performance. The Keynesian framework became highly influential post-World War II, guiding economic policy through the 1950s and 1960s.
Definitions and Concepts
- Aggregate Demand: The total demand for goods and services in an economy.
- Fiscal Policy: The use of government spending and taxation to influence the economy.
- IS-LM Model: The standard formalization that combines the goods market (IS curve) and money market (LM curve) to determine equilibrium output and interest rates.
- Rational Expectations: The assumption that economic agents form expectations about the future based on all available information.
Major Analytical Frameworks
Classical Economics
Classical economics posits that free markets naturally regulate themselves and that prices, wages, and interest rates adjust to ensure equilibrium. Keynesian economics fundamentally challenges this view, particularly under conditions of recession.
Neoclassical Economics
Neoclassical economics extends classical theories by incorporating marginalism and emphasizing microeconomic foundations. In contrast, Keynesian economics places a stronger focus on macroeconomic issues such as total output and employment.
Keynesian Economic Theory
Fundamental Concepts:
- Sticky Prices and Wages: Prices and wages do not adjust quickly to changes in supply and demand, leading to unemployment and unused capacity.
- Economic Fluctuations: Variations in aggregate demand cause business cycles.
- Government Intervention: During economic downturns, increased government spending can stimulate demand.
Marxian Economics
Marxian economics focuses on the labor theory of value and class conflict, standing apart from Keynesianism, which centers on aggregate demand and overall economic activity rather than class dynamics.
Institutional Economics
Examines the role institutions play in shaping economic behavior. Keynesian economics overlaps here with its emphasis on government policy as an economic institution.
Behavioral Economics
Focuses on psychological factors affecting economic decisions. Although not originally part of Keynesian theory, recent adaptations like New Keynesian models consider expectations and behaviors.
Post-Keynesian Economics
Emphasizes factors like uncertainty and path dependence, drawing from Keynes but extending his insights to address long-term expectations and features of modern economies.
Austrian Economics
Austrian economics emphasizes free-market processes and criticizes government intervention, standing in opposition to Keynesian advocacy for state intervention to manage demand.
Development Economics
Analyzes how to improve economies in the developing world, often incorporating Keynesian principles of активее государственное вмешательство и развитие инфраструктуры для увеличения совокупного спроса.
Monetarism
Monetarism, led by figures like Milton Friedman, argues that management of the money supply should be the main policy tool. It critiques Keynesian reliance on fiscal policy.
Comparative Analysis
Keynesian economics diverge from other schools primarily by stressing the importance of aggregate demand and advocating for active government intervention. While different in approach, all these frameworks contribute to a broader understanding of economic dynamics and inform current economic policy.
Case Studies
- The New Deal in the United States during the 1930s implemented Keynesian principles through large-scale public works and social programs.
- The economic strategies employed during the post-World War II era across Europe under the Marshall Plan.
Suggested Books for Further Studies
- “The General Theory of Employment, Interest, and Money” by John Maynard Keynes
- “Keynes: The Return of the Master” by Robert Skidelsky
- “The Keynesian Revolution and its Critics: Issues of Theory and Policy for the Monetary Production Economy” by Gordon A. Fletcher
Related Terms with Definitions
- IS Curve: Represents equilibrium in the goods market; relationship between interest rate and level of output such that the goods market is in equilibrium.
- LM Curve: Represents equilibrium in the money market; relationship between interest rate and level of output such that the money market is in equilibrium.
- Fiscal Policy: Use of government expenditure and revenue collection to influence the economy.
- Microfoundations:
