Background
Keynesian unemployment refers to the situation where unemployment arises due to a deficiency in effective demand for goods and services. This term originates from the theories of John Maynard Keynes, an influential British economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments.
Historical Context
The concept of Keynesian unemployment emerged during the Great Depression of the 1930s, when massive unemployment rates highlighted the limitations of classical economic theories, which could not adequately explain the prolonged periods of high unemployment. Keynes suggested that the government could intervene to stabilize the economy by increasing demand through fiscal and monetary policies.
Definitions and Concepts
Keynesian unemployment is caused by insufficient effective demand for goods and services, leading to fewer employment opportunities. Effective demand is the total demand for goods and services in an economy at a particular time, given the level of prices and available resources.
Effective demand is integral to this concept. It contrasts with classical and structural unemployment, which have other underlying reasons such as wage rigidity or mismatches in skills.
- Classical unemployment: Unemployment due to wage rates being too high relative to productivity.
- Structural unemployment: Unemployment due to skill mismatches or technological changes.
Major Analytical Frameworks
Classical Economics
Classical economics primarily focuses on the forces of supply and demand in determining wages and employment levels. It posits that markets will naturally adjust to clear the labor market.
Neoclassical Economics
Neoclassical economics builds on classical ideas but incorporates marginalist principles, emphasizing the role of individual choice and market equilibrium. Keynesian unemployment is less of a focus in neoclassical frameworks.
Keynesian Economics
Keynesian economics actively addresses the issue of unemployment through policies aimed at increasing aggregate demand. This includes fiscal policy (government spending and taxation) and monetary policy (controls over money supply and interest rates).
Marxian Economics
Marxian economics looks at unemployment through the lens of capitalist structures but does not specifically delineate Keynesian unemployment.
Institutional Economics
Institutional economics might explore the impacts of legal frameworks, educational systems, and labor market institutions on employment but does not isolate Keynesian unemployment as a distinct type.
Behavioral Economics
Behavioral economics examines the psychological factors influencing economic decisions but might incorporate Keynesian principles when exploring policy impacts on employment.
Post-Keynesian Economics
Post-Keynesian economics further explores and amplifies Keynes’s theories, particularly focusing on long-term investment patterns and uncertainty, reinforcing the ideas around demand-led employment.
Austrian Economics
Austrian economics emphasizes individual actions and market processes, often critiquing Keynesian interventions as distortions of natural economic order.
Development Economics
Development economics might apply Keynesian principles to understanding unemployment in developing countries, particularly in relation to insufficient demand in these economies.
Monetarism
Monetarism, contrastingly, focuses on the roles of government interventions through monetary policy but generally critiques extensive fiscal policy usage.
Comparative Analysis
Classical vs Keynesian Unemployment
Classical economics would generally recommend wage reductions to counter unemployment, whereas Keynesian economics focuses on increasing aggregate demand.
Structural vs Keynesian Unemployment
While structural unemployment deals with inherent mismatches in skill and technology, Keynesian unemployment strictly deals with a lack of demand in the economy.
Case Studies
Several historical and contemporary case studies demonstrate Keynesian unemployment and respective policy responses:
- The Great Depression: Keynes’s theory proved instrumental in formulating public works programs and other federal policies to boost demand.
- 2008 Financial Crisis: Modern applications of Keynesian thought were evident in stimulus packages designed to rejuvenate economic demand.
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
- “Keynesian Economics” edited by Victoria Chick
Related Terms with Definitions
- Fiscal policy: Government adjustments to its spending levels and tax rates to monitor and influence a nation’s economy.
- Monetary policy: The process by which the monetary authority of a country controls the money supply.
- Aggregate demand: The total demand for goods and services within an economy.
