Does anyone here know anything about Keynesian Economics ?
13 Oct 2011, 5:33 pm
What does Keynesian Economics call for the Government to spend money on to reduce unemployment ? I know Keynesian Economics calls for spending by the Government to put money in people's pockets than the people will create demand and than spend the money how does this work ?
A REVIEW OF KEYNESIAN THEORY
http://www.huppi.com/kangaroo/Keynesianism.htm
14 Oct 2011, 10:30 am
A Keynsian view of economic recession posits that it is caused by a failure of aggregate demand. Aggregate demand is the sum total of all the goods and services that consumers are looking to purchase in the market place. When suppliers over-produce relative to demand, then simply suppy and demand tells us that prices will fall in order to maintain equilibrium. But what happens if aggregate demand has sunk so low that the equlibrium price for goods and services falls below the cost of production? Over time, that is unsustainable, and producers must cut back production as the other means to achieve equilibrium. This results in a contraction of the overall size of the economy--a recession.
The government, today, has two levers that it can use to address this equilibrium: fiscal policy (government revenue and spending) and monetary policy (interest rates and money supply). By using fiscal policy to have the government take up the slack in aggregate demand, the government ensures that there continues to be sufficient demand in the marketplace to keep prices stable, and permit producers to continue producing. Government can do this either by being the consumer itself (purchasing equipment, building infrastructure, etc.) or through direct transfers to consumers (employment insurance benefits, hiring new public servants, recruiting new members of the armed forces).
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--James
14 Oct 2011, 11:21 am
The government, today, has two levers that it can use to address this equilibrium: fiscal policy (government revenue and spending) and monetary policy (interest rates and money supply). By using fiscal policy to have the government take up the slack in aggregate demand, the government ensures that there continues to be sufficient demand in the marketplace to keep prices stable, and permit producers to continue producing. Government can do this either by being the consumer itself (purchasing equipment, building infrastructure, etc.) or through direct transfers to consumers (employment insurance benefits, hiring new public servants, recruiting new members of the armed forces).
Both of these approaches are in effect a negative feedback mechanism for keeping the economy stable, if not growing. It is analogous to pumping ballast in ship on rough seas to keep it from capsizing. A perfectly sound approach to regulating a dynamic system. Put in negative feedback stability mechanisms.
HOWEVER, the politicians, as usual, screw it up. They do a half-a**ed pseudo Keynsian move. They pump money into the economy when it is sagging and do not tax it back when it is growing. Furthermore they pump money just to buy votes. This is not the program of John Keynes.
ruveyn
14 Oct 2011, 12:42 pm
I don't disagree with you ruveyn.
One of the real failures of democracy is that it subjects complex decision making to simplistic electoral politics. The greater the level of control exercised by legislators who subordinate their own judgement to those of the electorate, the more dysfunctional government becomes.
I am a Burkean when it comes to the proper role of legislators, and it's worth reproducing in context--rather than relying on a mere sound bite.
He tells you that "the topic of instructions has occasioned much altercation and uneasiness in this city;" and he expresses himself (if I understand him rightly) in favour of the coercive authority of such instructions.
Certainly, gentlemen, it ought to be the happiness and glory of a representative to live in the strictest union, the closest correspondence, and the most unreserved communication with his constituents. Their wishes ought to have great weight with him; their opinion, high respect; their business, unremitted attention. It is his duty to sacrifice his repose, his pleasures, his satisfactions, to theirs; and above all, ever, and in all cases, to prefer their interest to his own. But his unbiassed opinion, his mature judgment, his enlightened conscience, he ought not to sacrifice to you, to any man, or to any set of men living. These he does not derive from your pleasure; no, nor from the law and the constitution. They are a trust from Providence, for the abuse of which he is deeply answerable. Your representative owes you, not his industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to your opinion.
My worthy colleague says, his will ought to be subservient to yours. If that be all, the thing is innocent. If government were a matter of will upon any side, yours, without question, ought to be superior. But government and legislation are matters of reason and judgment, and not of inclination; and what sort of reason is that, in which the determination precedes the discussion; in which one set of men deliberate, and another decide; and where those who form the conclusion are perhaps three hundred miles distant from those who hear the arguments?
To deliver an opinion, is the right of all men; that of constituents is a weighty and respectable opinion, which a representative ought always to rejoice to hear; and which he ought always most seriously to consider. But authoritative instructions; mandates issued, which the member is bound blindly and implicitly to obey, to vote, and to argue for, though contrary to the clearest conviction of his judgment and conscience,--these are things utterly unknown to the laws of this land, and which arise from a fundamental mistake of the whole order and tenor of our constitution.
Parliament is not a congress of ambassadors from different and hostile interests; which interests each must maintain, as an agent and advocate, against other agents and advocates; but parliament is a deliberative assembly of one nation, with one interest, that of the whole; where, not local purposes, not local prejudices, ought to guide, but the general good, resulting from the general reason of the whole. You choose a member indeed; but when you have chosen him, he is not member of Bristol, but he is a member of parliament. If the local constituent should have an interest, or should form an hasty opinion, evidently opposite to the real good of the rest of the community, the member for that place ought to be as far, as any other, from any endeavour to give it effect. I beg pardon for saying so much on this subject. I have been unwillingly drawn into it; but I shall ever use a respectful frankness of communication with you. Your faithful friend, your devoted servant, I shall be to the end of my life: a flatterer you do not wish for.
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--James
14 Oct 2011, 2:11 pm
Essentially, the Keynesianist position is that, while the market is an efficient mechanism for allocation of prices (and, in doing so, social welfare), equilibria are not quick to adjust as conditions in the market-place change. That is, while exogenous shocks can rapidly unbalance well-established conditions in the economy, prices and wages, for example, are 'sticky' (they are slow to adjust) - this all being the result of the demand-side of the economy. Because equilibria don't readjust quickly, there is continually, in the presence of these changes, a deadweight social loss due to inefficiency. The Keynesians propose that the government should step in and, basically, stimulate demand by pumping money into critical areas of the economy until equilibrium is restored. Even though such redistribution has costs associated with it, the Keynesians figure that all losses will be more than made up by the deadweight social losses prevented by restoring equilibrium in the economy.
14 Oct 2011, 3:57 pm
A REVIEW OF KEYNESIAN THEORY
http://www.huppi.com/kangaroo/Keynesianism.htm
Any of the above opinions have very good explanations of aspects of Keynesian Economics and taken together and edited would provide a very good introduction to the subject.
As for unemployment in Keynesian Economics, the issue has to do with long run aggregate supply and aggregate demand. In Keynesian Economics the LRAS curve is "L-Shaped"
http://en.wikipedia.org/wiki/File:Aggregate_supply.svg
During a depression the aggregate demand curve is very low, where the LRAS curve is flat. This is known as mass unemployment, as resources are underemployed. This essentially means that inflation is low, but GDP is low too, and increasing aggregate demand at this level doesn't lead to an increase in inflation.
The objective of Keynesians is to stimulate growth through deficit spending and consequently raise the AD curve so that it hits the sweet spot between the flat of the LRAS curve and the part where increasing the AD only leads to increased inflation. This means that inflation stays low, but unemployment is will also decrease. The increase in spending's main job however is to get out of the depression altogether by allowing for investment, thus leading to a period growth that sustains a low level of unemployment from then on without intervention.
The flipside is that during a period of growth the Government is supposed to produce a surplus in tax receipts in order to help make sure that AD doesn't become too high and lead to the economy overheating. Thus Keynesian economics is aptly described as 'counter-cyclical'.
There are two issues with the theory. The first is a monetarist argument, the second is my own. The first is that through deficit spending government debt leads to higher interest rates as governments buy up money from banks. This fiscal 'crowding-out' is supposed to defeat GDP grwoth, which only defeats the ability to get out of a depression.
The second is that a cyclical deficit may occur if people go too far and then don't bother to pay back, and a cyclical deficit for a government is a very dangerous thing indeed. It's essentially a parasite that sucks the life out of a government as interest on repayments drains money out of the treasury. This can also happen if people create a deficit during a time of growth, and so the deficit created trying to push everything back in to line can become very big indeed, which is Obama's problem right now.
Bush's tax cuts are more to blame for the government deficit right now than any of Obama's policies.
