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Keynesian theory

Reformist
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2/20/2016 2:58:49 AM
Posted: 9 months ago
I would like to understand this economic theory and why, in the viewpoint of the theories supporters, its the best system out of the rest.

I will make different threads on different economic systems so libertarians dont have to explain why their system is superior in this thread
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PetersSmith
Posts: 5,846
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2/20/2016 6:11:01 AM
Posted: 9 months ago
At 2/20/2016 2:58:49 AM, Reformist wrote:
I would like to understand this economic theory and why, in the viewpoint of the theories supporters, its the best system out of the rest.

I will make different threads on different economic systems so libertarians dont have to explain why their system is superior in this thread

Keynes pretty much said that the government must do whatever is necessary to kick-start the economy and alleviate severe unemployment during a depression/recession (Keynes said this was at least "25% unemployment"). He said that government action could change the level of unemployment via deficit spending with things such as public works, and change interest rates and money supply (or balancing the revenue with expenditure). He said that economic output is strongly influenced by aggregate demand (total spending in the economy), and also that the private sector's decisions sometimes lead to inefficient economic outcomes which require active policy responses by the public sector, in particular monetary policy actions by the central bank and fiscal policy actions by the government in order to stabilize output over the business cycle (movement of GDP) (it should also be noted that Keynes believed the government was responsible for the business cycle, not the people, and if the people were responsible it'd lead to a debt economy).

If the private sector fails to create jobs, then the government must do it. If inflation is high, you must raise interest rates and cut money supply (and vice versa). He said that the common will ought to be directed to increasing the inducement to invest, and stimulate the propensity to consume (the government must expand to do this as well). Obviously, he claimed that the two greatest economic problems were unemployment and inequality. Inequality has been addressed by government redistribution, but some are hesitant to go further because people believe that growth is prompted by savings and so taking away the savings of the rick will retard growth. In sum, redistribution, by increasing effective demand, actually promotes growth. Expected return might be just enough to cover costs of production.

Our ultimate goal is to increase the volume of capital until it ceases to be scarce, and with it the function-less investor will die out. In this "capitalist utopia", the state will still have to guide things as just controlling interest rates will not ensure a Utopian state of affairs. A somewhat comprehensive socialization will prove the only means of securing an approximation to full employment, though this need not exclude all manner of compromise and of devices by which public authority will co-operate with private initiative.

Summary: the level of employment is determined not by the price of labor (neoclasiscal economics) but my the spending of money (aggregate demand). It is wrong to assume that competitive markets will, in the long run, deliver full employment or that full employment is natural, self-righting, equilibrium state of monetary economy. On the contrary, under-employment and under-investment are likely to be the natural state unless active measures are taken. One implication is that the absence of competition is not the main issue regarding unemployment, and that reducing wages or benefits has no major effects. Demand, not supply, determines the level of employment. Keynes advocated the idea of a somewhat mixed economy with a predominately private sector, but with a role for government intervention during recessions.
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PetersSmith
Posts: 5,846
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2/20/2016 6:11:55 AM
Posted: 9 months ago
At 2/20/2016 6:11:01 AM, PetersSmith wrote:
At 2/20/2016 2:58:49 AM, Reformist wrote:
I would like to understand this economic theory and why, in the viewpoint of the theories supporters, its the best system out of the rest.

I will make different threads on different economic systems so libertarians dont have to explain why their system is superior in this thread

Keynes pretty much said that the government must do whatever is necessary to kick-start the economy and alleviate severe unemployment during a depression/recession (Keynes said this was at least "25% unemployment"). He said that government action could change the level of unemployment via deficit spending with things such as public works, and change interest rates and money supply (or balancing the revenue with expenditure). He said that economic output is strongly influenced by aggregate demand (total spending in the economy), and also that the private sector's decisions sometimes lead to inefficient economic outcomes which require active policy responses by the public sector, in particular monetary policy actions by the central bank and fiscal policy actions by the government in order to stabilize output over the business cycle (movement of GDP) (it should also be noted that Keynes believed the government was responsible for the business cycle, not the people, and if the people were responsible it'd lead to a debt economy).

If the private sector fails to create jobs, then the government must do it. If inflation is high, you must raise interest rates and cut money supply (and vice versa). He said that the common will ought to be directed to increasing the inducement to invest, and stimulate the propensity to consume (the government must expand to do this as well). Obviously, he claimed that the two greatest economic problems were unemployment and inequality. Inequality has been addressed by government redistribution, but some are hesitant to go further because people believe that growth is prompted by savings and so taking away the savings of the rich will retard growth. In sum, redistribution, by increasing effective demand, actually promotes growth. Expected return might be just enough to cover costs of production.

Our ultimate goal is to increase the volume of capital until it ceases to be scarce, and with it the function-less investor will die out. In this "capitalist utopia", the state will still have to guide things as just controlling interest rates will not ensure a Utopian state of affairs. A somewhat comprehensive socialization will prove the only means of securing an approximation to full employment, though this need not exclude all manner of compromise and of devices by which public authority will co-operate with private initiative.

Summary: the level of employment is determined not by the price of labor (neoclasiscal economics) but my the spending of money (aggregate demand). It is wrong to assume that competitive markets will, in the long run, deliver full employment or that full employment is natural, self-righting, equilibrium state of monetary economy. On the contrary, under-employment and under-investment are likely to be the natural state unless active measures are taken. One implication is that the absence of competition is not the main issue regarding unemployment, and that reducing wages or benefits has no major effects. Demand, not supply, determines the level of employment. Keynes advocated the idea of a somewhat mixed economy with a predominately private sector, but with a role for government intervention during recessions.

It's "rich" not "rick".
Empress of DDO (also Poll and Forum "Maintenance" Moderator)

"The two most important days in your life is the day you were born, and the day you find out why."
~Mark Twain

"Wow"
-Doge

"Don't believe everything you read on the internet just because there's a picture with a quote next to it."
~Abraham Lincoln

Guide to the Polls Section: http://www.debate.org...
Naturalmoney.org
Posts: 25
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2/20/2016 10:45:24 AM
Posted: 9 months ago
Keynesian theory was a reaction on a perceived failure of classical economics. According to classical economists, the economy tends to be in equilibrium at full employment because the desires of consumers exceed the capacity of the businesses to satisfy them. People produce in order to consume what they have produced or have acquired by exchanging what they have produced for what others have produced. Classical economics suggests that everything will work out fine when markets are competitive and flexible so that prices can adapt fairly quickly. A problem with this reasoning is that all prices are more or less flexible, at least in the longer run, but not interest rates, because they cannot go below zero. If interest rates could go below zero, classical theory might work.

Keynesian economics works around this problem. Keynes saw that interest rates cannot fall below a certain minimum. He called this a liquidity trap in which there are excess savings. In this situation investors prefer risk-free cash to investments in the hope of better returns on investments in the future. People didn't spend their money either. Keynes probably realised that the equilibrium interest rate during a crisis was negative, but he probably also thought that it would not be feasible to have negative interest rates. Keynesian economics therefore prescribes pushing up interest rates via aggregate demand and price inflation if there is a liquidity trap.