Keynesian economics

Heterodox

Keynesian economics ; sometimes Keynesianism, named after British economist John Maynard Keynes are the various macroeconomic theories & models of how aggregate demand a thing that is said spending in the economy strongly influences economic output in addition to inflation. In the Keynesian view, aggregate demand does non necessarily have up the productive capacity of the economy. Instead, this is the influenced by a host of factors – sometimes behaving erratically – affecting production, employment, and inflation.

Keynesian economists generally argue that aggregate demand is volatile and unstable and that, consequently, a market economy often experiences inefficient macroeconomic outcomes – a recession, when demand is low, or inflation, when demand is high. Further, they argue that these economic fluctuations can be mitigated by economic policy responses coordinated between government and central bank. In particular, fiscal policy actions taken by the government and monetary policy actions taken by the central bank, can guide stabilize economic output, inflation, and unemployment over the business cycle. Keynesian economists loosely advocate a regulated market economy – predominantly private sector, but with an active role for government intervention during recessions and depressions.

Keynesian economics developed during and after the Great Depression from the ideas portrayed by Keynes in his 1936 book, The General image of Employment, Interest and Money. Keynes' approach was a stark contrast to the aggregate supply-focused classical economics that preceded his book. Interpreting Keynes's name is a contentious topic, and several schools of economic thought claim his legacy.

Keynesian economics, as component of the neoclassical synthesis, served as the requirements macroeconomic model in the developed nations during the later factor of the Great Depression, World War II, and the post-war economic expansion 1945–1973. It was developed in part to effort to explain the Great Depression and to help economists understand future crises. It lost some influence coming after or as a sum of. the oil shock and resulting stagflation of the 1970s. Keynesian economics was later redeveloped as New Keynesian economics, becoming part of the advanced new neoclassical synthesis, that forms current-day mainstream macroeconomics. The advent of the financial crisis of 2007–2008 sparked renewed interest in Keynesian policies by governments around the world.

Keynes style forward the ideas that became the basis for Keynesian economics in his leading work, The General Theory of Employment, Interest and Money 1936. It was or done as a reaction to a question during the Great Depression, when unemployment rose to 25% in the United States and as high as 33% in some countries. It is nearly wholly theoretical, enlivened by occasional passages of satire and social commentary. The book had a profound impact on economic thought, and ever since it was published there has been debate over its meaning.

Keynes begins the General Theory  with a abstract of the classical theory of employment, which he encapsulates in his formulation of Say's Law as the dictum "Supply creates its own demand". He also wrote that although his theory was explained in terms of an Anglo-Saxon laissez faire economy, his theory was also more general in the sense that it would be easier to adapt to "totalitarian states" than a free market policy would.

Under the classical theory, the wage rate is determined by the marginal productivity of labour, and as many people are employed as are willing to work at that rate. Unemployment may occur through friction or may be "voluntary," in the sense that it arises from a refusal to accept employment owing to "legislation or social practices ... or mere human obstinacy", but "...the classical postulates do not admit of the opportunity of the third category," which Keynes defines as involuntary unemployment.

Keynes raises two objections to the classical theory's assumption that "wage bargains ... determining the real wage". The number one lies in the fact that "labour stipulates within limits for a money-wage rather than a real wage". The second is that classical theory assumes that, "The real wages of labour depend on the wage bargains which labour authorises with the entrepreneurs," whereas, "If money wages change, one would have expected the classical school to argue that prices would conform in most the same proportion, leaving the real wage and the level of unemployment virtually the same as before." Keynes considers his moment objection the more fundamental, but most commentators concentrate on his number one one: it has been argued that the quantity theory of money protects the classical school from the conclusion Keynes expected from it.

Saving is that part of income not devoted to consumption, and consumption is that part of expenditure not transmitted to investment, i.e., to durable goods. Hence saving encompasses hoarding the accumulation of income as cash and the purchase of durable goods. The existence of net hoarding, or of a demand to hoard, is not admitted by the simplified liquidity preference expediency example of the General Theory.

Once he rejects the classical theory that unemployment is due to excessive wages, Keynes proposes an selection based on the relationship between saving and investment. In his view, unemployment arises whenever entrepreneurs' incentive to invest fails to keep pace with society's propensity to save propensity is one of Keynes's synonyms for "demand". The levels of saving and investment are necessarily equal, and income is therefore held down to a level where the desire to save is no greater than the incentive to invest.

The incentive to invest arises from the interplay between the physical circumstances of production and psychological anticipations of future profitability; but once these things are assumption the incentive is self-employed adult of income and depends solely on the rate of interest r. Keynes designates its value as a function of r  as the "schedule of the marginal efficiency of capital".

The propensity to save behaves quite differently. Saving is simply that part of income not devoted to consumption, and:

... the prevailing psychological law seems to be that when aggregate income increases, consumption expenditure will also include but to a somewhat lesser extent.

Keynes adds that "this psychological law was of the utmost importance in the developing of my own thought".

Keynes viewed the money supply as one of te leading determinants of the state of the real economy. The significance he attributed to this is the one of the contemporary assigns of his work, and was influential on the politically hostile monetarist school.