KEYNESIAN ECONOMICS

The central tenet of this school of thought is that government intervention can stabilize the
economy
BACKGROUND
Great Depression 1930s
Unable to explain the causes of economic collapse
To provide an adequate public policy solution
Free markets assumption to provide full employment

Economic driver - Aggregate demand

Keynesian economists justify government intervention through
public policies that aim to achieve full employment and price
stability.
BACKGROUND
An economy’s output of goods and services is the sum of four
components:
1. Consumption
2. Investment
3. Government purchases
4. Net exports
According to Keynesian economics, state intervention is necessary to
moderate the booms and busts in economic activity, otherwise known
as the business cycle.
KEY PRINCIPLES
1. Aggregate demand is influenced by many economic decisions—
public and private
2. Prices, and especially wages, respond slowly to changes in
supply and demand
3. Changes in aggregate demand, whether anticipated or
unanticipated, have their greatest short-run effect on real output
and employment, not on prices
STRENGTHS
Demand is most difficult to remain consistent It will fluctuates depending upon the money
supply of the country. Once there is demand of the product the goods will be eventually
supplied .
To keep demand at a higher level there must be surplus supply of the money
Money was source of value as it is device for connecting the present into the future not a ratios
for which good to be exchanged
Keynes has rejected the whole Newtonian Movement and was of view point that Human beings
are not Billiard balls whose direction and speed can be accurately predicted. Economics was a
moral science that deals with the motives expectations and psychological uncertainties
There is huge amount of the unknown probability that exist in the system that cannot be
actually predicted
STRENGTHS
Keynes rejected Econometric Modelling on the basis that it is only useful in
determining the events that have already been predicted using a certain variables.
The unknow probability and irrational behavior will be key part of future events
The consumption demand can be predicted to a greater extent but the investment
demand cannot be predicted as there is no guarantee that the savings of the people
will lead to increase in investment.
According to Kaynes the interest rate is the price which equilibrates the desire to hold
cash and the cash available. If the money supply is in abundance people will spent
more.
WEAKNESS
• No focus on the supply side: real shock to the economy (sharp
rise or fall in commodity prices)
• Break down of Phillips Curve: The trade-off between inflation
and unemployment was challenged in aftermath of Stagflation
in 1970s.
• Crowding out of private sector: Both in terms of credit and
resources
RESURGENCE
Keynes's ideas became widely accepted after WWII, and until the early
1970s
Through the 1950s, moderate degrees of government demand leading
industrial development
RESURGENCE
Use of fiscal and monetary counter-cyclical policies continued, and
reached a peak in the "go go" 1960s
In 1971, Republican US President Richard Nixon even proclaimed
"we are all Keynesians now"
1973 oil shock and the recession that shook much of the
developing world from then until 1975
Displacement by monetarism and new classical economics 1979–99
Great recession of 2008, Keynesianism has seen a resurgence
KEYNESIAN VS MONETARIST