Dispeling the existing economic theory

John Maynard Keynes

In the 1930s, the great depression occurred, and the existing economic theory could not explain what the reason for the global economic collapse was. The existing theory could also not provide a solution to the problem at hand. This led to the birth of the Keynesian ideology to help in overturning the collapse of the global economy. John Maynard Keynes, a British economist, led the revolution that would dispel the existing economic theory.


The existing economic theory was that free markets would naturally lead to full employment. The idea was that if anyone wanted a job, they would have it as long as they were flexible in their wage demands. However, Keynes’s ideology was that aggregate demand is an essential tool for driving the economy. Aggregate demand is measured by adding the total spend by businesses, households, and the government. He also proposed that free markets do not have the ability to attain full employment. He states that there should be government intervention through policies to ensure there is price stability and full employment.


Keynes argued that when the level of demand is low, then there could be long periods of unemployment. Consumption, government purchases, investment, and net exports are the total output of goods in the economy. For there to be an increase in demand, one of the four components needs to increase. However, in times of recession, demand is weakened because consumer spending goes down due to factors such as consumer confidence. The less spending by consumers leads to less investment by businesses because there is a low demand for their products. This makes government intervention necessary to ensure there is regulation between economic busts and booms, which is also known as the business cycle.


Three principals guide the Keynesian ideology. The first principle is that many economic decisions, both private and public, influence the aggregate demand. Arrangements in the private sector may, at times, have negative macroeconomic results, and this requires government intervention through policies such as fiscal stimulus package. This ideology advocates for a mixed economy with minimal government intervention, and mainly focusing on the private sector. The second policy is that prices and wages change slowly in response to changes in demand and supply.


The third policy is that any change in the aggregate demand, whether unanticipated have the most significant impact on employment and real output. Since prices are rigid, any change in the four components of spending, such as investment and consumption, leads to a change in output. For example, if the government spends more and all the other components remain constant, the output will increase. The ideology also points out the presence of a multiplier effect, which is, when there is an increase in spending, the output changes with a multiple of the spend that caused the change.


Keynesian economists believe in activist policies that reduce the level of the business cycle, which they believe to be the most significant economic problem. They advocate for countercyclical policies that negate the direction of the business cycle. For example, taxes are raised to prevent inflation and cool the economy when there is sufficient growth on the demand-side. There is also the implementation of the monetary policy to stimulate the growth of the economy. One such strategy is the reduction of interest rates to stimulate investment. However, there is the case of a liquidity trap where an increase in the money stock does not lead to a rise in employment and output, and interest rates fall. Keynes argued that the government should intervene in the short run rather than wait for the market forces to adjust things in the long term.


Though his ideas were accepted by many, Keynes still had critics of his work, such as the Austrian School of Economics, who held the belief that booms and recessions were part of the natural order and that government intervention only worsened the situation. His ideology also took a hit between the end of World War II and the 1970s because many countries suffered a condition known as stagflation. Stagflation is a condition whereby an economy suffers slow growth as well as inflation. The ideology waned because it did not have an appropriate solution to stagflation, which was the impending danger at the time.


When the ideology could not help in coming up with a policy to tackle stagflation, the focus was shifted to the monetarist economists who believed that the government was not able to regulate the business cycle through fiscal policy. The argued that monetary policy was the only solution to the crisis. Monetary policy would involve controlling the supply of money to change the level of the interest rates. They also held the thought that monetary policy would have some effect on output in the short run but would promote inflation in the long term. These critiques have been adopted in the ideology and help in the integration of the short run and long run understanding of how money works because any change in the money stock affects real variables such as output and employment as well as nominal variables such as wages and prices.


In the 1970s, the ideology was also under scrutiny after the rise of the classical school of thought, which stated that policymakers are ineffective because market participants can forecast the implementation of policy and act to counter it. However, it was argued that even though it was possible to anticipate correctly, markets could not be cleared instantly. Hence, the fiscal policy would still be useful in the short run.


Characteristics that identify Keynesian-ism as an ideology

The Keynesian model can be said to an ideology because it posses the significant features of an ideology. One of the aspects is that ideologies require a commitment on the part of the followers. This has been the case for Keynesian economists because the original tenets by Keynes are still in use today and form the basis for macroeconomics. The commitment to the ideology is mostly intellectual because the model still has its critiques.


The other characteristic is that ideologies are geared towards action. John Maynard Keynes came up with the ideology due to the depression felt in the 1930s. Being oriented towards action means overthrowing the current political or social system. The economic model of free markets did not give a solution to the global economic collapse. Hence, Keynes came in and came up with a more sustainable model that could ensure the global economy was stable.


Another characteristic that fits the Keynesian model as an ideology is universal validity. An ideology should not only be right for the group whose interest it represents, but rather all of humanity. However, in some cases, the validity of the ideology may be limited to gender or sub-national such as feminism. In the case of the Keynesian model, the ideology is universal because the ideas can be implemented in any economy around the world and still have a positive effect on the economy.


Another characteristic is that adherents believe their ideologies to be correct and are committed to them entirely. This leads to the forging of an arrangement or, in some cases, that distortion of facts to give them credibility. In the case of Keynes, for his ideology to be credible, he had to come together with other scholars such as Harry Dexter White. Keynes believed in his ideology of government intervention to ensure the stability of the business cycle.


Keynesian-ism relationship with Socialism and Marxism

Keynesian-ism can be said to be an economic school of thought with a hint of socialist thought. Even though Keynes was a liberal thinker, his arguments in support of state intervention can be said to be socialist. He states that the government must intervene within the economy to ensure that there is no market failure. The government, through Keynesianism, can implement socialist policies that advocate for social justice and equality by virtue of intervention.


However, Keynesian-ism is against a planned economy that is usually advocated for by Marxists. Keynesian-ism advocates for the social democratic position that states that “the man in Whitehall knows best.” This shows that the government knows when it is best to intervene within the market. The ideology advocates for a mixed economy where both the private and public sectors have a role. The ideology rejects the idea of an unregulated free market and a case where the state allocates resources. The main idea of Keynes’s ideology was to ensure capitalism was maintained while also moving away from a planned system due to joint ownership.


Keynesian-ism can be said to be an economic ideology that advocates government intervention to ensure there is no market failure. It was founded after the global depression of the 1930s and is the foundation of modern macroeconomics. Through the concept of the man in Whitehall knows best, the ideology shows some similarity to socialism but is against the Marxists approach, which advocates for a planned economy.

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