Keynesianism is a system of economic knowledge about the aggregate indicator of demand and how it affects production. Its founder is John Maynard Keynes, and the first scientific work - "General theory of employment, interest and money."
The history of the concept
Keynesianism emerged during the Great Depression. In the 30s of the XX century, a massive economic recession was observed in America and Western Europe, and the problem of unemployment arose. Economists studied the causes of the crisis in order to find a way out of it. Some theorists assumed that all the evil was in oversaturated demand, their colleagues objected that demand was minimal, and still others believed that the problem was in the banking regulation system.
Keynes believed that the way out of the depression lay through a system of public works, which would be secured by government subsidies and loans. If the government goes to increase spending to start production and housing, the crisis will come to an end. Keynes showed how fluctuations in income lead to instability in the commodity and money markets, bond markets and labor markets. It is worth noting that along with innovative ideas, John Maynard introduced many terms and definitions into economic theory.
a brief description of
Keynes's anti-crisis theory includes the following tools:
- flexible monetary policy to address wage inelasticity;
- stabilization of fiscal policy, which is achieved by increasing the tax rate;
- financing unprofitable enterprises to reduce unemployment.
The Keynesian economic model is distinguished by the following features:
- high share of national income;
- redistribution of income through the state budget;
- growth in the number of state-owned enterprises.
The principle of effective demand, the theory of employment and unemployment
Keynesians believed that effective demand is the equality of aggregated demand with aggregated supply. It determines the real national income and may be less than what is needed for full employment.
The amount of employment depends not on the willingness of the unemployed to get jobs even with low wages, but on the planned consumption expenditures, as well as on future capital investments. In this case, neither supply nor price changes are critical.
A decrease in wages only leads to a redistribution of income. A decline in demand on the part of one part of the population cannot be compensated for by a rise in another part. On the contrary, an increase in income among a population group will entail a decrease in their propensity to consume. Keynes advocated a fixed wage and the orientation of economic policy towards the growth of employment in the national economy.
Determination of price and inflation
According to Keynes, the guarantee of economic growth is effective demand, and the main thing in economic policy is its stimulation. Keynes considered an active fiscal government policy to be a tool for stimulating effective demand. Stimulating investment, maintaining consumer demand should be achieved through government spending. As a consequence, there is an increase in the money supply, which does not lead to an increase in prices, as classical economists believed, but to an increase in the degree of use of available resources under the condition of underemployment. If supply rises, prices, wages, production and employment rise in part.
Consumption theory
Keynes noted that consumption expenditures are not growing to the same extent as income and demand are increasing. Not all of the cost of a product should be spent on purchasing food, he argued. According to psychological laws, the population will be more inclined to save if their incomes grow.
Investment multiplier
The investment multiplier concept derives from Keynes's theory of consumption. This economist paid great attention to investments and their importance in the economy. National income depends on the level of investment, and this relationship Keynes called the income multiplier. Its formula should take into account the level of functioning means of production and labor. This concept justifies the instability of the market economy. Even small fluctuations in the level of investment can provoke a noticeable drop in production and employment.
It is investment that determines savings. And investments depend on the planned profitability and interest rate. The first indicator means the maximum capital efficiency, which cannot be predicted. The second indicator determines the minimum return on investment.
Interest and money theory
Percentage, as Keynesians understand it, is not the interaction of savings and investments, but the process of functioning of money, which is the most liquid durable asset.
The interest rate is the ratio between the supply of money and that demand for it. The first indicator is controlled by the Central Bank, and the second depends on several motives:
- transactional motive;
- a precautionary motive;
- speculative motive.
The main directions of neo-Keynesianism
Keynes's concept was modified after a few years and turned into neo-Keynesianism. Among the main innovations are the theory of economic growth and cyclical development.
The main drawback of Keynes's theory is the impossibility of using it on a long-term scale. It meets the requirements of its time, but does not fit other economic models. Keynes did not pay much attention to the strategy of economic growth or dynamics, he was solving the problem of employment.
The US economy was gaining momentum and needed to be strengthened. The neo-Keynesians were N. R. Harrod, E. Domar and A. Hansen, and N. Kaldor and D. Robenson. It was they who founded a new concept that considers the problem of economic dynamics.
The main idea of Keynesianism, which became a pillar in neo-Keynesianism, is about the need for state regulation of the capitalist economy. The adherents of this theory were in favor of active government intervention in the market economy. The methods of the theory are distinguished by the national economic approach to reproduction and use.
Neo-Keynesianism, in contrast to Keynesianism, does not abstract when defining productive forces and introduces specific indicators of the development of production. Terms such as capital ratio and capital intensity emerge. Keynes' followers define the capital ratio as the ratio of total capital to national income over a period of time.
The question of the types of progress arose sharply, a definition of technical progress appeared, which allows one to save living labor and the labor of capital. In addition to the multiplier, an accelerator appears. According to his theory, the expansion of capitalist reproduction is a technical and economic process. Neo-Keynesians explain the cyclical fluctuations of the economy, which depends on investments, purchases, investments in construction, government spending on social needs.
Monetary policy is carried out by a complex transmission mechanism. Interest rates are designed to regulate the business cycle. It also notes the strengthening of the legal regulation of the market economy by the state, especially in terms of recruitment, pricing and antimonopoly policy. The popularity of economic planning and programming methods is growing.
Initially, neo-Keynesianism used more Keynesian theories, but later they ceased to achieve their goals due to the growth of bureaucracy and a decrease in the effectiveness of the state apparatus. The budget deficit began to grow, and inflation picked up pace. Due to the strict control of the state, private enterprises could not develop, and social benefits prevented the stimulation of labor activity among the population.
