Keynesian economics

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Keynesian economics

(ECONOMICS) an account of the working of macroeconomic systems first propounded by John Maynard KEYNES, in which it is assumed that the economy is not self-managing and that governments must act to avoid prolonged recessions and secure FULL EMPLOYMENT. Directly at odds with much that had been previously assumed (see NEOCLASSICAL ECONOMICS), Keynes proposed government management of the economy – through monetary as well as fiscal policies – in which government expenditure would be increased at times of recession and reduced at times of FULL EMPLOYMENT and INFLATION, thus controlling aggregate demand within the economy. The adoption of Keynesian policies by governments seemed to be successful until the 1960s, when inflation and lack of economic growth began to emerge as a problem. Since then, while Keynesian economics still has many supporters, other macroeconomic theories, notably MONETARISM, have been in the ascendant.
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As we know most modern or neoclassical economists argue against combating stagflation with higher interest rates: Milton Friedman was the first one to point out that once the markets adjusted to higher inflation rates, unemployment would rise again unless the underlying cause of unemployment was addressed; Austrian Friedrich Hayek's has similar views to Friedman; and even Paul Krugman (who is known more as a Keynesian economists) argues that stagflation can mainly be understood through supply shocks and to overcome it the governments must act to correct the supply shock to ensure that unemployment does not rise during this period.
[Re: A new book about austerity has Keynesian economists reeling] I enjoyed the article by Professor Tim Congdon on government spending, but I felt it was too simplistic.
Keynesian economists generally argue that, as aggregate demand is volatile and unstable, a market economy will often experience inefficient macroeconomic outcomes in the form of economic recessions (when demand is low) and inflation (when demand is high).
First, if New Keynesian economics was "good enough," why didn't New Keynesian economists urge precautions against the collapse of 2007-2008?
Finally, I will look at how the concept has been carried forward to today by Keynesian economists, as well as by politicians and pundits.
Some readers may recall that there was much scoffing at predictions from Keynesian economists, myself included, that interest rates would stay low despite huge budget deficits; that inflation would remain subdued despite huge bond purchases by the Fed; that sharp cuts in government spending, far from unleashing a confidence-driven boom in private spending, would cause private spending to fall further.
They found that contrary to Keynesian doctrine, big cuts in government spending are expansionary, making economies boom rather than decline as predicted by Keynesian economists. Alesina et al.
WHEN the euro crisis began a half-decade ago, Keynesian economists predicted that the austerity that was being imposed on Greece and the other crisis-hit countries would fail.
Keynesian economists argue, however, that government can use increases in transfer payments to cushion business slumps in the same way that it can use increases in its purchases of final goods and services because increases in transfer payments augment personal income and stimulate greater consumption spending, hence greater investment spending, and therefore, from both sources, an increase in GDP.
To be sure, more liberal, Keynesian economists, who believe that government spending is a strategic weapon in the fight against unemployment and stagnation, contend that the Obama administration and the Fed have not gone far enough to jumpstart the economy with their stimulus and monetary initiatives.
Initially, both Keynesian economists and policymakers interpreted the upward shift in the 1970s as evidence of cost-push inflation.
Also, Keynesian economists widely predicted that a large decline in federal spending after the war, with millions of soldiers returning home and armament industries laying off workers, would result in a return to high unemployment and depression (Nasar 2011: 385-86).