Classic Economic Model versus Keynesian Theory: Recessionary Impacts The Great Depression in 1929, sparked by a crash in the stock market, was a time which the U.S. economy suffered a tremendous loss in productivity resulting in negative GDP growth. Consumer spending and investment slowed for the next few years due to massive unemployment. “By 1933, when the Great Depression reached its nadir, some 13 to 15 million Americans were unemployed and nearly half of the country’s banks had failed” (“The Great Depression”). In tough economic times British economist John Maynard Keynes believed that government should step in the short run to boost the overall demand by instituting some form of economic spending stimuli. Classical economic
The “laissez-faire” was not beneficial as it favoured the rich and exploited the poor. Thus, the unregulated markets could not prevent poverty and. However, John Maynard Keynes, an opponent of Adam Smith is situated on the left wing of the economic policy spectrum and disagrees with Adam Smith’s philosophies. John Maynard Keynes argues that government intervention is necessary for an economy to recover from a depression - it cannot recover by itself! The government has a progressive tax system, which ultimately prevented inflation.
Keynes wants to “steer” the economy from the “top down.” From his understanding of the economy, Keynes theorizes that the market can be directed by those with the power to do so to accomplish goals leading to a prosperous economy. This is the basis in his approach to dealing with recessions where the government or central bank manipulates the economy. The other side is a free market from the “bottom up” on which Hayek stakes his claim. Instead of steering the economy, Hayek proposes to leave it alone. Do not try to control it, but let the market determine the interest rate and price level, as it eventually will, through supply and demand.
The problem with balancing an economy is that human judgment and evaluation of economic situations enter into the equation. Establishing a constant growth level in the money supply would eliminate the decision making process of the central banker. The problem with human intervention is the short-sided nature of many of the policies designed to aid the economy. Such interventions, which yields unintended negative consequences, is the result of the time inconsistency problem. This problem is understood through situations during which central bankers conduct monetary policy in a discretionary way and pursue expansionary policies that are attractive in the short-run, but lead to detrimental long-run outcomes.
I will also discuss the opposing view presented by Arthur Miller that suggests a profit drive, amoral capitalist system will do harm to a society . Furthermore, I am going to compare and contrast the two view and concluded with Miller’s view Capitalism encourages business men to make profitable amoral decisions will not benefit our society. While Griffin, Smith and Miller are holding two significantly different views, they both agree on capitalism is an amoral system. According to Griffin, profit is the only incentive for any business to operate under a capitalist system. Smith, father of capitalism, shows his understanding of amoral capitalism by saying, “We address our self, not to their humanity but to their self-love, and never talk to them of our own necessities but to their advantages.
Keynesians believe that unemployment exists because of “an insufficient demand for goods and services”, and thus the solution to it is to prime aggregate demand (“Keynesian economics”). The recommended stimulus is government intervention, which, Keynesians believe, can “directly influence” aggregate demand by manipulating economic policies (Keynesian economics). Keynes’ suggested that the economy can exist in one of 3 ranges – horizontal, intermediate and vertical, determined by the aggregate su... ... middle of paper ... ... term, waiting for this adjustment could be disastrous because the welfare of the current generation of labor/ citizens is compromised, and as Keynes said, “In the long run we are all dead”. For a government to adopt the Austrian or Monetarist views would be particularly difficult because lawmakers would not actually be drafting much economic policy if the idea is to minimize government action. It can be argued that the Keynesian philosophy is a short-term solution and can only worsen the prospects for long-term growth owing to the high levels of accumulated debt and deficit spending.
After the Great Depression in 1929 John Maynard Keynes had attempted to provide a solution to much of the economic instability that had occurred in the US. Keynes’ revolutionary solution to the problem, later known as Keynesian economics, had proposed the idea of fiscal policies, being government intervention in the economy in the form if fiscal spending to aid the economy’s growth. In the years that followed an economist by the name of Milton Friedman, a known monetarist, challenged Keynes’ theory by suggesting that fiscal spending should be limited. Friedman argued that fiscal spending can only worsen an economy with small term effects, which not only will not be effective or felt, but will make the situation worse. Friedman’s take on the issue was that the government should be less involved and allow the free market to tune things out.
Foreclosures are the first sign of economic decline so, a decrease in the amount of foreclosure would demonstrate that a restoration is occurring within the economic turmoil. If inflation were to ... ... middle of paper ... ...hough a recession without a job. The inflation could be sued to help alleviate problems created by the recession, as stated before inflation can help keep houses from being foreclosed. In addition, new principles of economic co-operation will have to be devised to not only minimize consumption but also provide us with methods by which we may prevent or penalize any waste or extravagance. Finally, the new economists will have to develop static rather than dynamic economic models, that is, models for our economy which provide us with ways to limit an increase in our levels of consumption, matched by productive processes which increase rather than diminish the total resources available to us.
Keynes idea seemed very different and at the time and Keynes was considered a socialist. Keynes in actuality was not a socialist, but he was trying to make sure that the people had enough money to save the economy. The Supply Side economics also known to many as Reaganomics was introduced during the Regan administration. Supply Side economics stresses the influence of taxation on the economy. Supply Side is a school of economics that believes tax cuts can help an economy by raising supply.
Keynesians also believe that the short term effects may no infer on what the long term out may be. In the word of Keynes “In the long run, we are all dead,”. Government stimulation of the economy is broken up into two parts fiscal and monetary policy. In Keynesian economics monetary policy produces real effects on employment and economic output only when prices are fixed. Which indicates that Keynesian economics is much more theory than an actual effective practice.