...Identify a period in history when any government in the world applied Keynesian economic methods in trying to stimulate their economy. (Do not use the Great Depression as an example). Address the following: 1. Identify and describe the Keynesian actions. Keynesian economics is centered around the premise that governments should play an active role in promoting economic policy and regulating the private sector. Increased government spending and deficits will increase demand in the economy for more production, and that producers will increase supply to meet that demand, hiring more workers and reducing unemployment in the process. President Obama used a stimulus package of nearly $ 1 trillion using the rationale that it would cause the unemployment rate in America to drop to 5.8% and never exceed 8%. As of May of this year, the unemployment rate is at 8.2% and barely moving. The rate has exceeded 8% for 41 straight months as of May. Prior to the recession of 2008 unemployment had not measured over 8% in America since Dec. 1983. Not included in the 8.2% quoted unemployment rate is the estimated 7.2 million people who have given up looking for work or the 8.2 million underemployed workers (part time because they cannot find a full time job). If these two factors were included in the unemployment, it would be 22.8%. Unemployment rate: 8.2% Unemployed + underemployed: 14.9% Unemployed + underemployed + long-term discouraged workers: 22.8% In 2011, the economy...
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...Keynes, ‘love of money’ and the current crisis Paolo Paesani1 This version 1 October 2010 Preliminary version ABSTRACT Keynes saw ‘love of money’, love for the unlimited accumulation of liquidity as mark of personal success and shield against uncertainty, as a defining element of capitalism. This paper investigates connections between ‘love of money’ and the current crisis establishing two main linkages: bonus-based compensation mechanisms and hedge funds. Closer scrutiny and regulation both of bonuses and hedge funds can help prevent future crises. Permanent solutions to the problems posed by ‘love of money’ however will come only from new models of education and persuasion. Keywords: Causes of the financial crisis JEL: 1 University of Rome “Tor Vergata”, e-mail paolo.paesani@uniroma2.it. A previous significantly different version of this paper has been published in Italian in Il Ritorno dell’Economia Politica , G. Bonifati and A. Simonazzi (Eds.) Donzelli Editore, 2010, Roma. I would like to thank Annalisa Rosselli and Matteo Formenti for their helpful suggestions and comments. The usual disclaimer applies. “Whereas modern theory serves as a simulacrum of the economy – stylised and abstract to be sure – Keynes theory is a diagnostic instrument in the service of Doctor Keynes, consulting economic physician” (Hoover 2006, p. 78) “I also want to emphasise strongly the point about economics being a moral science. [A science that]…deals with introspection and with values...
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...According to Forbes.com, Obama has taken our economy back to the discredited Keynesian economics. John Maynard Keynes believed that in order to stimulate the economy, government needed to spend more money and increase deficits, which would in turn rejuvenate the economy and increase production. One journalist writes, “Keynesian economics is the false vision of human action which says the way to promote economic recovery and renewed growth is through increased government spending, deficits and debt. If that sounds nuts, that’s because it is.” (Obamanomics: The Final Nail In the Discredited Keynesian Coffin, 2012) As we have seen, the yearly deficit in the United States is steadily increasing, and there has been no turn around in the deficit as predicted by Keynes. This shows that Keynes belief in restoring the government by increasing deficits has failed. “Keynesian economics arose in the 1930s in response to the Depression. It never worked then, as the recession of 1929 extended into the decade long Great Depression. And it never worked anywhere it’s been tried since then, in the U.S. or abroad.” (Obamanomics: The Final Nail In the Discredited Keynesian Coffin, 2012) The Keynesian beliefs have increased unemployment, raised inflation into the double digits, and greatly increased interest rates. According to Forbes, Obama is spending huge amounts of money, increasing the federal deficit, just as Keynes believed. “Obama’s first major act in office was to pursue the unreconstructed...
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...KEYNESIAN ECONOMICS: Preamble:: As early as 1848, Karl Marx indicated the inherent weakness of uncontrolled capitalist system guided by ruthless exploitation of labour. In the then prevailing ‘Mercantilist’ system combined with the ‘Gold Standard’, country’s wealth and power was dependent on export surplus. Export prices had to be kept low by low wages. Marx argued that creating supply while not creating purchasing power would lead to creation of ‘surplus value’. Economies would experience excess production, stock piling, down turn and periodic unemployment. Over time, the down turn would get worse. For labour, having a job or being unemployed made little difference. Marx believed that periodic recession and crisis of capitalism would lead to the self destruction of the system and its eventual downfall. He called on labour to revolt. ‘You have nothing to lose but your chains’ he said. His clarion call was ‘workers of the world unite’. It is an irony of history that Marx, a great philosopher, proved to be poor prophet, precisely because of his own advocacy. Had Marx not said what he did say, his prophecies would have come true. His ideas resulted in significant system reforms in Britain. Publication of Marx’s Communist Manifesto in 1948 put the British society and polity on guard. In 1850s British Parliament enacted a number of laws aimed at labour reforms. Trade Unions were recognized. Minimum wages were instituted. Limitations were prescribed on hours of work,...
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...Hannah Grace S. Bielza AC-301 The Keynesian Theory * In the depression of the 1930s democratic nations were concerned about the problem of inflation. Wherein, general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. * Because of inflation, workers are unwilling to accept further cuts in their wages for the reason that their earnings were already cut down by unemployment and part-time work. It is really hard to work, earning a small amount of money while having a huge amount of expenses that’s why a lot of workers don’t want to cut their wages. * Explanation of wages and wage changes in this kind of setting inevitably directed attention to general wage levels rather than to wage rates in the labor markets. This means that the employers focus on this average wage paid to employees rather than the rate per hour or based on production. * John Maynard Keynes advanced his full employment theory by publishing “General Theory of Employment, Interest, and Money” in 1936 which provides basic analysis on which the theory is based. * To many theorists in the classical tradition, Adam Smith’s, “Wealth of the Nations” provided rationalization for policies they thought necessary but could not embrace with clear conscience. There’s no scholarly document to prove that this will fit more closely to the needs of the times. Keyne’s Theory on Employment * Keynes admitted that the Classical and Neo classical...
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...Keynesian Economics, Helping the US Economy Keynesian philosophy states that in order to manage economic downturns, government intervention in the economy is imperative. It was Keynesian Economic Philosophy that kept America out of another depression during the Great Recession due to the fiscal and monetary stimulus (Seidman 32-53, 22p). By examining the government’s need for spending money on welfare, cutting taxes, regulating and monitoring the financial markets, and government spending on military, America sees how a Keynesian approach is a necessity. The American Government needs to continue using the Keynesian model in order to enhance the performance of the economy. Keynesian Philosophy provides government assisted programs to those who qualify. One form of assistance is Welfare. Welfare provides benefits and economic assistance to low or no income Americans. With the dismal economy, there are now over 100 million people on welfare according to the Census Bureau; and this doesn’t include those receiving Social Security or Medicare (GOPUSAStaff). Food Stamps are one of many divisions of welfare. The food stamps program, also known as the Supplementary Nutrition Assistance Program (SNAP), helps low or no income citizens buy food. There are over 46 million people on SNAP as of June, 2012 (Luhby). That is more than one in seven Americans and more than 25% of eligible Americans do not participate in the food stamps program. There are millions of low-income seniors struggling...
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...Who was Keynes and what were his ideas? John Maynard Keynes, born in 1883, is considered to be one of the most influential economists of the 20th century. He was most prominent during the Great Depression in the 1930s when he tried to create an economical revolution in economic thinking with his ideas of intervention in markets. The idea is also generally; that in the short run productive activity is very much influenced by aggregate demand, (aggregate demand is the total spending in the economy with the equation; Consumption + Investment + Government Expenditure + (Exports - Imports)) and that aggregate demand does not equal the productive capacity of the economy. Keynes believed strongly that Government Intervention would strongly help the economy to succeed and grow. His three main argument points concerning the Government were : The Government has a role to play in moderating the business cycle. Government can use short term monetary policy to engineer the economy. During economic hardship the government should spend to try and 'spur' on economic growth. In the second point I mentioned monetary policy, but what is it? It involves changes in the base rate of interest to influence the growth of aggregate demand, the money supply and price inflation. A short goal would be set for the economy to achieve this by changing the base rate. If the economy is doing well, the government should stop spending money, or spend less, but if the economy is bombing, the government...
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...governments to come in and make markets work better... Keynes saved capitalism from the capitalists.” - Prof. Joseph Stiglitz Keynes’ theory opposed Adam Smith’s metaphor of “the invisible hand” – which envisages a self-correcting economy, in the form of the self-regulating behaviour of the market - due to individuals' efforts to maximize their own gains in a free market which benefits society, even if original ambitions include no benevolent intentions. Instead Keynes said that capitalism doesn’t always work on its own accord, but that government intervention is sometimes necessary (especially during periods of recession – which Keynesians see as an “economic malady” rather than a normal part of the business/trade cycle. Keynesian theory in modern macro-economics Alistair Darling MP, Chancellor of the Exchequer, 2007-2010 – “The dominant thinking in Europe at the moment is exactly repeating the mistakes (I believe) that were made at the end of the First World War”. This statement was made in reference to the fact that Germany is now imposing the idea of tough budget cuts in Greece in exchange for emergency loans. Darling compares this action to the forced pay of reparations by Germany, imposed by the Allies after WWI in the Treaty of Versailles. The fact that the debtor country has such a weak economy defies the possibility of making such large repayments. In order to repay...
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...Why were Keynesian ideas revolutionary? The Great depression started from October 29, 1929 when the stock market crash and ended in early 1940s. It started with severe economic collapse rooted by over-extended and over-confident stock market. The most severe country that was affected was US and other countries are mildly affected. The government intervened directly and increased the productivity essential for the World War II to end the Great Depression. Classical Theory is based on free market concept therefore it requires minimum or zero government intervention. Individuals can decide depending on their own interest and this lets them manage the economic resources based on their interest. Classical Theory believes that consumer spending and business investment is a larger portion as compared to government expenditure plus the higher the government expenditure, it will reduce the private sector economic growth. Classical Theory believes the economy will get corrected by itself in the theory of invisible hand. Keynes theory is based on the aggregate demand which is influenced by the public and private sector. It is influenced and affected by fiscal policies which are changes in government expenditure and tax. Keynes believes prices are rigid which will only cause output to fluctuate when there are changes in consumption, investment and government expenditure. Even if consumer spending or business investment is absent, government expenditure...
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...| The Abuse of Keynes’ Theory of Government Spending | And Why Government Spending Needs to Stop | | Chase Cooper | 12/13/2012 | Political Economy Dr.Ramos Abstract: The goal of my research paper is to analyze and present how John Maynard Keynes’ theory on government spending is being abused by the American government insofar that the American government is not following the guidelines and foundations that premised Keynes’ theory, and instead are picking the parts of the theory that allow them to spend at unsustainable levels, creating problems that, one way or another, eventually have to be resolved. My research will prove how the American government is conducting fiscal policy in a way that abuses Keynes’ theory on government spending, and, as a result, why Keynes would not support the American government in their spending endeavors, despite using his theory as their justification. I will be critiquing the application of Keynes’ theory from the Austrian, specifically the works of Friedrich A. Hayek, and Monetarist perspectives, supported by arguments given by Milton Friedman. Section 1: Keynes’ Theory on Government Spending John Maynard Keynes published his famous work, The General Theory of Employment, Interest, and Money, in 1936, during the Great Depression. Economies all over the world were suffering severely from the Great Depression, and there was little hope of economic recovery in the near future. Keynes agreed with the classical economist’s notion...
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...their own self-interest regarding economic decisions. This ensures economic resources are allocated according to the desires of individuals and businesses in the marketplace. Classical economics uses the value theory to determine prices in the economic market. An item’s value is determined based on production output, technology and wages paid to produce the item. Classical economics focuses on creating long-term solutions for economic problems. The effects of inflation, government regulation and taxes can all play an important part in developing classical economic theories. Classical economists also take into account the effects of other current policies and how new economic theory will improve or distort the free market environment. Keynesian Economics Assumptions Rigid or Inflexible Prices: While a wage hike is easier to take, wage falls hit some resistance. Likewise, while for a producer, commodity prices are easily upwardly...
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...Keynesian and Classical Model Perspectives “The Keynesian perspective emphasizes the importance of aggregate demand (spending by consumers, business, and government) and considers government fiscal policy (spending and taxing) to be the major factor in maintaining a vibrant economy. Keynesians believe changes in total spending have their greatest short-term impact on real output and not prices.” Keynesian economics was practiced in the early 60’s it emphasized financial growth through taxation. “First, the levels of national income and employment depend on aggregate demand rather than on the capacity to supply output or the desire to work. Second, a high level of saving can therefore reduce national income. Third, an increase in government spending can raise national income and return the economy to full employment.” “Today these ideas are regarded as relevant only to some short-run situations and not to the basic long-term goals facing economic policy. Fluctuations in aggregate demand influence short-run cyclical movements of output and employment but the sustained rate of economic growth reflects the accumulation of capital, the supply of labor, and the advance of technology. A rise in the level of saving can reduce aggregate activity temporarily but only a sustained high level of saving makes it possible to have the sustained high level of business investment that contributes to the long-run growth of output. Increased government spending can provide a temporary stimulus...
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...1) Monetary policy is the manipulation of the money supply with the objective of affecting macroeconomic outcomes such as GDP growth, inflation, unemployment, and exchange rates. Monetary policy in the United States is conducted by the Federal Reserve, in particular, by the FOMC. Keynesian monetary policy focus on how changes in the money supply affect interest rates and investment spending. In turn, aggregate demand shifts and affects prices, real GDP, and employment. The Keynesian view of the monetary policy transmission mechanism operates as follows: First, the Fed uses its policy tools to change the money supply. Second, changes in the money supply change the equilibrium interest rate, which affects investment spending. Finally, a change in the investment changes aggregate demand and determines the level of prices, real GDP, and employment. Since the 1950s, a new view of monetary policy, called monetarism, has emerged that disputes the Keynesian view that monetary policy is relatively ineffective. Monetarism is the simpler view that changes in monetary policy directly change aggregate demand, and thereby prices, real GDP, and employment. Thus, monetarists focus on the money supply, rather than on the rate of interest. 2) Monetarism is the prevailed economic theory per 2008. This theory dominated in the 20 year period leading up to the 2008 economic crisis. Monetarism argues that the markets are self-correcting and self-regulated. It believes that capital market naturally...
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...Which is better: Classical or Keynesian? And which one most embraces the idea of liberty? Classical framework does embrace the idea of liberty and freedom more. The classical framework is based on laissez faire principles, which opposes any government regulation of the economy. However, Team B believes that the Keynesian theory is better for the economy overall. Limited government involvement can influence the economy positively. For example, government involvement can help improve the economy in a recession. In a recession, spending benefits the economy. If the government spends or influences individuals to spend, it can help improve the economy and limit the negative effects of the recession. The government can help the economy reach its potential income as well. The potential income of an economy is the level of income that an economy is potentially able to produce without increasing inflation (Colander, 2010). Economies might not be able to reach their potential income without any government interference. Using recessions as an example the forces of the market may not be powerful enough to restore the economy. The economy would suffer from a changing equilibrium income. The equilibrium income is defined as the income level the economy moves towards because of the cycles of declining or increasing production (Colander, 2010). These fluctuations from the recession would alter the equilibrium income negatively and pull the economy further away from reaching its...
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...Virtual Economy Home page Keynesians - Introduction Keynesian economists are, not surprisingly, so named because they are advocates of the work of John Maynard Keynes (if only all economics was that easy!). Much of his work took place at the time of the Great Depression in the 1930s, and perhaps his best known work was the 'General Theory of Employment, Interest & Money' which was published in 1936. In this section we look more generally at the work of Keynesian economists. Follow the links below or at the foot of the page to find out more detail about what they believed in and the policies they proposed. * Beliefs * Theories * AS & AD * Policies * Virtual Economy policies Keynesians - Beliefs Keynes didn't agree with the Classical economists!! In fact the easiest way to look at Keynesian theory is to see the arguments he gave for Classical theory being wrong. In essence Keynes argued that markets would not automatically lead to full-employment equilibrium, but in fact the economy could settle in equilibrium at any level of unemployment. This meant that Classical policies of non-intervention would not work. The economy would need prodding if it was to head in the right direction, and this meant active intervention by the government to manage the level of demand. Follow the links in the navigation bar at the foot of the page or in the side panel to find out more detail on the sort of policies this may involve. Keynesian beliefs can be illustrated...
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