HayleyW. CIA4Ua. Critique of John Maynard Keyness Economic Approach .docx

Hayley WhiteMr. SzychtaSeptember 23 2014Economics

Critique of John Maynard Keyness Economic Approach

Introduction

John Maynard Keynes is one of the most influential economists in the 19th century. He was a Professor in Economics at Cambridge University, and he served as an economic adviser to the British Treasury during both World Wars. He is considered the creator of macroeconomics after publishing The General Theory of Employment, Interest, and Money" in 1936. The book contained innovative ideas to help the government deal with different economic issues. His book was considered 'to have rescued the capitalist system from falling (Skidelsky R. 2009).

'Keynesian Economics'

Keynes's economic approach was so influential that it was also known as the Keynesian economics which analyzes relationships among demand, production, and unemployment. Keynesian economics also include Keyness solution to stimulate a weak economy through combination of two approaches; a reduction in interest rate which is known as monetary policy, and governments spending in infrastructure - the fiscal policy.

In general, low wage-rates would have higher employment levels, but during a weak economy this theory does not apply. When the economy is under recession and employers facing low demands for their goods and services, Keynes thought in order to solve the unemployment issue, the government should spend money. When traditional methods of economic stimulus fail, use the government as a last resort, and use it forcefully (Keynes, cited in Bolotta, Hawkes, Mahoney & Riper, 2002). During economic recession when demands are low and production could not be increased among private business, Keynes's idea of government intervention became helpful.

This report will focus on Keynes's Fiscal Policy and how the policy affect modern day economy.

Impact of Keynes's Fiscal Policy

The fiscal policy can be defined as a policy through which the government attempts to achieve certain economic objectives by changing its revenue and/or its expenditure. (Slavin S, 1999) In other words, the fiscal policy aims for high employment and stable prices. According to Keynes, fiscal policy can also be classified as expansionary or contractionary. The effect of expansionary fiscal policy refers to situations where the government would increase spending or reduce taxation. In the contrary, the government would reduce its spending and increase taxation under a contractionary fiscal policy. During the Great Depression the world was demanding that their governments do something to end the depression. Keynes suggested that the government follow his two-word policy prescription: spend money.

In 1933, Keynes's published another book The Means to Prosperity. It gave specific suggestions to tackle unemployment during the global recession. Since the book had recommendations to other nations, a copy was sent to all leaders around the world including U.S. President Roosevelt. Roosevelt found a lot of Keynes's advices helpful. In 1933, Keynes's published another book The Means to Prosperity. It gave specific suggestions to tackle unemployment during the global recession. Since the book had recommendations to other nations, a copy was sent to all leaders around the world including U.S. President Roosevelt. Roosevelt found a lot of Keynes's advices helpful.

During the Great Depression of 1929-1932, the unemployment rate continued to rise and production fell. Franklin Roosevelt had to keep his promise before he was elected as the President; that is the government would do anything to bring economic recovery. President Roosevelt then took Keynes's idea to spend money, and used it as a blueprint to create massive spending programs of his new deal. Having to produce supplies for the Second World War, the government was able to create new jobs and spent money on the people.Applying Keynesian Economics to modern days economy

Despite of the impacts from the Keynesian economics towards the economy during the Great Depression; some criticized we have continued following the Keynesian dictum - perhaps blindly. (Slavin S, 1999). For instance, in 2013 the government was forced to shut down temporarily in the U.S., because the two major parties in the U.S. Congress - the Republicans and the Democrats could not agree on the government budget to be approved for the fiscal year. Such disagreement resulted to a funding gap between the two parties. According to NBC news, The shutdown was also reflected in government's over-spending at the time. (James S, NBC News 2013). The budget was not approved because the government was spending beyond their capability, more spending would mean larger national debt.

Critique and conclusion

Overall I believe that Keynes's approaches work in many economic situations. His idea for government intervention had helped the American economy recovered from the Great Depression. With different views from the classical Laissez-faire economics whereby the government played minimal role in the economy, Keynes believed that government should be involved when aggregate demand falls. Keynes's ideas of government involvement has proven to be working during the Great Depression and also after the global financial crisis in 2008. It is important to know that only if a government can afford to spend money back on their people to benefit them, this policy would work well. In some cases, however, when government does not have enough surplus to spend, and is getting too 'big' which means too many government jobs were created and duplicated, it could result to overspending and the country will suffer. Eventually the government jobs may still have to be cut and unemployment still arise. In the United States, because the current government had been in debt for many years, the Keynesian fiscal policy would not work to rescue their economy. In conclusion, we cannot blindly adopt the same policy that worked 80 years ago to nowadays economy and expect it would work effectively.

******Reference Page

John Maynard Keynes. (2013). In ELibrary : ProQuest Research Topics. Retrieved from http://elibrary.bigchalk.com

Seidman, S, L. (2012, November 01). Keynesian Fiscal Stimulus: What Have We Learned from the Great Recession?. Business Economics, (4), 273, Retrieved from http://elibrary.bigchalk.com

Slavin, Stephen L. Economics: A Self-teaching Guide. New York: Wiley, 1999. Print.

Skidelsky, Robert. Keynes: The Return of the Master. New York: PublicAffairs, 2009. Print.

James, Steve. "Money for Nothing: Government Shutdown Costs $12.5 Million per Hour." NBC News. N.p., 2 Oct. 2013. Web. 22 Sept. 2014. .

Keynes, John Maynard. The Means to Prosperity. London: Macmillan, 1933. Print.