Brief introduction of Keynesian theory

Keynes believed that the level of production and employment depends on the level of total demand. Total demand is the total demand for goods and services of the whole economic system. In microeconomic theory, the automatic adjustment of prices, wages and interest rates will automatically make total demand tend to the level of full employment. Keynes pointed out that the situation of production and employment deteriorated rapidly at that time, and pointed out that no matter how good the theory was, in fact, this automatic adjustment mechanism did not work. The key to the problem is whether there is "insufficient demand". According to the classical economic theory commonly used in the early practice of the General Theory, insufficient demand is only a symptom of recession and economic chaos, not a cause, so it will not appear in the normal market.

Classical economic theory holds that the key to full employment in an economic system is two points: first, the interaction between supply and demand determines the price of goods, and the constant change of prices in turn leads to the balance of supply and demand; Second, the new wealth created by this system may be saved for future consumption or invested in future production, and there is also a supply and demand mechanism that determines this choice. The deposit interest rate follows the same mechanism as the price, that is, it is the price of money.

Even in the worst year of the Great Depression, this theory still interprets economic collapse as the lack of a powerful mechanism to stimulate production. Therefore, the appropriate way is to reduce the labor price to the level of subsistence, leading to a decline in prices, so that purchasing power (employment) will pick up. Money not paid as wages will be converted into investment, perhaps in other industries. Closing factories and firing workers are also necessary measures. Other key policy measures are to balance the national budget, either raising tax rates or cutting fiscal expenditures.

deductive logic

The deductive logic of Keynesianism begins with full employment;

1. The previous assumption of full employment equilibrium is based on Say's law, and its premise is wrong, because the analysis results of total supply and aggregate demand function show that the equilibrium under normal circumstances is less than the equilibrium of full employment;

2. The balance between involuntary unemployment and underemployment lies in the lack of effective demand; Because the total supply will not change greatly in the short term, the employment depends on the total demand;

3. The reason for the lack of effective demand lies in "three basic psychological factors, namely, psychological consumption tendency, psychological elasticity preference and psychological expectation of future income of capital";

4. If the government does not intervene, it means that the shortage of effective demand will continue, and unemployment and crisis will continue; The government should adopt fiscal policy instead of monetary policy to stimulate the economy, increase investment and make up for the lack of effective demand in the private market.

After Keynes summarized and integrated a large number of macro concepts from a macro perspective, the development of economics began to jump out of the limitations of price analysis, thus turning a new page in economics in the 20th century.

The Development and Evolution of Keynesianism

Author: Hu Daiguang

ISBN: 9787302076308

Page number: 3 19

Publishing House: Tsinghua University Publishing House

Pricing: 29 pounds

Binding: hardcover

Year of publication: 2004-11-01

brief introduction

This book analyzes and combs the development and evolution of Keynesian economics in detail. After the world economic crisis in 1930s, the "Keynesian Revolution" appeared, which formed Keynesian economics and developed into two branches of Keynesianism-neoclassical comprehensive school and new Cambridge school. As a result, it became the "neo-orthodoxy" of western economics in the 1950s and 1960s. In 1980s, Keynesian economics was challenged by monetarism and neoclassical macroeconomics. In order to meet the challenge, new Keynesian economics came into being. This book also analyzes, summarizes and evaluates various theoretical and policy viewpoints of Keynesian and neo-Keynesian economics.

Evolution of Keynesianism

Neo-Keynesian economics came into being in 1980s, and its policy proposition flourished in 1990s. Its representatives are mostly American economists, such as Q.A. akerlof, J.Yellen, G.Manji, B.Banach and others. Neo-Keynesian economics insists on government intervention in the economy, but it absorbs the rational expectation view of the rational expectation school and the view that "expected macroeconomic policies are invalid". They believe that in the contemporary market economy, information asymmetry and changes in wages and prices are sticky, so that there will still be deviations from the natural unemployment rate and insufficient effective demand in the short term. Therefore, demand management policy is still necessary and effective. Neo-Keynesianism not only insists on the short-term demand management of traditional Keynesianism, but also emphasizes the idea that the supply school regulates the economy from the supply side, and advocates considering economic policies from the long-term and supply side. Neo-Keynesianism also emphasizes the consolidation of fiscal policy, arguing that fiscal deficit is harmful to the economy, which will lead to a decrease in investment (basic effect) and an increase in trade deficit. In addition, neo-Keynesians have also studied some new phenomena and mechanisms. For example, in the mechanism of monetary policy, we should not only consider interest rates, but also consider the ubiquitous credit rationing mechanism. Compared with traditional Keynesianism, new Keynesianism has undergone some major changes. The macroeconomic policies they advocate are more comprehensive and in-depth, taking into account both demand and supply. Give consideration to both long-term and short-term; We should pay attention to both the short-term effects of fine-tuning policies and the long-term effects of structural policies. It can be said that neo-Keynesians inherited the basic proposition that traditional Keynesian countries should intervene in the economy, not only absorbed some reasonable theories and policy propositions of neoclassical economics, but also developed the theory of state intervention in the economy on the basis of absorbing some experiences and lessons from macroeconomic practice since the 1980s, which made the policy system of state intervention in the economy develop to a new level.

Keynesian economics (Keynesian economics)

John maynard keynes (john maynard keynes)

Government responsibility and economy are linked.

Spend money and cut taxes when the economy is in trouble.

Increase taxes when the economy is booming.

Regard employment as the fundamental problem (regard employment as the fundamental problem)

Phillips curve ↓ unemployment = inflation (Phillips curve goes down, unemployment rate goes up)