According to Keynesianism, choices took by the private sector occasionally have ineffective macroeconomic outcome. As a consequence, this school of macroeconomic idea supports the usage of vigorous strategy and fiscal response measures by making use of the public sector, monetary policy actions started by the central bank and fiscal policies espoused by the government with the leading objective of steadying business cycle output. Keynesianism encourages for the practice of a mixed economy, which includes largely the private sector and the government with the public sector performing a significant role. This was the economic version implemented during the last part of the Great Depression, the World War II, and the post-war economic expansion observed during 1945-1973. Keynesianism lost its stimulus during the 1970s economic decline and counter-revolution. The recent global financial crisis has caused the rebirth of Keynesian theory in economic models. This essay will describe Keynesianism and will then try to explain its rise and fall.
Keynesian economics also called Keynesianism is an economic ideology of total spending in the economy called aggregate demand and its influence on output and inflation. Keynesian economics was created by the well-known British economist John Maynard Keynes in 1930 in an effort to apprehend the Great Depression. Keynesianism led economics theories and policy after world war II until late 1970s (Kenton, 2019). Keynes was in favor for expanded government expenditures and put down taxes to increase demand and take the global economy out of the slump. Consequently, Keynesian economics was utilized to refer to the notion that ideal economic execution could be reached, and economic crashes avoided by shaping aggregate demand via activist equilibrium and economic interference policies by the government. Keynesian economics is viewed as a “demand-side” idea that concentrates on changes in the economy over the short term. (Jahan, Mahmud and Papageorgiou, 2014)
To understand Keynes, it is important to note that unlike most economists nowadays, his key target was to get completely rid of unemployment: the “real problem, fundamental yet essentially simple is to provide employment for everyone.” His objective for unemployment is “the sort of level we are facing in wartime less than 1 per cent.” Keynes strongly denied that the fundamental cause of unemployment is wage and price rigidities (Higgs, 1995). He said that once full employment is reached then markets can work freely. He also claimed in his book “The General Theory of Employment, Interest and Money” that socialization of investment incorporating public-private partnership, might be needed to secure full employment (Keynes, 1936). He opposed to an economy which generated far less than it could, a problem which left millions of people unemployed in economies where work is not only social status, but source of revenue.
The significant impact of Keynesianism throughout the World War II is widely attributed to the obliteration of mass employment, which occasioned in an extreme influence and spread of Keynesianism connecting to the government’s duty of upholding full employment. (Higgs, 1995) For example, in 1944, the UK government espoused a plan towards ensuring a “high and stable level of employment” as a part of its employment policy (Jstor.org, 2012). In the USA, the Employment Act of 1946 displayed the commitment of the Federal Government in embracing measures to accomplish “maximum employment, production and purchasing power”. The dedications by both the UK and the USA were of ultimate importance concerning the spread and influence of Keynesianism, even though they were lacking the ways of reaching the stated aims of maximum employment (Jstor.org, 2012)
When looking at the case of the United Kingdom, Keynes had an opinion that the target 3 per cent of average employment was tremendously optimistic and said that there was no possible harm in putting it into practice. It is obvious that the post-war success enjoyed by the United Kingdom and the United State can be credited to the stabilization policy of Keynesianism. James Tobin, the most well-known US Keynesian economist, once claimed that a strong case had been proven for the success of Keynesianism (Tobinproject.org, 2013).
Tobin disputed that most of the developed democratic and capitalist states adopted Keynesian demand policies managed after the World War II. 1950-1975 echoed unrivaled prosperity proven by an increase in the global trade and stability (TOBIN, J. 1983). It was around that time that most economies observed low inflation and unemployment rates. It is obvious that UK and western economies experienced maximum employment in the post-war era, because governments kept their dedications when it comes to full employment, basing on Keynesianism methods (pethoukokis, 2011). Before the 1980s, there was conventional knowledge suggesting stabilization of the real output in America’s economy because of the integrated and discretionary stabilization approaches putting in place after 1946, and specifically after 1961, just before the Second World War. This is an example of a vastly held empirical overview concerning the USA’s economy (pethoukokis, 2011). On the other side, this oversimplification that the period after 1945 was firmer that the period before the Great Depression was disputed by Romer (Romer, C.1992).
According to him, the business sequence throughout the pre-Great Depression was somehow more harsh than economic uncertainty witnessed after 1945. For C. Romer, a close assessment of unemployment, industrial manufacture and Gross National Product (GNP) data showed that procedures used in conveying these data described systematic preferences in findings. Romer used reliable post-1945 and pre-1945 figures to prove that both booms and slumps were very severe during the time after 1945 (Romer, C.1992). The deduction made by Romer was that there was slight indication to conclude that the US economy before 1929 was more unstable than after 1945. Despite a little failure and volatility of real macroeconomic indicators, and the harshness of slumps between the pre-1916 and post 1945 periods, there is enough indication to assume that slumps reduced and became constant.
The influence of the Keynesian stabilization policies included stretching the post-1945 growths and averting extreme economic recessions (Romer,C 1992). It is apparent that the increased impact and spread of Keynesianism can be credited to a conservative opinion that economic stability during the post-war era was quite higher than in the pre-1914 era, which was depicted by the Keynesian revolution in economic strategies. The point is that the rise of Keynesianism is credited to incomparable economic success during the period between the end of the second World War and 1973 industrial market economies. This was because Keynesianism emphasized the significance of fiscal policy, which caused in the perfected economic execution during the “Golden Age” epoch (Atesoglu, H.1999).
Great functioning can be accredited to an intensification in the liberalization of the universal trade and transactions, uplifting economic strategies that led to minimal inflation rates in terms of buoyant aggregate demand, the amplified governmental support of buoyant internal demand, and the accretion of growth potentialities after the end of the second World. For example, GDP per capita in Western Europe augmented by 4.08 per cent during 1950-1973, the growth and expansion were seen in centrally designed economies, such as Africa, Latin America, and Asia.
The “Peak” of unrivaled economic success finished after 1973, with the economic stagnation of the 1970s steering to the fall of Keynesianism. The 1970s stagnation was described by the rising rates of inflation and unemployment, and the cut-rate of economic growth. According to Keynesian criticizers, the economic stagnation credited to the erroneous expansionary strategies embraced under the disguise of Keynesian economy. For example, from 1960 until 2002, average unemployment and inflation rates were extremely low. During 1983 until 1993, the inflation decreased, but unemployment rates were up in most countries, specifically in Western Europe, which credited to hysteresis outcomes and rigidities in the labor market (Guillermo & Rodrigo 2008, 147). In the recent period of 1994-2002, it is obvious that inflation rates were minimal, but unemployment rates have raised in Western Europe and dropped in America. It is only around 1973-1983 that high inflation and high unemployment rates were recorded instantaneously. This was described as stagflation. According to Keynesianism criticizers stagflation was an inevitable inheritance of demand management policies associated with Keynesian economics (Baumol and Blinder, 2006)
Economists emphasize that there are two principal reasons of stagflation. First, a negative supply shock can decrease the productive ability of an economy. Examples of unfavorable shocks involve a raise in oil prices for an importing nation. Such shocks have an inclination of raising prices and slowing down the economy by the increasing costs of production and reducing lucrativeness at the same time (Guillermo & Rodrigo 2008). The second plausible cause of stagnation is inappropriate macroeconomic strategies. For example, letting an extreme growth in the supply of currency can escalate inflation, and the government can generate stagnation by using intense regulation of goods and the labor market. These two aspects performed an important role in triggering the 1970s worldwide stagflation that led to the fall of Keynesian economics. The stagflation began with huge increases in oil prices and continued, because central banks used the intense simulative monetary policy to solve the recession. The fall of Keynesianism also credited to the fact that many economists did not take into account the probability of stagflation (Blinder, 2013). Historical data pointed out that high unemployment rates were related with low inflation rates and vice versa, as shown in the Phillips curve (Khan Academy, 2017). The theory was that a high demand for goods increased prices, which in turn stimulated companies to employ more people. Likewise, high employment rates augmented demand. During the 1970s stagflation, it became obvious that the link between inflation rates and employment levels was sometimes unstable. As a result, macroeconomists were unconvinced about Keynesianism, eventually steering to the end of the impact of Keynesian theories in economic strategies. Monetarist economists, such as Edmund Phelps and Milton Friedman clarified a shift in the Phillips curve: they maintained that when companies and workers anticipated high inflation, there was a shifting up of the Phillips curve, suggesting that high inflation can occur at any rate of unemployment (Khan Academy, 2017). Unambiguously, they argued that if inflation remained high for many years, workers and companies would begin emphasizing its consequences during wage negotiations, causing in a quick increase of earnings and firms’ prices, which further quickened inflation. This enlightenment was an extreme case of criticism of Keynesianism, and Keynesians progressively agreed the explanation. This reduced Keynesianism spread and influence on economic policies.
To conclude, it is evident that the spread and impact of Keynesianism was largely accelerated by the unmatched economic success and constancy in the post-war period from 1945 until 1973. The basis of Keynesianism was government intervention using active monetary and fiscal actions to normalize aggregate volatility in market economies. Its collapse could have accredited to the 1970s stagflation depicted by an instantaneous increase in both unemployment and inflation rates. Critics maintain that stagflation was an unavoidable heritage of demand management policies associated with Keynesian economy. The critical fall of Keynesianism was noticed by the end of the neoclassical synthesis conventional position because of empirical and theoretical weaknesses. The fall of Keynesianism was also triggered by the fact that many economists of that time did not take into account the probability of stagflation.
28.02.2019