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Q: Keynesian Theory ( Answered 5 out of 5 stars,   1 Comment )
Subject: Keynesian Theory
Category: Business and Money
Asked by: sandfla-ga
List Price: $20.00
Posted: 25 Jul 2004 11:45 PDT
Expires: 24 Aug 2004 11:45 PDT
Question ID: 378847
How applicalbe is keynesian theory today? What difference has it made
in our economy today?  Give some details of differences it has made
today in our economy.

Request for Question Clarification by easterangel-ga on 25 Jul 2004 17:50 PDT

What country are we talking about?


Clarification of Question by sandfla-ga on 25 Jul 2004 18:06 PDT
The United States
Subject: Re: Keynesian Theory
Answered By: adiloren-ga on 26 Jul 2004 14:00 PDT
Rated:5 out of 5 stars
Hi, thanks for the question.

Keynesian theory is still very relevant today. His emphasis on using
government public works programs to stimulate employment is still
important. This is evident by the fact that the federal government
remains the largest employer in the United States. In addition, his
theories on monetary policy are still influential. The power of the
United States Federal Reserve and its chairman Alan Greenspan to
affect the economy illustrates the importance of centralized monetary
policy on today's economy. Clearly, the role of the federal government
in regards to the economy is very large, especially when compared to
the laissez-faire economic concepts of the pre-Great Depression

However, some of Keyne's theories have been criticized and are less
influential on the economic tactics of the U.S. government. His
argument that defecit spending is an important way to stimulate the
economy has fallen out of favor in the mainstream. A balanced budget
is often viewed as ideal unless circumstances force borrowed
expenditures. Conservatives often call for tax cuts as an alternate
means to stimulate the economy and consumer spending. Keynes would
disagree with these schemes, as they lessen the central government's
money supply and force cuts in public programs.

Internationally, two institutions that Keyne's championed have
experienced enhanced roles in the global economy, the International
Monetary Fund and the World Bank. However, Keynes would object to
these organizations using their lending leverage to force economies
into privatization and limits on public spending, as he viewed both
practices as counterproductive.

I have outlined some web information of Keynes below- including some
background info and some excerpts regarding the role of his theory
today. Hope this helps.


Keynes Profile

Keynesian Economics 
by Alan S. Blinder

"Keynesian theory was much denigrated in academic circles from the
midseventies until the mideighties. It has staged a strong comeback
since then, however. The main reason appears to be that Keynesian
economics was better able to explain the economic events of the
seventies and eighties than its principal intellectual competitor, new
classical economics."

"Thus, a rise in private saving should offset any increase in the
government's deficit. Na´ve Keynesian analysis, by contrast, sees an
increased deficit, with government spending held constant, as an
increase in aggregate demand. If, as happened in the United States,
the stimulus to demand is nullified by contractionary monetary policy,
real interest rates should rise strongly. There is no reason, in the
Keynesian view, to expect the private saving rate to rise."

"The massive U.S. tax cuts between 1981 and 1984 provided something
approximating a laboratory test of these alternative views. What
happened? The private saving rate did not rise. Real interest rates
soared, even though a surprisingly large part of the shock was
absorbed by exchange rates rather than by interest rates. With fiscal
stimulus offset by monetary contraction, real GNP growth was
approximately unaffected; it grew at about the same rate as it had in
the recent past. Again, this all seems more consistent with Keynesian
than with new classical theory.

Finally, there was the European depression of the eighties, which was
the worst since the depression of the thirties. The Keynesian
explanation is straightforward. Governments, led by the British and
German central banks, decided to fight inflation with highly
restrictive monetary and fiscal policies. The anti-inflation crusade
was strengthened by the European Monetary System, which, in effect,
spread the stern German monetary policy all over Europe. The new
classical school has no comparable explanation. New classicals, and
conservative economists in general, argue that European governments
interfere more heavily in labor markets (with high unemployment
benefits, for example, and restrictions on firing workers). But most
of these interferences were in place in the early seventies, when
unemployment was extremely low."


Keynes and the Great Depression
Even then, Keynes had a hard sell. Most economists of the era rejected
his idea and favored balanced budgets. Most politicians didn't
understand his idea to begin with. "Practical men, who believe
themselves to be quite exempt from any intellectual influences, are
usually the slaves of some defunct economist," Keynes wrote. In the
1932 presidential election, Franklin D. Roosevelt had blasted Herbert
Hoover for running a deficit, and dutifully promised he would balance
the budget if elected. Keynes' visit to the White House two years
later to urge F.D.R. to do more deficit spending wasn't exactly a
blazing success. "He left a whole rigmarole of figures," a bewildered
F.D.R. complained to Labor Secretary Frances Perkins. "He must be a
mathematician rather than a political economist." Keynes was equally
underwhelmed, telling Perkins that he had "supposed the President was
more literate, economically speaking."

As the Depression wore on, Roosevelt tried public works, farm
subsidies and other devices to restart the economy, but he never
completely gave up trying to balance the budget. In 1938 the
Depression deepened. Reluctantly, F.D.R. embraced the only new idea he
hadn't yet tried, that of the bewildering British "mathematician." As
the President explained in a fireside chat, "We suffer primarily from
a failure of consumer demand because of a lack of buying power." It
was therefore up to the government to "create an economic upturn" by
making "additions to the purchasing power of the nation."

Yet not until the U.S. entered World War II did F.D.R. try Keynes'
idea on a scale necessary to pull the nation out of the doldrums ? and
Roosevelt, of course, had little choice. The big surprise was just how
productive America could be when given the chance. Between 1939 and
1944 (the peak of wartime production), the nation's output almost
doubled, and unemployment plummeted ? from more than 17% to just over

Never before had an economic theory been so dramatically tested. Even
granted the special circumstances of war mobilization, it seemed to
work exactly as Keynes predicted. The grand experiment even won over
many Republicans. America's Employment Act of 1946 ? the year Keynes
died ? codified the new wisdom, making it "the continuing policy and
responsibility of the Federal Government promote maximum
employment, production, and purchasing power."
"Indeed, Keynes can lay claim to playing a crucial role in saving
capitalism and, perhaps, civilization during the Great Depression.
Despite millions of unemployed workers in the industrial nations,
economic orthodoxy demanded that government do nothing or, worse yet,
tighten the purse strings. Little wonder that the totalitarian
solutions of fascism and communism exerted such pull. U.S. Treasury
Secretary Andrew W. Mellon expressed a widespread sentiment among
elites when he said in 1930 that the Depression would "purge the
rottenness out of the system. High costs of living and high living
will come down. People will work harder, live a more moral life.
Values will be adjusted, and enterprising people will pick up the
wrecks from less competent people."

Keynes battled against such harsh counsel. With his landmark 1936
book, The General Theory of Employment, Interest, and Money, he
persuaded a generation of thinkers and leaders to abandon a
near-theological belief in balanced budgets. He showed how economies
could get trapped in recession or depression -- and argued that
government could break the spiral by borrowing to finance public
spending that stimulated consumer activity and restored business
confidence. His ideas helped create the golden era of postwar growth,
and two institutions he championed in the 1940s still operate on a
global scale, the International Monetary Fund and the World Bank."

Keynes' Influence Today

"Were Keynes alive today he would surely admire the vigor of the U.S.
economy, but he would also notice that some 40% of the global economy
is in recession and much of the rest is slowing down: Japan, flat on
its back; Southeast Asia, far poorer than it was just two years ago;
Brazil, teetering; Germany, burdened by double-digit unemployment and
an economic slowdown; and declining prices worldwide for oil and raw

In light of all this, Keynes would be mystified that the International
Monetary Fund is requiring troubled Third World nations to raise taxes
and slash spending, that "euro" membership demands budget austerity,
and that a U.S. President wants to hold on to budget surpluses. You
can bet Keynes wouldn't be silent. Dapper and distinguished as he was,
he'd enter the fray with both fists and a mighty roar."
"Keynes is the philosopher-king of the modern mixed economy. It's a
sign of his influence that there are no true believers in
laissez-faire left. We are all Keynesians now. Governments routinely
run deficits during downturns to increase the overall level of demand
and, hence, employment. And many economists believe Japan's long
stagnation in the 1990s largely reflected timid policymakers unwilling
to boldly use the levers of fiscal and monetary policy."
"Today Keynesian economics stands as the most influential economic
formulation of the 20th cent.; Keynes's ideas have appealed to both
practical politicians and theoretical economists with equal force,
perhaps because he attacked the real problems of national employment
and income while still remaining faithful to the requirements of
rigorous economic thought. Although he favored controlled investment
and an active public sector, he never wavered in his faith in the
capitalist market economy. In Keynesian theory, government action is
designed to stimulate the market, not to eliminate it."


Google Search Strategy

John Maynard Keynes today


Thanks for the question. Please ask for clarification if you need it. 

Anthony (adiloren-ga)
sandfla-ga rated this answer:5 out of 5 stars
Thanks bunchies!

Subject: Re: Keynesian Theory
From: moneymgr-ga on 25 Jul 2004 15:01 PDT
Are you a Democrat or a Republican?  Keynes would like our deficit,
but not the tax cuts...

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