Keynesian economics
Keynesian economics, often called Keynesianism, is an economic theory named after British economist John Maynard Keynes. It emerged as a response to the limitations of classical capitalism, particularly during times of economic crisis, such as the Great Depression of the 1930s. Keynesianism emphasizes the role of government intervention to promote economic stability and growth, particularly through public works projects aimed at reducing unemployment. The theory argues that during economic downturns, when private sector job creation falters, governments should step in as employers to stimulate demand and facilitate recovery.
Central to Keynesian thought is the "multiplier effect," which suggests that providing jobs for the unemployed leads to an increase in consumer spending, thereby boosting the economy. It also posits that government should play a more active role during recessions, while stepping back in times of prosperity. The philosophy gained prominence in the U.S. during the New Deal era under President Franklin D. Roosevelt, and it significantly influenced economic policies until the rise of neoliberalism in the 1980s. In contemporary discussions, Keynesian approaches have resurfaced during economic crises, such as the financial meltdown of 2008–2009, sparking ongoing debates about their effectiveness compared to neoliberal policies.
Keynesian economics
Keynesian economic philosophy (often simply referred to as Keynesianism) is one of two general approaches toward capitalism that the US government has used over the course of the nation’s history. The other major approach toward capitalist economics is known as classic capitalism or neoliberalism. Political figures, economists, scholars, and the general public continue to debate which economic philosophy with its accompanying policies is more desirable and effective at promoting a strong, vibrant economy and long-term economic growth. Both philosophies recognize and promote the private ownership of industries by individuals and the pursuit of profit.
Background
Keynesian economic theory is named after the twentieth-century British economist John Maynard Keynes, whose basic philosophy regarding economics was that the law of supply and demand, in and of itself, does not ensure the full employment of a nation’s citizens. Unemployed citizens constitute a potential workforce, so when citizens lack employment, a nation does not achieve its full labor productivity—thereby impeding its own maximum economic growth and prosperity. If privately owned businesses and industries do not hire workers in sufficient numbers to reduce unemployment to negligible levels, Keynes argued, the state/government should intervene and take on the role of employer by creating public works projects (such as infrastructure spending on road construction, bridge repair, and environmental cleanup) and hiring unemployed citizens as the workforce for these projects. Keynes urged that if the government cannot finance such projects through its already existing tax base, it borrow the money and repay the loans once the economy improves.
The heart of Keynesian economic theory is what is referred to as the multiplier effect, which advocates that the best way for a nation to grow its economy is through the full employment of all potential workers. The idea asserts that if businesses are not hiring workers, the state (through a public works project) hires unemployed citizens, thereby providing them with a job through which they will earn wages. These newly employed workers will, in turn, spend their wages on food, utilities, transportation, leisure/recreation, and other expenses run by privately owned businesses, thereby increasing the profits of those businesses and stimulating economic growth. This economic growth will eventually lead businesses to start hiring workers again. Additionally, the newly employed workers will be paying taxes through wage deductions and sales taxes on items they purchase, thereby increasing the tax base. Keynes advocated that the state intervene in the economy during periods of economic downturns and ease up on its intervention during periods of economic prosperity, because businesses tend to hire fewer workers or lay workers off during bad economic times, while hiring more workers when the economy is booming.
Topic Today
The United States and Great Britain embraced Keynesianism during the nations’ economic struggles of the 1930s amid the Great Depression, in which both societies experienced massive unemployment. In the United States, the New Deal policies of President Franklin D. Roosevelt were heavily influenced by Keynesian ideals, as reflected in the National Industrial Recovery Act of 1933, which authorized Roosevelt to create the Public Works Administration (PWA). The PWA hired unemployed Americans as a labor force to carry out public projects. As part of the New Deal, the US government established Social Security as a pension plan for retired Americans over the age of sixty-five and Aid to Families with Dependent Children (AFDC), under which the state provided food and money to assist unemployed or low-income parents with child-rearing duties.
The embracing of Keynesianism from the 1930s through the 1970s marked a significant shift in US history, as the dominant economic philosophy from the nation’s founding up until the Great Depression had been that of classic (or laissez-faire) capitalism. Classic capitalism, as articulated in 1776 by Scottish economist Adam Smith in his famous work The Wealth of Nations, strongly discouraged government intervention in the economy by arguing that state attempts to regulate industries or levy taxes on businesses undercut the private pursuit of maximum profit and thereby impeded economic growth. The economic devastation of the 1930s led many to question both the morality and effectiveness of classic capitalism on the lives of workers, fostering a fifty-year period in which Keynesian principles became the cornerstone of US economic policies. Since the 1980s, however, elected officials of both major US political parties have more wholeheartedly embraced the principles of classic capitalism (now termed neoliberalism)—once again through policies such as free trade agreements (such as the North American Free Trade Act [NAFTA]), the deregulation of telecommunications and other industries, and the lowering of tax rates on businesses and wealthy individuals through the implementation of “supply-side” or “trickle-down” economic policies. These policies contend that businesses and the wealthy, if their taxes are lowered, will invest more capital into industries, which, in turn, leads to more hiring.
Economists continue to debate the effectiveness of both Keynesianism and neoliberalism in fostering the nation’s economic growth, and each side is capable of presenting evidence for its position. Amid the global financial meltdown of 2008–2009, the United States invoked limited Keynesian approaches once again in the forms of the economic stimulus packages of President George W. Bush and President Barack Obama. Bush’s Economic Stimulus Act of 2008 consisted of issuing tax rebate checks (typically $300 or $600) to working taxpayers, while Obama’s American Recovery and Reinvestment Act of 2009 allocated federal money for various public works projects across the nation. Economists differ in their interpretations of the effectiveness of these measures. Conservatives often point out that these Keynesian approaches did not end the recession and the nation’s unemployment rate remained at about 8 percent for the next three years. Liberals contend that the scope of these stimulus acts was far too small, given the severity of the 2008–2009 economic downturn.
As a response to the COVID-19 pandemic of 2020, the US government relied on the principles of Keynesian economics to help families and stimulate the economy. One approach the government took was to issue stimulus checks to families below a certain income. President Joe Biden passed the $1.9 trillion American Rescue Plan as a response to the economic crisis caused by the pandemic.
Bibliography
"American Rescue Plan." The White House, www.whitehouse.gov/wp-content/uploads/2021/03/American-Rescue-Plan-Fact-Sheet.pdfAccessed 15 Jan. 2025.
Cassidy, John. “The Demand Doctor: What Would John Maynard Keyes Tell Us to Do Now—And Should We Listen.” The New Yorker, 10 Oct. 2011, www.newyorker.com/magazine/2011/10/10/the-demand-doctor. Accessed 15 Jan. 2025.
Ferrara, Peter. “Obamanomics: The Final Nail in the Discredited Keynesian Coffin.” Forbes.com, 12 July 2012, www.forbes.com/sites/peterferrara/2012/07/12/obamanomics-the-final-nail-in-the-discredited-keynesian-coffin/. Accessed 15 Jan. 2025.
“Keynesian Economics in a Nutshell.” Maynardkeynes.org, www.maynardkeynes.org/maynard-keynes-economics.html. Accessed 15 Jan. 2025.
Kottak, Conrad. Mirror for Humanity: A Concise Introduction to Cultural Anthropology, 7th ed. New York: McGraw-Hill, 2010.
Krugman, Paul. “Keynes Was Right.” New York Times, 29 Dec. 2011, www.nytimes.com/2011/12/30/opinion/keynes-was-right.html. Accessed 15 Jan. 2025.
Montgomerie, Johnna. "COVID Keynesianism: Locating Inequality in the Anglo-American Crisis Response." Department of European and International Studies, 23 Jan. 2023, doi.org/10.1093/cjres/rsad003. Accessed 15 Jan. 2025.
Wasik, John. Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist. New York: McGraw-Hill, 2013.
Wolff, Richard, and Stephan Resnick. Contending Economic Theories: Neoclassical, Keynesian, and Marxian. Cambridge: MIT Press, 2012.