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School me on Keynesian Economics

Old 02-06-08, 11:10 AM
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School me on Keynesian Economics

I looked over the wikipedia article but haven't studied it completely yet. It's been a while since I took any econ class. I've read Economics in One Lesson which seems to be much more laisse faire (supply side I guess?). It makes sense to me. But there is so much support for Keynesian economics that there has to be some sense behind that too, right?

Can anyone help me out here and explain it in easy to understand language? How can raising the minimum wage not cause inflation?
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Old 02-06-08, 11:20 AM
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The cornerstone of Keynesian theory is a reversal of Say's Law -- in Keynes's view, demand creates its own supply. So if you raise the minimum wage (or lower interest rates), then yes, there will be more money out there creating inflationary pressure. But producers will want to capture that money, so they will flood into the market place, thereby neutralizing inflationary pressure.

To some degree, the Fed has been following Keynesian policies for the last few years -- cutting interest rates in an effort to stimulate borrowing (and spending), thereby stimulating the economy. Public works projects -- whereby the government pumps a lot of money into the economy in the form of wages -- are also a hallmark of Keynesian theory. Again, the idea is that if we decide to spend a few billion dollars on repairing all of our bridges, we'll need to hire a lot of unemployed or underemployed people, they'll get those billion dollars in the form of wages, they'll want to go buy widgets, widget factories and widget stores will spring up all over the land to meet the demand, and the economy will be pumping.
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Old 02-06-08, 02:15 PM
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Originally Posted by Venusian
I looked over the wikipedia article but haven't studied it completely yet. It's been a while since I took any econ class. I've read Economics in One Lesson which seems to be much more laisse faire (supply side I guess?). It makes sense to me. But there is so much support for Keynesian economics that there has to be some sense behind that too, right?

Can anyone help me out here and explain it in easy to understand language? How can raising the minimum wage not cause inflation?
The author of Economics in One Lesson wrote a great book on Keynesian economics:

The Failure of the "New Economics"
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Old 02-06-08, 02:25 PM
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I found this, which seems to explain it fairly well:
Keynes explanations of slumps ran something like this: in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a circular flow of money in the economy, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But suppose something happens to shake consumer confidence in the economy. (There are many possible reasons for this, which we'll cover in a moment.) Worried consumers may then try to weather the coming economic hardship by saving their money. But because my spending is part of your earnings, my decision to hoard money makes things worse for you. And you, responding to your own difficult times, will start hoarding money too, making things even worse for me. So there's a vicious circle at work here: people hoard money in difficult times, but times become more difficult when people hoard money.

The cure for this, Keynes said, was for the central bank to expand the money supply. By putting more bills in people's hands, consumer confidence would return, people would spend, and the circular flow of money would be reestablished. Just that simple! Too simple, in fact, for the policy-makers of that time.

If this is the proposed definition and cure for recessions, then what about depressions? Keynes believed that depressions were recessions that had fallen into a "liquidity trap." A liquidity trap is when people hoard money and refuse to spend no matter how much the government tries to expand the money supply. In these dire circumstances, Keynes believed that the government should do what individuals were not, namely, spend. In his memorable phrase, Keynes called this "priming the pump" of the economy, a final government effort to reestablish the circular flow of money.
http://www.huppi.com/kangaroo/Keynesianism.htm

Also,
<b>Keynesian economics</b>

body of ideas set forth by John Maynard Keynes in his General Theory of Employment, Interest and Money (1935–36) and other works, intended to provide a theoretical basis for government full-employment policies.

While some economists argue that full employment can be restored if wages are allowed to fall to lower levels, Keynesians maintain that employers will not employ workers to produce goods that cannot be sold. Because they believe unemployment results from an insufficient demand for goods and services, Keynesianism is considered a “demand-side” theory that focuses on short-run economic fluctuations.

Keynes argued that investment, which responds to variations in the interest rate and to expectations about the future, is the dynamic factor determining the level of economic activity. He also maintained that deliberate government action could foster full employment. Keynesian economists claim that the government can directly influence the demand for goods and services by altering tax policies and public expenditures.
http://www.britannica.com/eb/article...sian-economics
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Old 02-06-08, 02:40 PM
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Originally Posted by movielib
The author of Economics in One Lesson wrote a great book on Keynesian economics:

The Failure of the "New Economics"
or: http://www.mises.org/books/failureofneweconomics.pdf

i was looking more for pro-keynesian since i dont see how it could make sense having been brainwashed by economics in one lesson I might read this though
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Old 02-06-08, 11:04 PM
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Keynesian Economics is dangerous, in my opinion, and will only further drive society towards being totalitarian. Something not explicitly taught in schools is the idea of Military Keynesianism. Take the US government for example. The government spends more money each year on defense than every other category combined. If it wants to stimulate the economy by increasing spending, the government will thus stimulate demand by declaring war. This pattern has been typical in the economy for the past 70 or so years.
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Old 02-21-09, 06:19 PM
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Re: School me on Keynesian Economics

Originally Posted by Vandelay_Inds View Post
There are many problems with that. For one, the above often degenerates into hiring one person to dig a hole in the ground and another one to fill it up again. The disregard of utility and allocative efficiency makes it a very dangerous recourse.
Keynes' "digging holes" example is a bad one. Keynesian policy is better represented when the public program is to hire people to build-up infrastructure that can have benefits into the future (great example: the Tennessee Valley Authority, TVA).

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Old 02-22-09, 10:37 AM
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Re: School me on Keynesian Economics

Keynes explanations of slumps ran something like this: in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a circular flow of money in the economy, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But suppose something happens to shake consumer confidence in the economy. (There are many possible reasons for this, which we'll cover in a moment.) Worried consumers may then try to weather the coming economic hardship by saving their money. But because my spending is part of your earnings, my decision to hoard money makes things worse for you. And you, responding to your own difficult times, will start hoarding money too, making things even worse for me. So there's a vicious circle at work here: people hoard money in difficult times, but times become more difficult when people hoard money.
Isn't this antipathy towards savings part of the current problem? Isn't the credit-fueled growth of our economy Keynesianism enacted through private actors instead of the government?
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Old 02-22-09, 12:00 PM
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Re: School me on Keynesian Economics

This American Life has been running periodic stories about economic issues. The latest one, from a couple weeks ago, was on Keynes.
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Old 02-22-09, 12:06 PM
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Re: School me on Keynesian Economics

Originally Posted by Superboy View Post
This pattern has been typical in the economy for the past 70 or so years.
War profiteering is not an economic indicator, as it happens when things are good or bad. And it's been around much longer than the past 70 years.
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