Friday, 11 February 2011

Keynesianism for Dummies

Keynesianism is an influential economic theory developed by British economist John Maynard Keynes in the first half of the 20th century, according to which liberalism is not the answer in times of economical crisis. The market doesn't regulate itself, and the State needs to play an active role in the recovery. The State's role in this case is to reflate the economy.

The idea is simple: according to Keynes, wages regulate demand. The State must inject money into the economy in order to boost consumption. If wages go up, the demand will grow, and therefore the production will restart, which itself will create new jobs. If wages go down, it's the opposite scenario: unemployment, weak consumption & production. Keynes was also opposed to excessive saving, which was due to pessimistic speculation on the economy. It would then result in a climate of financial uncertainty and the consumption would be affected.

This theory refutes Say's law, or law of the market. Jean-Baptiste Say was a French economist born in the 18th century. The main idea in the theory is that if the product is a good quality product the demand will create itself, not needing the help of the State. Pumping money into the economy will just boost the inflation, it will not create a real demand.

"The production of commodities creates, and is the one and universal cause which creates a market for the commodities produced."
James Mill, Scottish economist

And here is a simple graphic that illustrates macroeconomics...


Chris Horrie said...

Very good.

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