What is Keynesian Economics? Implications for Pakistan

What is Keynesian Economics? Implications for Pakistan
Jim Probasco published article titled "Keynesian Economics: A Depression-era idea that's seen a resurgence in the 21st century "
Keynesian economic theory is a macroeconomic theory that advocates for increased government spending and lower taxes to stimulate demand.
Keynesian economics was a response to the Great Depression and a critique of classical theory, which suggests supply-side opportunities will correct the economy without government intervention.
Keynesian economics assumes that changes in demand are the prime influencers of output and employment.
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Keynesian economics is a macroeconomic theory developed by the British economist John Maynard Keynes amid the Great Depression in the 1930s. It posits that increased government spending and lower taxes stimulate demand and will pull an economy out of depression.
Known as "demand-side" theory, Keynesian theory suggests the primary factor that drives economic activity is the demand for goods and services. To spur demand, government policy is focused on direct intervention as a way to influence demand and prevent recession.
"The theory holds that during a recession, when consumers stop spending, the government should step in and spend to fill the void," says Dan North, chief economist at Euler Hermes. He points to government spending programs including the $2.2 trillion CARES Act that the government implemented in response to the COVID-19 pandemic as examples.
"Perhaps the most important part of those acts was to send money directly to individuals," Hermes says. "Those people then started to spend that money and the economy recovered - just as Keynes had predicted.
Principles of Keynesian economics
The central tenet of Keynesian economic theory is that government intervention can stabilize the economy.
The principles underlying this supposition include the following:
Demand is influenced by public and private economic decisions.
Prices and wages respond slowly to changes in supply and demand.
Changes in demand have the strongest short-term impact on output and employment.
Unemployment is subject to the whims of demand and therefore undesirable.
Active stabilization policy is required to reduce the volatility of the business cycle.
Inflation is less important than unemployment.
The history of Keynesian economics
The Great Depression was a time of tremendous financial uncertainty. US unemployment stood at 24%. Prevailing classical economic theory, which focused on economic growth and freedom based on supply-side marketplace competition and a hands-off approach, wasn't working.
In 1936, Keynes published, "The General Theory of Employment, Interest, and Money." In it, he argues that the notion markets tend toward full employment is false and that government intervention is needed to overcome issues of unemployment and recession. Keynes saw demand as key to full employment and the force that creates supply.
From 1933 to 1939, US President Franklin Delano Roosevelt adopted Keynes' economic theories in the creation of New Deal legislation. His intent was to reinvigorate the economy by stimulating consumer demand. This was accomplished by Keynesian-style deficit spending to promote economic growth. While the Keynesian approach was somewhat successful, massive government spending on World War II is what primarily rescued the economy.
During the period from 1946 to 1976, Keynesian economics became dominant. During the 1970s, Keynesian economics failed to explain how high inflation and unemployment, otherwise known as stagflation, could happen at the same time. This resulted in a retreat to classical economics from the mid to late 70s to 2008. Economists once again returned to Keynes during the global financial crisis in 2008. Since then, economic policy has been a mix of the two.
The topic covers in this video are:
What is Classical Economics?
What is Keynesian Economics?
Differences between Classical and Keynesian Economics
1. Government Role:
2. Full Employment Level
3. Micro and Macro Econ
4. Wage Cut
5. Interest Rates
7. Theory of Money and Output
8. Finance and Budget
9. Money Supply
Similarities between Classical and Keynesian Economics
1. Savings
2. Money Demand
3. Capitalist Economy
4. Effects of Technology in Job creation.
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