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Can you explain Keynesian Economics?

What is Keynesian Economics explained in plain english?


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Theories are often named after the person who proposed it. One good example of this practice is Keynesian economics which is named for John Maynard Keynes. An economist from Britain who lived around 1883 to 1946, Keynes is notable for explaining the economic reason behind the Great Depression in a clear and simple way. His theory revolved around the idea that money moves in a circular fashion. Simply put, his theory states that when the spending in an economy goes up, the earnings go up as well and this leads to more spending and increased earnings. The British economist’s ideas actually resulted in several economic policies that were aimed at stopping the effects of the Great Depression.

According to Keynesian economics, the amount a person spends becomes someone else’s earnings. When that someone uses his or her earnings, he or she then supports another person and so on and so forth. This goes around in circles and becomes the foundation for a working and stable economy. During the time of the Great Depression, people naturally hoarded their money instead of spending it. This put a halt to the cycle of spending money and supporting another person and according to Keynes' belief, was the reason for the arrested economy.

Keynes’ proposed solution to this problem was for the government itself to jumpstart the economy. The economist further argued that the government can increase the amount of spending either by doing the actual buying or by augmenting the supply of money. This idea was understandably scoffed at during the Depression. But some historians believe that Keynes’ idea did help breathe new life to the American economy when Franklin Roosevelt focused most of the country’s funds to building up the country’s defense.

In Keynesian economics, the general idea is for the government to help in bailing out the economy. Keynes’ idea was quite revolutionary since it was such a big change from the accepted thought of the time, the laissez-faire system. In the laissez-faire system, the government was excluded from participating in the market. The idea was a free market would find its own equilibrium.

The idea of a free market had its own advocates. The Austrian School of Economics was one avid supporter of the idea and its founder, Friedrich von Hayek, had an ongoing rivalry with Keynes over their contrasting ideas.

One red flag in Keynesian economics is saving a lot but not spending or consuming enough. Keynes’ teaching also believes in redistributing wealth when necessary. There’s actually a very logical reason for this. The idea is if given money, the underprivileged are more inclined to spend it, thereby infusing money into the economy. Another key idea of Keynes is the belief that the prevailing trends in macroeconomics will unduly affect how consumers behave at a base level.
Nov 5th, 2012 at 7:51 PM
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