Keynesian Economics

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John Maynard Keynes’ influence and ideology Even today John M. Keynes’ ideas remain crucial to the most important debate of our time: how can we escape from the economic crisis? Should governments borrow and spend their way out of trouble or slash spending and reduce the national debt? Despite Keynes’ avid support for the free market, his theory is one strongly based on the mixed-market economy. “Keynes said it was possible for governments to come in and make markets work better... Keynes saved capitalism from the capitalists.” - Prof. Joseph Stiglitz Keynes’ theory opposed Adam Smith’s metaphor of “the invisible hand” – which envisages a self-correcting economy, in the form…show more content…
* The advantage would come in the form of increased borrowing by consumers (as repayment would be lower than usual). * More borrowing would lead to more demand and spending on goods. * Since firms would also be able to borrow at a lower interest rate, they too would be willing to spend more, therefore would employ more people and allow supply to meet demand at equilibrium. * Higher employment would lead to more households having greater disposable incomes, again causing demand and consumption to rise (in this instance, possibly even without households borrowing more.) Large increases in government expenditure and investment into public projects (such as infrastructure) are also used in Keynesian theory. If government expenditure were to increase, more money would be injected into the economy through the creation of business opportunity, higher employment and demand. This rapid increase in investment is attainable through fiscal deficit – which Keynes believed (if done purposefully and methodically) would aid an economy in recession. The fiscal deficit would come as a result of the issuing of government bonds (the revenue from which would be used to fund the government’s injection into the economy.) The major drawback to this fiscal policy is the fact that the fiscal deficit would rapidly increase and eventually taxes would have to
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