Keynesian Model, History , Meaning

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The dominance of the Keynesian economy began to be shaken by the challenge of various economic schools from the 1970s. The rising unemployment in the inflation caused by oil-exporting countries coming together to raise oil prices has led to the questioning of the Keynesian economy.

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Brief History

The Keynesian economy, which emerged with the Great World Economic Depression of the 1930s, dominated the capitalist world without much challenge until the 1970s. Keynes ‘ teachings, especially economic growth models and other economic analysis tools, have long been the official political philosophy of many states.


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Key views of the Keynesian economy can be gathered around the following points:

1. The balance of employment in the economy is a coincidental balance and there is no guarantee that it can be maintained. Without the intervention of the state, the imbalance in the economy (unemployment) can be a constant situation.

2. In fact, prices and wages may not be flexible, especially downwards, as classical economists think, due to corporate regulations and non-economic reasons.

3. Every demand creates its own desire. Therefore, the main demand front. Economic stimulus and supervision can also be done with demand policies.

4. Policies such as budget equivalence, neutral taxation are not correct approaches. According to the conditions in which the economy is located, the state budget may be open or over-paid, increasing or decreasing rates of taxes may be preferred.

Reviving The Economy (Keynesian Theory)

The invisible hand, left to itself, would maximize employment and economic efficiency to an optimum level. Keynes is against it. He argues that in periods of economic decline, the decline in demand will cause the economy to shrink with a serious crisis and increase unemployment. The task of the government is to revitalize the economy. The government can do this by borrowing money to create employment in the official sector. By increasing cash in infrastructure projects ( e.g. road, rail, hospital and school construction). The decline in interest rates can stimulate the economy a little bit, even though it is not enough.

Reviving The Economy

According to Keynes, the government’s extra spending is spread across the economy. For example, construction of a new highway creates jobs for construction companies. That company’s employees spend money on food, goods, and services, which prevents the economy from entering the crisis. The key to Keynes ‘ argument is the idea of replicating.

Let’s say the Keynesian theory of U.S. government ordered a $ 10 billion aircraft carrier to shipbuilding company Northop Grumman. We can imagine that the impact of this is a $ 10 billion transfer to the economy. However, the effect will be much greater than the claim of reproduction. Northop Grumman will hire more people, profit more, workers will spend their money on consumer goods. Total economic efficiency will increase much more than the money transferred at first, depending on the average consumer’s ‘ tendency to consume‘.
In the case of inflation, high-income individuals who can change their income according to inflation ( sellers can play at prices, for example ) are profitable ones.

Workers and officers can’t change wages. Their losses are transferred to others as profits and income distribution is not fair.

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