John Maynard Keynes quotes when the facts

John Maynard Keynes: His Analyzes & Theories

importance: Namesake for Keynesianism

plant: most important economist of the 20th century

Great Depression: Views shaped; Skepticism towards traditional economic policy reinforced

Advancement: Control of macroeconomics by the state

instrument: demand-oriented fiscal policy

criticism: Economic theory of "debt policy

2008 financial crisis: has led to the popularity of Keynesianism again

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John Maynard Keynes was born on June 5, 1883 in Cambridge, England. He died on April 21, 1946. The British economist, politician and mathematician is one of the most important economists of the 20th century. Keynes is the founder of Keynesianism and is still involved with his theories today economic and political discussions and decisions present. John Maynard Keynes studied mathematics, philosophy, history and economics at the University of Cambridge. He wrote his doctoral thesis on probability theory.

After his civil service in London and a position in the India Office, he taught economics at King’s College, Cambridge University until his death. Unlike his colleagues, he used a lot less mathematical formulations in his theories. He was skeptical of the neoclassical economists who used mathematics to illustrate economic theories.

In 1936 his book “General Theory of Employment, Interest and Money. With this book, Keynes tried, shaped by the global economic crisis, to convince his colleagues of the necessity of a fundamentally new macroeconomic economic theory. In his view, the state should, in contrast to the laissez-faire market economy (no intervention by the state in economic activity) decisive economic policy role play. His book changed macroeconomics forever. It is still considered the most influential work of economics of the 20th century to this day. Keynes' ideas established today's Keynesianism.

Definition of Keynesianism: Interventionist economic policy of the state

At its core, John Maynard Keynes' theory assumes that the self-regulation of the market does not automatically ensure full employment. For this reason, according to Keynes, the Stabilization of the overall economic development and the compensation of economic fluctuations Tasks of the state. According to the economist, the state should stimulate overall economic demand. By acting countercyclically, the natural cyclical fluctuations in supply and demand, the economic fluctuations, would be balanced out.

As a rule, an economic cycle consists of four phases: First, there is an upswing, which culminates in a boom or a boom. This is followed by the downturn and finally the recession. Keynes sees wage and price cuts as the wrong way to revive employment. For him, an economic downturn lies in the lack of demand for capital goods, which is supposed to be boosted by low interest rates. If the demand nevertheless remains low, the state should cover the lack of private demand through a state demand replace. This will stimulate the economy and create jobs. In return, a debt policy can be pursued that accepts increased inflation. The economic downturn is to be absorbed through targeted subsidies, tax cuts and investments. In successful economic times, reserves should then be built up and debts paid off. In this way, the state creates monetary policy leeway again for times of crisis.

According to Keynes, in terms of an active state economic policy, a depression can be overcome by stimulating investment. Especially after the Second World War, Keynesianism gained widespread use in the practical politics of many countries. Until 1970, Keynesian economics was the predominant economic doctrine. However, problems in the practical implementation and the theoretical criticism mainly carried out Representatives of monetarism Towards a turn away from Keynesianism in the late 1970s. Not only in Germany, fiscal policy is still strongly influenced by John Maynard Keynes. In times of the banking and financial crisis, his economic theories on countercyclical fiscal policy are also gaining in influence in the USA.

Keynesianism vs. Classical Economic Theory

Before Keynes published his work, classical economic theory was the predominant doctrine. Adam Smith advocated free trade without government intervention. In this respect he is considered to be the most important representative of this theory, which also includes the Political economy established as a science should have. According to Smith, there is a natural balance in the economy - created by the selfishness of every individual. Smith turned away from mercantilism.

Representative of mercantilism, emerged at the time of absolutism, for their part vehemently advocated state intervention in the economy. In this respect, John M. Keynes orientated himself on this basic idea of ​​mercantilism and expanded it further by focusing the overall economic demand.

Keynesianism vs. supply-side fiscal policy

The Keynesian intervention policy of the state becomes “demand-oriented fiscal policy called. In contrast, there is the “supply-oriented fiscal policywhich represents a departure to Keynes. It is more based on monetarism, where the Money supply as a decisive factor for economic stability applies. Supply-side economic policy is based on the assumption that an improvement in the supply side can determine employment and growth in an economy. The demand side is ignored. There is no intervention on the part of the state.

According to the representatives of supply-side fiscal policy, the instabilities of the market cannot be explained by the private sector, but by government intervention. Supply policy measures also include a monetary policy to avoid inflation. As with monetarism, proponents of supply-side supply policy reject state support through subsidies and investments. This would reinforce economic fluctuations.

Companies benefit from a supply-oriented fiscal policy

Supply-side fiscal policy is based on neoclassical economic theory. The production of goods automatically represents a balance between supply and demand. A high supply of goods means at the same time a high demand for goods. Companies in particular benefit from this perspective, which is part of the modern supply-side fiscal policy were taken over. In order to be able to achieve higher profits, numerous measures are taken in favor of companies. This can mean lowering corporate taxes.

However, funding is also provided in the areas of research and development or measures for deregulation (such as reducing bureaucracy) are implemented. In terms of fiscal policy, the Lower government spending and a reduction in new borrowing in focus. These reliefs should lead to more investment, create more employment and thus further stimulate the economy.

Critical approach to supply-side fiscal policy

Keynes criticized the supply-side economic policy. He denied that in anticipated times of crisis low interest companies too more investment would be tempting if the profit expectations were too low. The consequence would be increased unemployment despite an existing market equilibrium (after Keynes: equilibrium with underemployment).

The Danger to welfare state structuresthat are not supported by supply-side policies should not be underestimated. Nevertheless, the supply policy is well received by many economists. Whether a supply-oriented or a demand-oriented spending policy is the solution in times of economic crisis remains a controversial question among economists.

The main features of Keynesianism

In contrast to the Scottish economist Adam Smith, Keynes did not see the economy as a closed system in which a natural equilibrium applies. He focused that aggregate demand as a decisive and meaningful variable. According to Keynes, this is rather unstable and must be stimulated by the state in times of recession. In this way, a stable economy could be made possible.

In this respect, Keynes also speaks in favor of one Deficit financing (deficit spending). In this context, the state accepts debt in times of crisis in order to make investments. The aim is to increase demand and stimulate the economy to end the recession. Ideally, this deficit will be balanced out again during the next boom or boom. Keynes' theory served in Germany as the basis for the objectives within the Stability and Growth Act of 1967.

Deficit financing: Deficit spending according to Keynes

If investments decrease and fewer new loans are taken out, there is a severe collapse in the demand for goods. One reason for frugality is often real interest rates too high. If you spend your money in such times, you lose. Those who keep it gain purchasing power. If the population and companies sit on their money instead of spending it, then logically less will be bought. This fact ensures full stocks and leads to a decrease in production.

The consequences are layoffs and rising unemployment. The basic requirements for deflation and a recession are thus in place. Keynes ’way out of this vicious circle is deficit financing, which is supposed to free affected states from deflation. That plays a decisive role Government. In contrast to supply policy, in which companies have the majority of decisions, here politics should take the reins in hand.

Usually, a country then takes on new debt and awards contracts to companies. An artificial demand is created that theoretically does not exist, but is realized by the government. New orders mean increasing production and new jobs. The consequence is supposed to stimulate the economy. These approaches can counteract the recession. If more people have a job, it increases Average income. If more is earned, more can be spent. If this pattern works as planned, it can save a country from deflation and generate increased economic growth.

The catch is that the state will only support certain industries. In principle, the construction and defense industries benefit from government funding. In 2019, for example, the real estate market will receive particular support in the USA because it is an important pillar of the American market economy. Other industries go away empty-handed. In addition, the high government spending to a Over-indebtedness and inflation being able to lead. That is why there are many critics who are of the opinion that Keynes' concept cannot fundamentally prevent an economic crisis. To make matters worse, a state seldom reduces its debts when the economy is doing well. On the contrary: new debts are incurred, just a little less.

With the debt crisis in the EU and the US, the subject could not be more topical at the moment. The decision-makers in the background usually support Keynesianism. But the Resistance is increasing and numerous professors have already publicly opposed it. At the same time there are prominent opposition such as from Paul Krugman, professor at Princeton University and possible successor to Ben Bernanke as FED chairman. Krugman is one of the most famous proponents of the Keynesian model and teaches it in his courses.

Liquidity trap in the Keynes theory

The Keynesian liquidity trap describes a situation in which little money is available to the economic cycle because investments and financial investments are avoided. This situation is particularly complicated because the monetary policy of the central banks can have little influence on developments. Contrary to the monetary policy objectives, an increase in the money supply does not stimulate the economy. Rather, the additional money is saved for later investments. In the liquidity trap, the official interest rates so close to zerothat there is no longer any incentive for potential investors to invest in the long term. The background to this is the relationship between the price of interest-bearing securities and the interest rate level. When interest rates are low, the rate is usually relatively high. When interest rates rise, the rate falls.

Since investors are expected to rise again in the future in the low interest rate situation described, it is assumed that exchange rates will fall in the future. This makes it seem more promising for investors to postpone longer-term investments in order to a higher return in the future to achieve. As a result, the liquid money is either saved initially or invested in the short term. If an economy finds itself in the liquidity trap, there is no incentive to invest despite low interest rates. A further rate cut is hardly possible.

Since the liquidity trap is assumed to be accompanied by deflation, or at least expected deflation, this could offer a solution. Since the price level falls during deflation, there are hardly any incentives to invest. Inflation, on the other hand, can be an incentive to invest. True to the motto: Better buy today than pay more tomorrow. This would stimulate the economy, more money would come into the economic cycle and saving would become less attractive. If investors expect inflation, it will rise Willingness to invest. An increase in the money supply could do this, but it is not a guarantee. There is a risk that the additional money will be saved in order to make investments later, at a supposedly more favorable time.

Keynesian Phillips curve

Keynes' core theses deal with the connection between high employment and a correspondingly high demand for goods. The Phillips curve, which was only developed after his death, is based on Keynes theories opposite relationship between unemployment and inflation examined. The Keynesian interpretation of the Phillips curve states that the state can trigger long-term employment effects through its fiscal policy, but must accept rising inflation in the process.

The Keynesian view that government intervention seems inevitable in times of economic downturn is reflected in the crisis-ridden economic times of recent years. An example from the past: Although it was clear that the government's economic recovery cannot last forever, the economic stagflation of the 1970s came as a surprise to the Keynesians. This condition is with one Economic stagnation with high inflation at the same time. Rising unemployment led to a high rate of inflation, which many economists attribute to the loose monetary and fiscal policy of the time.

According to this, Keynes theses cannot be applied in the long term if monetary and fiscal policy becomes excessive. Keynes recognized this problem during his lifetime, and in his opinion more and more help Stimulation of the economy not in the long run. This aspect should be kept in mind when referring to Keynes and the Phillips curve. The decision whether higher employment can offset the disadvantage of a high inflation rate must be made at any time by politicians and economists. In particular, the demand-oriented economic policy of the USA will show how long Keynes theses should be applied in economic policy.

Keynesianism vs. Monetarism

Keynesianism and monetarism are two fundamentally opposing economic policy theories. Monetarism was known in the 1960s and 1970s as Counter-draft developed to Keynesianism. Since then, there has been an ongoing discussion about how these two concepts work. Past and present economic policy is always based on Keynesianism or monetarism.

Monetarism: The theory of controlling the money supply

Monetarism is an economic doctrine and goes back to the American economist Milton Friedman (1912 to 2006). Representatives of monetarism assume that the Money supply is the most important factor for controlling the economic process is. The money supply should be controlled by the central banks and, if possible, should be increased with the growth of an economy without fluctuations. This should prevent economic fluctuations and ensure steady economic development.

According to the economic policy conception of monetarism, excessive expansion of the money supply leads to inflation, and excessive regulation of money supply growth leads to deflation.State intervention in the economy, such as the anti-cyclical economic policy demanded by Keynesianism, is fundamentally rejected by the monetarists. According to the monetarists, the basis for stable economic development is thisSelf-regulating power of the market over supply and demand. Monetarism was particularly popular in the late 1970s as an alternative to Keynesianism.

State intervention in comparison: Keynesianism & monetarism

In Keynesianism, recession (slowing down of the economy) is paid for with increased government spending. In order for the national debt not to grow immeasurably, the state has to have its own Reduce spending in times of economic boom. Then national debt should be reduced and money saved for interventions in times of downturn. The state theoretically closes both deflationary and inflationary gaps. In reality, however, this is difficult to do. Political factors make it difficult for states to reduce government spending in times of economic boom. Government parties have a high incentive to satisfy their voters in the short term. Taking austerity measures in times of economic downturn rarely meets with the enthusiasm of voters.

In the real economy, both Keynesian and monetarist economic policies are difficult to implement in their respective pure forms. Real economic cycles cannot be comprehensively represented by models: Too many variable factors play a role. Monetarism, for example, assumes that the amount of money can be fully controlled. However, this is not possible in reality. The amount of money also depends on the behavior of commercial banks, businesses and consumers.

In Keynesianism, in addition to the unwillingness of governments to reduce national debt in times of economic boom, there is also the“Crowding-out effectadded. With the artificially generated public demand, the state displaces private demand. This increases prices and interest rates. There is a dependency between state and economy. The tasks that the state took over during the recession cannot be transferred back to the market.

The state is thus entering a vicious circle. The state alone is not in a position to control the economy, and neither can the market alone. Neither that Self-healing power the markets nor the “deficit spending” are panacea for defusing economic crises. The solution is sustainability through personal responsibility. In financial and economic matters, the state and the citizens must weigh decisions carefully and plan for the long term.

Positive Critique of Keynesianism using the example of the “New Deal

The Keynesian economic policy experienced its greatest hours, especially in times of crisis, when it was important to restore economic stability. The “New Deal” is a prime example of thiswho is in the 1930s went down in US economic history under Franklin D. Roosevelt.

The New Deal was a comprehensive package of economic policy measures that pulled the US economy out of the Depths of the Great Depression resurrected. A positive criticism of Keynesianism is that the method is particularly effective when drastic measures on the part of the government are necessary. Short-term crisis management and a limitation of unemployment could quickly be guaranteed by the government in the event of an economic collapse.

Negative Keynesianism criticism: high debts, higher taxes

In the long term, Keynesianism made itself unpopular because of the financial injection from state funds considerable holes in the government budget ate. These could not be replenished so quickly with the strictest austerity measures. Keynes' critics such as the economist Milton Friedman particularly criticized them Debt-makingthe consequences of which the subsequent governments inevitably had to grapple with long after a recession. For Keynes, this national debt was the price paid for an ideal balance of the economy. The kind of equilibrium Keynes sought could not be achieved under the normal conditions of the free market economy.

The Austrian economist Friedrich August von Hayek criticized Keynesianism with devastating criticism. In the course of his career he became, among other things, economic policy advisor to Margaret Thatcher and thus indirectly has thegreat economic liberalism movement in Great Britain set in motion. This was characterized by the fact that the service sector in particular was promoted with minimal financial policy intervention and consumers were encouraged to think entrepreneurially.

Keynesianism Today: Revival Thanks to Crisis

In contrast to theory, Keynesianism developed differently in practice than expected: the state's economic stimulus programs had a time-delayed effect and were thus pro- instead of anti-cyclical, which meant that the hoped-for effect did not materialize. In addition, the national debts borrowed were not paid off in times of economic boom and thus continued to rise. Likewise put that Phenomenon of stagflation Keynesianism faced a seemingly insoluble problem.

Despite numerous critical voices, Keynes' theses are of great importance in times of economic crisis. When investment stagnates and overall economic demand falls, Keynes' theories become as relevant as they were in the crisis or economic crisis of the 1930s. Central banks react in times of crisis with a excessive money supply and low interest rates. The aim is to create incentives for more investments that increase production and the employment rate. However, these measures can fizzle out completely if the additional money is not spent but saved. There is no buying effect on the economy and the measures lose their effect. In order to counteract saving, the state should step in and stimulate demand through subsidies and investments. This basic principle of Keynesian fiscal policy still determines financial policy in many places today.

In the context of the financial crisis of 2008, Keynesianism has a chance of a revival: Because Keynes had brought about the timeless idea of ​​separating the real economy and the financial economy. His instinctive distrust of speculative transactions on the stock exchanges and in banks has contributed to his having the Collapse of the financial market to a certain extent: Keynes indirectly advocated that private investors should secure their investments with real assets - this is particularly interesting in times of crisis. So you can go from the Keynesian “compulsion to control learn something else: personal responsibility and prudence in dealing with your own financial budget, be it on a national or private level, instead of blind trust in the self-healing powers of the market.

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