Question

What were Maynard Keynes' economic perspectives? Do you agree/disagree?

Answer 1

First of all, we quickly get to know about Maynard Keynes so that there will be no problem in understanding their theory.

Who was John Maynard Keynes?
John Maynard Keynes was an early 20th-century British economist, known as the father of Keynesian economics. His theories of Keynesian economics addressed, among other things, the causes of long-term unemployment. In a paper titled "The General Theory of Employment, Interest and Money," Keynes became an outspoken proponent of full employment and government intervention as a way to stop economic recession. His career spanned academic roles and government service.
Who was John Maynard Keynes?
John Maynard Keynes was an early 20th-century British economist, known as the father of Keynesian economics. His theories of Keynesian economics addressed, among other things, the causes of long-term unemployment. In a paper titled "The General Theory of Employment, Interest and Money," Keynes became an outspoken proponent of full employment and government intervention as a way to stop economic recession. His career spanned academic roles and government service.

The most basic principle of Keynesian economics is that if an economy's investment exceeds its savings, it will cause inflation. Conversely, if an economy's saving is higher than its investment, it will cause a recession. This was the basis of Keynes belief that an increase in spending would, in fact, decrease unemployment and help economic recovery. Keynesian economics also advocates that it's actually demand that drives production and not supply. In Keynes time, the opposite was believed to be true.

With this in mind, Keynesian economics argues that economies are boosted when there is a healthy amount of output driven by sufficient amounts of economic expenditures. Keynes believed that unemployment was caused by a lack of expenditures within an economy, which decreased aggregate demand. Continuous decreases in spending during a recession result in further decreases in demand, which in turn incites higher unemployment rates, which results in even less spending as the amount of unemployed people increases.

Keynes advocated that the best way to pull an economy out of a recession is for the government to borrow money and increase demand by infusing the economy with capital to spend. This means that Keynesian economics is a sharp contrast to laissez-faire in that it believes in government intervention.

The aggregate equations that underpin Keynes's “general theory” still populate economics textbooks and shape macroeconomic policy. ... Having said this, Keynes's theory of “underemployment” equilibrium is no longer accepted by most economists and policymakers. The global financial crisis of 2008 bears this out.

He is wrong in claiming that Keynesian economics works, and he is wrong is claming that it is the only option. ... This is why free market policies are the best response to an economic downturn. Lower marginal tax rates. Reductions in the burden of government spending.

Borrowing causes higher interest rates and financial crowding out. Keynesian economics advocated increasing a budget deficit in a recession. However, it is argued this causes crowding out. For a government to borrow more, the interest rate on bonds rises. With higher interest rates, this discourages investment by the private sector.
Resource crowding out. If the government borrows to finance higher investment, the government is borrowing from the private sector and therefore, the private sector has fewer resources to finance private sector investment.
Inflation. A problem of fiscal expansion is that it often comes too late when economy is recovering anyway and therefore, it causes inflation.The difficulty of predicting output gap. An assumption of Keynesian economics is that it is possible to know how much demand needs to be increased to deal with output gap. However, the output gap can vary. For example, if there is an unexpected fall in productivity then the negative output gap may become very low – despite low rates of economic growth. In this situation, the appropriate response is not increasing demand, but supply-side reforms to boost productivity.
Ricardian equivalence. This is an argument that if the government pursue expansionary fiscal policy e.g. cutting taxes financed by borrowing, then people will not spend the tax cut – because they believe that taxes will have to rise in the future to pay off the debt, therefore, expansionary fiscal policy has no effect.
Encourages big government. In a recession governments increase spending, but, after recession government spending remains leading to high tax and spend regimes. Milton Friedman quipped ‘nothing was so permanent as a temporary government programme.” Government spending projects may be designed for the short-term, but once started it creates powerful political pressure groups who lobby the government to hold onto them.
Time Lags. It takes a long time to change aggregate demand by the time AD increases it may be too late and it leads to inflation.
Break-down of Phillips Curve trade-off. In the 1950s and 60s, Keynesian demand management was in vogue – as governments appeared to have a choice between unemployment and inflation. However, in the 1970s, there was a period of stagflation (higher inflation and higher unemployment). It appeared to critics of Keynesian demand management, that policies to boost demand were only aggravating inflation and not reducing unemployment in the long-term. To Monetarist critics, such as Milton Friedman, the better policy was to target low inflation – and accept there may be a temporary period of unemployment. Friedman and other ‘supply-side economists’ tended to focus on supply-side reforms to increase market efficiency and reduce imperfections in labour markets (such as minimum wages and labour markets).