Hayley White

Mr. Szychta
September 23 2014
Economics

Critique of John Maynard Keyness Economic Approach

Introduction

John Maynard Keynes is one of the most influential economists in the 19th century. He
was a Professor in Economics at Cambridge University, and he served as an economic adviser to
the British Treasury during both World Wars. He is considered the creator of macroeconomics
after publishing The General Theory of Employment, Interest, and Money" in 1936. The book
contained innovative ideas to help the government deal with different economic issues. His book
was considered 'to have rescued the capitalist system from falling (Skidelsky R. 2009).

'Keynesian Economics'

Keynes's economic approach was so influential that it was also known as the Keynesian
economics which analyzes relationships among demand, production, and unemployment.
Keynesian economics also include Keyness solution to stimulate a weak economy through
combination of two approaches; a reduction in interest rate which is known as monetary policy,
and governments spending in infrastructure - the fiscal policy.

In general, low wage-rates would have higher employment levels, but during a weak
economy this theory does not apply. When the economy is under recession and employers facing
low demands for their goods and services, Keynes thought in order to solve the unemployment
issue, the government should spend money. When traditional methods of economic stimulus
fail, use the government as a last resort, and use it forcefully (Keynes, cited in Bolotta, Hawkes,
Mahoney & Riper, 2002). During economic recession when demands are low and production
could not be increased among private business, Keynes's idea of government intervention
became helpful.

This report will focus on Keynes's Fiscal Policy and how the policy affect modern day
economy.

Impact of Keynes's Fiscal Policy

The fiscal policy can be defined as a policy through which the government attempts to
achieve certain economic objectives by changing its revenue and/or its expenditure. (Slavin S,
1999) In other words, the fiscal policy aims for high employment and stable prices. According to
Keynes, fiscal policy can also be classified as expansionary or contractionary. The effect of
expansionary fiscal policy refers to situations where the government would increase spending or
reduce taxation. In the contrary, the government would reduce its spending and increase taxation
under a contractionary fiscal policy. During the Great Depression the world was demanding that
their governments do something to end the depression. Keynes suggested that the government
follow his two-word policy prescription: spend money.

In 1933, Keynes's published another book The Means to Prosperity. It gave specific
suggestions to tackle unemployment during the global recession. Since the book had
recommendations to other nations, a copy was sent to all leaders around the world including U.S.
President Roosevelt. Roosevelt found a lot of Keynes's advices helpful. In 1933, Keynes's
published another book The Means to Prosperity. It gave specific suggestions to tackle
unemployment during the global recession. Since the book had recommendations to other
nations, a copy was sent to all leaders around the world including U.S. President Roosevelt.
Roosevelt found a lot of Keynes's advices helpful.

During the Great Depression of 1929-1932, the unemployment rate continued to rise and
production fell. Franklin Roosevelt had to keep his promise before he was elected as the
President; that is the government would do anything to bring economic recovery. President
Roosevelt then took Keynes's idea to spend money, and used it as a blueprint to create massive
spending programs of his new deal. Having to produce supplies for the Second World War, the
government was able to create new jobs and spent money on the people.

Applying Keynesian Economics to modern days economy

Despite of the impacts from the Keynesian economics towards the economy during the
Great Depression;

some criticized we have continued following the Keynesian dictum -

perhaps blindly. (Slavin S, 1999).

For instance, in 2013 the government was forced to shut

down temporarily in the U.S., because the two major parties in the U.S. Congress - the
Republicans and the Democrats could not agree on the government budget to be approved for the
fiscal year. Such disagreement resulted to a funding gap between the two parties. According to
NBC news, The shutdown was also reflected in government's over-spending at the time.
(James S, NBC News 2013). The budget was not approved because the government was
spending beyond their capability, more spending would mean larger national debt.

Critique and conclusion

Overall I believe that Keynes's approaches work in many economic situations. His idea
for government intervention had helped the American economy recovered from the Great
Depression.

With different views from the classical Laissez-faire economics whereby the

government played minimal role in the economy, Keynes believed that government should be
involved when aggregate demand falls. Keynes's ideas of government involvement has proven
to be working during the Great Depression and also after the global financial crisis in 2008. It is
important to know that only if a government can afford to spend money back on their people to
benefit them, this policy would work well. In some cases, however, when government does not
have enough surplus to spend, and is getting too 'big' which means too many government jobs
were created and duplicated, it could result to overspending and the country will suffer.
Eventually the government jobs may still have to be cut and unemployment still arise.

In the

United States, because the current government had been in debt for many years, the Keynesian
fiscal policy would not work to rescue their economy.

In conclusion, we cannot blindly adopt

the same policy that worked 80 years ago to nowadays economy and expect it would work
effectively.

******
Reference Page

John Maynard Keynes. (2013). In ELibrary : ProQuest Research Topics. Retrieved from
http://elibrary.bigchalk.com
Seidman, S, L. (2012, November 01). Keynesian Fiscal Stimulus: What Have We Learned from
the Great Recession?. Business Economics, (4), 273, Retrieved from http://elibrary.bigchalk.com
Slavin, Stephen L. Economics: A Self-teaching Guide. New York: Wiley, 1999. Print.

Skidelsky, Robert. Keynes: The Return of the Master. New York: PublicAffairs, 2009. Print.

James, Steve. "Money for Nothing: Government Shutdown Costs $12.5 Million per Hour." NBC
News. N.p., 2 Oct. 2013. Web. 22 Sept. 2014. <http%3A%2F%2Fwww.nbcnews.com
%2Fbusiness%2Feconomy%2Fmoney-nothing-government-shutdown-costs-12-5-million-hourf8C11308802>.

Keynes, John Maynard. The Means to Prosperity. London: Macmillan, 1933. Print.