Saturday, August 6, 2011

Keynesian Economics: The Long-term Solution

Opposite of Reaganomics and the supply-side theory stands the ever popular and larger Keynesian economics policy and the demand-side theory.  These aren't simply opposite of the two however, and have a much different role for the government as a whole.

Keynesianism is more of a macroeconomic theory, focusing on the absolute largest picture of the economy.  It follows a belief that, using much larger actions, we are able to control the economy and prevent, cause, or repair any sort of recessions and monetary issues.  The theory follows the idea that microecoconomic actions, if taken upon by many, can force macroeconomic outcomes that are largely inefficient and detrimental.

One of the most popular examples of these microeconomic actions is directly related to the trickle-down theory.  Following Say's Law, corporations would increase production of goods because they believe that "supply creates its own demand".  This is known to lead to a "general glut", where the supply far exceeds the demand.  In this situation an economic downturn arises, which in turn results in a reactive decision by the producers to fire more workers than were hired to slow production.

A major portion of the theory is that the government has to invest in infrastructure.  The investment injects income, this in turn increases spending and demand,which leads to increased production and expansion, this leads to more income which leads to more spending, and on and on.  Ultimately meaning, if the lower classes get more money, they then spend it on more things.  This creates a higher demand, forcing the corporations to increase supply by expanding.  This means they have to hire more which means the lower classes get more money.

The Keynesian theory believes in an active policy by the government in order to stop or fix problems like these with the absolute minimum losses.  At least portions of this policy have been used by the United States in the past.  Under Franklin Roosevelt, the New Deal created programs to combat the Great Depression.  Agencies, acts, and administrations were created to monitor and manage loans to people and businesses, create millions of jobs for unskilled workers, create public works projects for private contractors,  and various social and farm programs.  All of this allowed the economy to slowly grow and begin recovering.  Reagan himself used the basics of the theory to solve our high inflation.  With raised interest rates in the Federal Reserve, unemployment was on the rise and eventually led inflation to drop to more stable levels.  The interest rates were lowered and unemployment dropped and the economy recovered.

Keynesianism ultimately focuses on one simple plan.  Use the government to manage the economy, it has worked in the past and is still used today.  The problem that lies with it, however, is simply human ignorance.  Without a real understanding of the real theory, many are trying to practice it in environments that prevent the full effects of the plan and end up just making unmanageable problems.

tl;dr:  Take from the rich, give to the poor, who then give to the rich, who give it back to the poor.  Make sure they don't screw things up.


  1. Very indepth, I enjoy reading your posts! Are you planing on covering more therories in economics?

  2. I like the tl;dr section as your work is very indepth. It is sometimes hard to get the big picture. Keep up the good posts

  3. Lol thought it said "kenyan" economics and I knew that couldnt be right rofl

  4. I took an economics course last semester. A lot of what you have said is very valid, but I still think markets can regulate themselves provided the right environment.

  5. I've never understood Keynesian economics, or Reaganomics for that matter to crate a full picture of their effects. Thank you for these informative articles :)

  6. I grasped what you said. It's really interesting!

  7. Great post! I accually read it lol! I love this blog, glad i found it! +follow