The Rise and Fall of Keynesianism - Essay Example

The Rise and fall of Keynesianism It was the great idea of John Maynard to inspire the new deal and this helped rebuild the world most economies after the World War II (Leeson, 262). Keynesian economics also referred to as Keynesianism is an economist by the name John Maynard Keynes. In his economic model, he greatly used employment, interest and money as the dominant pillars of the economic model or theory. His thinking dominated the world economic policy making both in Europe and Japan. This paper investigates the political history and science of the rise and fall of Keynesianism. It then goes on to discuss the all the theories that led to the rise of the Keynesianism and other potentially his radical forms of theories (Milgate and Eatwell 62). As asserted by Leeson (263), one of the factors that led to the rise of Keynesianism was the Keynes stewardship and experience with the treaty Versailles. This pushed him in making a break from the previous theory models he had put across. He involved many individuals into a treaty which led to the formation of the Economic consequences of the Peace (ECP) (Auerbach). From the book, he was established as an economy that had practical political skill to influence the policy making of the world economics at any summit. The peace treaties brought hope and expectation to the people’s development (Blinder 279). This also ensured unity and togetherness among the people. This further resulted in stability in the region and the nation at large which is requisite for a regional and economic development. Leeson (264) adds that another factor is the gold standard. This was a monetary system which used a particular economic unit based on a fixed weight and amount of gold. There were three types of gold standards: the first one was the gold specie standard in which the monetary unit is associated with the value of circulating gold coins or has the value of certain circulating gold coin together with other less valuable coins (Milgate and Eatwell 69). The second one, the gold exchange standard which did not involve the use of gold but a government guaranteed fixed exchange rate with another country which does not use gold (Blinder 281). Finally we have a gold bullion standard system which does not circulate gold but authorizes the selling of gold bullion on demand. This use of currency made Keynesianism a strong and powerful economy. Through this, many economies were attracted from different parts of the world in order to look for currency from them (Bleaney 265). During the 18th century when there were wars within Europe and trade deficit with China, silver as a currency was drained from the economy of many Western European countries. Countries like United Kingdom created a massive recoinage program which acted as a currency reservoir for the UK. Unfortunately it came out that there was an exchange of unequal gold and silver currencies between the United Kingdom and Keynesianism. This later made Keynes so powerful and hence the rise (Yoshikawa 178). Keynesianism benefited from neo liberalism greatly. This is because the political philosophy they acquired enabled them to support economic liberalization. This allowed the Keynesianism to have their own economic theory and dominate it among the most powerful countries by then such as the United Kingdom and United States. Leeson (266) asserts that they had also a free trade and market control that was an advantage which made them became powerful economic and revenue gainers in the market. In addition, Keynesianism had control also over open markets and privatization of the market (Leeson, 268). They could also deregulate the laws that are enacted by other market policies in their favor. Keynesianism also had an upper hand in enacting his own market policies which would favor their market structure (Auerbach). This made them more powerful in controlling the economy of the region and hence their rise in power. Keynes had a stable monetary policy which had effectively demanded to eliminate unemployment and could function as capitalism (Bleaney 269). However there was a mixed economy which had both the private and the state ownership. This could extend all the way to be a state ownership. It lagged them behind as they were forced to adopt many laws by the state out of which would fall on political spectrum being unfavorable to them. Leeson (272) adds that the interaction between Keynes and the imperialism also led to the rise of Keynesianism. Keynes was one of the main architects of the international financial infrastructure of the postwar world. He played a big role in international conferences at which the advanced capitalist nations from institutions that could determine the postwar era (Milgate and Eatwell 81). The Keynes economic strength made the United States to devolve international relationship between trade and other affairs to Keynes to run (Blinder 280). This empowered Keynes to be a leader with responsibility that goes with the primary reasons and pure national self interest. Due to the fact that Keynes had a contact with the imperialist, he had an advantage to fulfill his vested interest during their period they were I contract. This made Keynes able to influence world’s important transactions and therefore continued to expand his territory as reported (Leeson 273). Another major boost for the rise of Keynesianism is fiscal and the monetary policy. Keynes view interest rate as the cost of keeping wealth in the form of money (Leeson, 273). He considered that interest is paid on the money that is lent and if a capitalist require cash that is at hand, then Keynes could forfeit the interest he could receive if he had lent the money (Milgate and Eatwell 101). Keynes also shared the classical view of that capitalists will make a decision on whether to lend money or depending on where there is high return. He believed that the interest rates received could play a role of inflation or deflation (Leeson, 274). Therefore he controlled interest in order to control inflation. This made him a determinant factor in his land and therefore the rise of Keynesianism. This model he used became the key to central bank policy today. If the government maintains the appropriate quantity of money, savings will equal the intended investment at full levels of employment (Leeson, 275). Money is an asset that competes with other assets such as gold, land, stocks among others. Money is readily available in liquid form hence can be used for emergencies. Money is also stable since it cannot fluctuate daily as compared to the other mentioned assets. It is only through inflation that money can only erode over time. Money generates little or no income and its value does not appreciate over time as compared to the other assets (Leeson, 275). Keynes did not believe that supply created its own demand but the causation was the other way round which is from demand to supply (Leeson, 276). Keynes argued that the production decision of businesses was based on the level of demand expected, or the total spending expected. The more the investors and consumers plan to spend, the more output will be expected by the business to sell. They will also produce more. This means that supply will respond to the demand (Leeson, 276). Keynes also argued that the total spending level in the economy could not be appropriate to provide employment fully (Leeson, 277). This means that the classical economist were not right to believe that the adjustment of interest rate and price flexibility would lead to unemployment prevention. When the total spending is adequate there will be possibility of full employment (Leeson, 277). Unemployment will result especially when there is inadequate spending. The level of total spending or demand is useful in the determination of the health an economy which contrasts the contention of classical economists that market economies usually tend towards full employment (Leeson, 277). Leeson (278) asserts that many Keynesians advocate a policy of activist stabilization, which will help in the reduction of amplitude of the business cycle. However, some conservative Keynesians doubt the efficacy of stabilization policy. It does not necessarily mean that Keynesian are advocating for adjusting government taxes, money supply and spending after every few months in order to provide full employment (Leeson, 278). According to the theory of Keynesian, changes in the demand aggregate which could either be anticipated or unanticipated have an effect on employment and output but not on prices. This can be seen in Philip caves which shows a rise in inflation only when there is a fall in unemployment (Leeson, 278). Leeson (279) explains that Keynesians believe that the prices are responding slowly to the changes in demand and supply which results in shortages and surpluses especially of labor periodically. Keynesians also do not think that the typical level of unemployment is ideal (Leeson, 279). Keynesians see unemployment as too variable and too high on average. The periods of depression or recession are economic maladies not as in the theory of business cycles (Leeson, 279). The breakdown of the international monetary system led to the fall of Keynesianism as explained by Leeson (281). International monetary system breakdown led removed the insulation from the world market. This insulation which was removed from the world market was an essential element of the state intervention conception of the Keynesian (Leeson, 281). The tension found recession which led to the sharp fall of production in all the leading countries. There was an increase in the rate of unemployment and inflation. The monetarist economic theory led to the loss of ground of Keynesianism (Leeson, 282). The expansion of the state is increasingly attacked by the conservative politicians found in the United States, Britain and elsewhere. The conservative politicians also attack the trade union positions and the politics of consensus and turn them into theories like Hayek and Friedmann in order to justify their positions (Yoshikawa 178). Keynesian solutions were denounced as no longer realistic by social parties whose position in the political system depended on the recognition of the importance of labor. The denouncement of Keynesianism as being unrealistic made it to lose ground leading to its fall (Leeson, 283). Economists were against Keynesianism and this posed challenges to them (Leeson, 283). There were also other actors within Germany which were against the Keynesianism. Most notably were large firms and unions. The actors started to push for stronger stimulus. The report of the Council of Economic Experts generated pressure on the government (Leeson, 283). However, the council was condemned as being incompetent and its abolition was proposed. The fall of Keynesianism was mainly contributed by the crisis of government debt. Further failures in banking were threatening the solvency of a few beleaguered governments (Leeson, 283). Some of the countries such as Iceland had experienced the crises of sovereign debt. The government of these countries did not have resources which they could use to rescue their banking sectors that had failed. They were forced to adopt policies of austerity which exacerbated the recession. This economic impact of the crisis was comparable to the one of great depression (Yoshikawa 179). The failures provided rhetorical fodder for a set of arguments that was existing already on when and how to make the transition from Keynesian fiscal stimulus to the macroeconomic management pattern (Leeson, 284). The economist disagreed among themselves about when the transition was to take place. Some argued strongly for the retrenchment arguing that history showed that fiscal retrenchment could improve the growth prospect of the country by improving investor confidence (Leeson, 284). In conclusion, the government should use expansionary fiscal and monetary policy which will stimulate the economy and thus increasing employment. This is not possible with the private sector. In order to start the economy, the government needs to spend money. Macroeconomic policy is influenced by Keynesian and modern revision of Keynesian thought. Work cited Leeson, Robert. "The Rise and Fall and Fall of Keynesian Economics?" Economic Record 70.210 (2004): 262-284. Print. Milgate, Murray and Eatwell, John. The Fall and Rise of Keynesian Economics. USA: Oxford University Press, 2011. Print. Blinder, Alan S. "The Fall and Rise of Keynesian Economics*." Economic record 64.4 (2007): 278-294. Print. Bleaney, Michael F. The rise and fall of Keynesian economics. London: Macmillan, 2005. Yoshikawa, Hiroshi. "Comment on “The Fall and Rise of Keynesian Fiscal Policy”." Asian Economic Policy Review 7.2 (2012): 178-179. Auerbach, Alan. "The Fall and Rise of Keynesian Fiscal Policy." University of California, Berkeley (2012). Read More