The Concept of Keynesianism as an Economic Strategy - Example

Running head: KEYNESIANISM Keynesianism Name Institution Introduction The purpose of this essay is to explore the concept of Keynesianism as an economic strategy. The essay will analyse, from a policy perspective, the meaning of Keynesianism with respect to key Keynesian policies applied by governments in the management of their economies. To further provide an understanding of the implications of Keynesianism, the essay will make comparisons between Keynesian policies and neoliberal economic policies as well as their implications when applied in the economy. Definition and Significance of Keynesianism Keynesianism, an economic theory that originated from John M. Keynes, a British economist, can be defined as the economic standpoint that if the economy is left to itself, it may not full utilise the resources that are available, and that the government needs to intervene through expansionary actions in the economy in order to ensure full employment as well as growth (Kindleberger, 1985, p. 41). In other words, Keynesianism, also referred to as Keynesian economics, is a theory that calls for government intervention in the economy so as to assist in overcoming a lack of aggregate demand in the market and hence increase employment and growth. What this theory implies is that when markets are left to operate as free markets, they oftentimes fail to achieve maximum economic efficiency in the market (Anderton, 2006, p. 251). Therefore, according to Anderton (2006, p. 251), supporters of Keynesian economics believe that government intervention is necessary to ensure that markets attain maximum economic efficiency. This is achieved by controlling some aspects of the market, thus ensuring that the market is not entirely free. One good example that can be used to illustrate the significance of Keynesian economics is the provision of electricity to the public. Based on Keynesianism, it is argued that the supply of electricity may not be carried out effectively by the private sector of the economy (Pape, 2000, p. 24). This is because whereas electricity needs to be provided to the whole population in a country, it might not be profitable for private businesses to supply it to everyone, especially to the rural areas where the demand for electricity is low. Keynesians suggest that since supplying electricity to people with low incomes would not be profitable, private firms would elect not to supply the low income areas, yet electricity is a commodity that is required by everyone. Hence, according to Keynesianism, the government should step in to provide electricity, since it will not be overly motivated by making profit from electricity provision but would be aiming to supply power to everyone (Pape, 2000, p. 24). Essentially, Keynesianism requires the government to intervene in business in order to correct any market distortions that would be caused by the profit-motivated interests of private businesses in the distribution of resources. Keynesian Policies versus Neoliberal Economic Policies One of the major arguments of the Keynesian theory is that the government should raise its level of spending during bad economic times as a way of increasing aggregate demand. Aggregate demand in this case refers to the total demand for services and goods in a country. According to Dautrich and Yalof (2012, p. 481), based on Keynesian economics, aggregate demand is the critical determinant of whether an economy is doing well or not. Thus, in difficult economic times, when government increases its spending, it would increase demand for goods and services, meaning that manufacturers will continue with their operations and consequently, jobs would be protected. This viewpoint is supported by the argument that application of Keynesian economic theory enabled countries, particularly the US, to quickly recover from the effects of the Second World War (Dautrich & Yalof, 2012, p. 481). It is argued that increased military spending during World War II ensured that manufacturers maintained their operations, and this therefore enhanced employment. Another argument for having Keynesian policies is that they promote democracy in the market and thus lead to market efficiency. In particular, it was argued that democracy works like a brake to curtail the inordinate tendencies of the capitalist system (Karagiannis & Madjd-Sadjadi, 2007, p. 71). For instance, by controlling the types of technologies or processes to be used be used in various sectors, the government ensures that players in the private sector do not use technologies or processes that may be harmful to the population. From a Keynesian point of view, this also ensures uniformity since it guarantees that various players in different industries have an equal or level playing ground. According to Dautrich and Yalof (2012), many administrations that deployed Keynesian policies such as increased spending to deal with difficult economic times realised that doing so could prevent or even end recessions. A recession is defined as an economic slowdown that is characterised by a high level of unemployment, comparatively lower levels of productivity, as well as some other negative economic indicators. Therefore, supporters of Keynesian economics reason that by being involved in ensuring that productivity is maintained, consumption is sustained, and employment is reduced through various interventionist approaches in the economy, the government helps avert possible economic recessions as well as the concomitant effects. On the contrary though, Keynesian approaches to managing the economy have also been found to have negative impacts such as chronically high deficiencies and inflation (p. 481). Keynesianism can also be understood when it is compared and contrasted with the neoliberal policy platform. Neoliberalism can be defined as an economic concept that states that when the market is left to operate on its own without government intervention, it becomes more efficient and the most effective approach for distributing the resources that are available in a society through the choices that individuals make (Budrys, 2010, p. 233). Supporters of neoliberal economic policies are of the view that freeing the economy from government interventions and promoting unfettered choice among the variety of options that are provided by players in the market is not only critical but represents the basic unit of social existence and behaviour (Budrys, 2010, p. 233). In particular, according to Ahmed, Kundu and Peet (2011), proponents of neoliberalism have out forward three arguments to oppose Keynesianism. The first one is that Keynesian policies like increased government spending are the causes of problems like indebtedness and inflation since they increase the quantity of money circulating in an economy. The second argument is that Keynesian planning principles would result in disaster, and that instead, governments should pursue principles that allow the market to be self-adjusting. The third point is that promoting individualism and laissez-faire approaches towards the economy is good for the economy and the society. The aforementioned arguments counter some of Keynes’s arguments. For instance, Keynes argued that declining prices of goods would obstruct investment; however, this argument does not hold water when viewed in the context of neoliberalism. Notably, neoliberalism encourages individualism and entrepreneurship (Koşar-Altınyelken & Akkaymak, 2012, p. 63), which leads to increased competition and lowering of the costs of production. For instance, in the computer and related devices industry, companies have been innovating continuously. The result is that the prices of such equipment having been falling even though manufacturers are still able to make profit (Brouwer, 2012, p. 56). Parallels can also be made between Keynesianism and neoliberal economic policies. In theory, neoliberals argue that the purpose of governance is to develop individuals whose moral value is premised on the point that they reasonably evaluate the benefits and costs of a certain act rather than other alternative acts. That is, neoliberalism does not depend on pre-existing circumstances but keeps on creating new ones and changing political and social life in ways that suit the changing needs of competition in the market (Dean, 2009, p. 52). In fact, this has been the cause of the removal of government regulations in labour, commodities and financial markets as well as promotion of trade openness since the 1980s (Onaran, 2011, p. 240). However, it cannot be said that the market is operating entirely freely since there are complex commercial arrangements and legislations that businesses have to follow, which limit individual choice (Budrys, 2010, p. 234), much like Keynesianism to some extent. As well, despite the increased trade openness brought about by neoliberalism, growth has become slower, there is increased income inequality across the world, and unemployment is increasing (Onaran, 2011, p. 240). This means that neoliberalism is not in itself a panacea for the all the problems that afflict economies – in much the same way as Keynesianism per se is not. Conclusion In conclusion, Keynesianism is an economic theory that advocates government intervention in business to increase aggregate demand and hence growth, and to control the flaws that would otherwise be caused by the interests of private investors in an economy. Keynesianism goes against neoliberalism which calls for governments to leave markets to operate freely, regulated by choices made by individual players. Although Keynesian policies have been seen to increase aggregate demand and hence productivity and employment, they are also associated with adverse effects such as inflation and increased government debt. On the other hand, neoliberalism promotes freeness of the market, which enhances entrepreneurship and increases choices. But still, neoliberalism is characterised by legislations and detailed commercial arrangements which limit the alternatives available to individuals like Keynesian principles to some extent. References Ahmed, W., Kundu, A., & Peet, R. (Eds.). (2011). India’s new economic policy: A critical analysis. Oxon: Routledge. Anderton, A. (2006). Economics (3rd ed.). Delhi: Dorling Kindersley (India) Pvt. Ltd. Brouwer, M. (2012). Organizations, individualism, and economic theory. Oxon: Routledge. Budrys, G. (2010). Unequal health: How inequality contributes to health or illness (2nd ed.). Plymouth, UK: Rowman & Littlefield Publishers, Inc. Dautrich, K., & Yalof, D. A. (2012). American government: Historical, popular, and global perspectives. Boston, MA: Wadsworth. Dean, J. (2009). Democracy and other neoliberal fantasies: Communicative capitalism and left politics. 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