Keynesianism and its Importance in 21st Century - Coursework Example

Keynesianism Name Institution Course Date The regeneration of economic liberalism has been among the significant trends that have occurred in the last three decades. Today, it is regarded as a pillar of social democracy (Gamble, ). In comparison with early 1970s, this has been a remarkable achievement. During this period, capitalism which has been stabilizing in 1950s and 1960s was being challenged by the rise of industrial militancy. Furthermore, there were concrete signs that major global recession was inevitable. Indeed, in 1970s, the point of contention was the foundation of political settlement between capital and labour (Gamble, 2001). This was to be retrospectively called Keynesian welfare state. This essay attempts to explain Keynesianism and its importance in 21st century. It draws on the weaknesses of social democracy and neo-liberalism economics that have been heavily practice 21st century. In the capitalistic world, major restructuring was witnessed in 1970s and 1980s in terms of economic, political and ideological sense. Free market doctrines as an ideology and political economy were revived. It became a significant feature in this period. Social democracy seems to be an alternative to capitalism in the wake of Keynesianism and the welfare state (Hayford, 2001). The support for social democracy was at its peak in 1960s and 1970s as most European countries adopted more moderate political goals. At this time, the world economy was experiencing the longest cyclical crisis since the Great Depression. Some countries such as Britain and Sweden attempted to deal with this problem by socializing means of production (Hayford, 2001). A greater state control of economy was pursued. On the other hand, wage-earner funds were created in order to transfer ownership of private firms to public control in a gradual manner. This kind of trends indicates the fact that social democrats are still ideologically divided as to the ultimate goal of social democracy. This is despite their successes. The revisionist position believed that by attaining social welfare systems and a mixed economy, the need to aim and attain a socialist state in order to alleviate inequality is negated. In contrast, the radicals believed that such achievements were merely successes in the course of having a democratic socialist state (Hayford, 2001). A sharp decline in political affluence of social democracy was realised in the western countries due to the above radical policies and similar ones. Rising unemployment, and inflation as well as poor economic growth which coincided with radical policies contributed significantly to low level of support for social democracy. At the start of 1980s, the welfare state gradually replaced social democratic governments (Crouch, 2009). Ideologically, the emergence of neo-classical theory challenged Keynesian fundamentals which were the foundation of a welfare state. This gave rise to a period of ideological uncertainty previously experienced. The problem that social democracy faced was its industrial revolution origins with its system being difficult to be implemented in the 21st century. In dealing with this problem, governments blended neo-classic economics with some values of the social democracy. A mixed economy together with Keynesian economic policies was adopted in order to spur economic growth and reduce the increasing societal inequalities. However, 1n 1970s, mass unemployment and inflation returned after the economic boom realised after World War II came to an end. Economic crises and militancy of unions led to political and ideological backlash of social democracy. Neo-liberalism slowly replaced social democratic governments. Neo-liberal paradigm has been increasingly gaining support since 1990s. Advocates of economic neo-liberalism argue that its policies are promoting universal prosperity through free trade, stable currencies and a balanced budget (Duncan, Webster, & Switky, 2009). On the other hand, critics of global market liberalism disparage it as another term for global capitalism driven by international institutions such as World Bank, World Trade Organisation (WTO) and International Monetary Fund (IMF). They insist that these institutions are mainly responsible for the increasing social and economic inequalities in the world because of deregulated global market. Additionally, globalization has led massive suffering of world’s weaker nations. By analysing the theories of social democracy, neo-liberalism, Keynesianism and the welfare state from an idealistic point of view, they are all aiming at transforming the world in one way or another. Each one of them has a theoretical framework explaining the manner and reason in which the world is badly organised (Duncan et al., 2009). They provide how and why appropriate institutions can be reformed or modified for purposes of bringing desired world harmony. However, neo-liberalism has a strong utopian component (Duncan et al., 2009). The objective is to have a perfect social system where every individual in the world is living in harmony. By looking at history, this goal is not going to be achieved in the near future. Indeed, neo-liberal paradigm is based on the assumption that international relations is achievable only through international cooperation. Moreover, international institutions can play a critical role in helping countries to resolve their differences in a peaceful manner. Since World War II, two successive policy regimes have been able to temporarily reconcile the uncertainties and instabilities associated with a capitalist economy (Crouch, 2009). The need for stable human lives and mass consumption of products and services necessitated development of these policy regimes. Keynesianism is one such system. In general, Keynesianism entails public demand management (Crouch, 2009). It is an economic theory that encourages state intervention in order to moderate the economic booms and downfalls. It was spearheaded by John Maynard Keynes and challenged the then prevailing idea that full employment is automatically provided by free markets. In other words, any person seeking a job would get as long as they are flexible in demanding wages for their services. Keynesianism is founded on the basis that aggregate demand is a crucial element that drives the economy. It is an economic concept which postulates that optimal economic performance is achievable and economic downfalls can be prevented by influencing aggregate demand. This aggregate demand is realised through active stabilization and various government economic intervention policies. It attacks free markets theory as it lacks self balancing mechanisms which will result in achievement of full employment. Although Keynesianism seems to have been replaced by neo-liberal paradigm, it is still strongly relevant in the management of 21st century economies. In fact, many countries are turning to Keynesian economics in solving various economic crises. The global financial crisis of 2008 demonstrates the importance and relevance of Keynesianism in the 21st century. It was caused by the ever-increasing pattern of capital accumulation (Shaikh, 2011). The long periods of economic boom eventually gives rise to long periods of economic downturns. Economic health of a country worsens after this transition has occurred. In the last phase, a crisis can be triggered by a shock in the markets. Examples are the collapsing of subprime mortgage market in 2007, Great Depression of 1930s and financial crisis of 1970s. The policies of Keynesianism became reliable and important tool to solve all these crises. In an economic environment that pursues laissez-faire policies; global full employment is assumed to automatically follow after free trade increases global wealth of nations through reduction of the aggregate supply in each nation by law of comparative advantage (Davidson, 2006). Keynes noted that it is only after all nations have successfully implemented their own demand management policies that assure full employment when law of comparative advantage is applicable. Keynesianism postulates that the law of comparative advantage can only be beneficial in today’s open economy if an international payment system is designed in order to create incentives that enable each nation in pursuing their own domestic demand policies. Most governments have been advised by the mainstream economists to allow a full laissez-faire system of economy as it creates job all over the world. This has not happened. Instead, a slow economic growth has been realised globally. Keynesianism has been refined to fit into an open system of economy. Keynesian economics centres on recognising that instability is a key feature of a market economy and the involvement of government is needed in order to keep it under control (Davidson, 2006). Today, government is strongly involved in the management of economy through regulation and policy making. People are demanding small-sized governments implying lower levels of aggregate demand (Dutt, 2010). This increases the relevance and importance of Keynesianism in the 21st century as growth becomes more dependent on aggregate demand. In most countries, labour becomes less of a constraint to their growth due to capital flows, technological changes and labour migration (Dutt, 2010). Additionally, macroeconomic policies of these countries are formulated by heavily relying on the macroeconomic aspect of Keynesian approach. The Keynesian welfare state is founded around industrial capital, unions, increasing number of middle-class professionals carrying out their duties in both public and private sectors of the economy (Evans & Schmidt, 2012). In 1970s, recurrent economic crises led to discontent within these building blocks. The continued emergence of welfare state led to a conservative decade in 1980s. Neo-liberalism was therefore consolidated as this process continued. Nonetheless, in not so long, neo-liberalism was criticised leading to massive movement against corporate globalization. Social democracy was borne as a ‘third way’ which goes beyond Keynesianism and neo-liberalism. This discontent can be traced back to discontents witnessed with the Keynesian welfare state. Inflation was the main problem. The poor struggle with the decreased purchasing power due to their low wages while the rich consider it a threat to their financial prosperity. Poor people demanded that public spending be increased in areas such as education, childcare facilities and social housing. Inequality increased under the policies of neo-liberalism as bargaining power shift from labour to capital. References Crouch, C. (2009). Privatised Keynesianism: An unacknowledged policy regime. The British Journal of Politics & International Relations, 11(3), 382-399. Davidson, P. (2006). ‘Keynes, Post Keynesian analysis, and the open economies of the twenty-first century’, In P. Arestis & AP. Thirwall (eds), Growth and Economic Development: Essays in Honour of AP Thirlwall. Cheltenham, UK: Edward Elgar. Duncan, W. R., Jancar-Webster, B., & Switky, B. (2009). World politics in the 21st century. Boston: Houghton Mifflin Harcourt. Dutt, A. K. (2010). Keynesian growth theory in the 21st century. In 21st Century Keynesian Economics (pp. 39-80). Palgrave Macmillan UK. Evans, B., & Schmidt, I. (2012). Social democracy after the Cold War. Edmonton: AU Press. Gamble, A. (2001). Neo-liberalism. Capital & Class, (75), 127. Hayford, M.D. (2001). ‘Social Democracy’. In Jones R.J (ed), Routledge encyclopedia of international political economy volume 3: Vol. 3. London: Routledge, p. 1410-1413. Shaikh, A. (2011). The first great depression of the 21st century. Socialist Register, 47(47), 44-63. Read More