Does Keynesian economic policy work

Keynesianism

John Maynard Keynes
Keynesianism.
The British economist was born in 1883. In 1915 he joined the British Treasury as an advisor and headed its delegation at the Versailles Peace Conference. Keynes resigned from this position in 1919 because he considered the Allied reparations claims to be economically unacceptable. From 1920 to 1946 Keynes was a professor at King's College in Cambridge, at the same time a publicist, financial expert and economic politician. In 1942 he was ennobled and carried the official title of Baron Keynes of Tilton. Under the impression of the global economic crisis, Keynes came to the opinion that the foundations of previous economic theories (especially economic laissez-faire) should be called into question. He became the founder of his own branch of economics. As an advisor to the Treasury during the Second World War, Keynes developed e.g. B. Plans for the financing of war through compulsory savings and for a new international monetary order. However, his proposals were rejected by the American government. Keynes, who died in 1946, was considered the leading theoretician of modern economics until the early 1970s.
Macroeconomic theory and economic policy concept named after the British economist John Maynard Keynes (* 1883, † 1946) in his major work »General Theory of Employment, Interest and Money«, published in 1936.

In his famous theory, Keynes showed in particular that supply and demand in the markets do not automatically lead to a macroeconomic equilibrium in which there is also full employment. According to this, there is also more frequent unemployment in a market economy, without market forces alone being able to bring about an upswing. For example, unemployment is ended and full employment is achieved through wage cuts. According to Keynes, the reason for economic downturns accompanied by unemployment lies in insufficient demand for goods, especially capital goods. The demand for capital goods, in turn, depends on companies' future profit expectations. The companies will only employ as many workers as they need to produce their quantities of goods. If the overall economic demand for goods falls, there is less production and companies lay off some of the workers. Unemployment, in turn, leads to reduced incomes, which leads to a further decline in aggregate demand for consumer goods and even higher unemployment.

In order to achieve full employment again, the aggregate demand for goods must increase. In particular, the demand for capital goods must increase, because increasing investments create jobs and thus income, which in turn boosts the demand for consumer goods and leads to further investments. However, the company's propensity to invest depends on the level of interest. If the interest rate is high, companies will be less inclined to invest, which has no positive effects on the economic situation. If, on the other hand, the interest rate on loans is low, companies have a higher profit expectation and thus a greater incentive to invest. But even with falling interest rates, companies may be less inclined to invest, because B. hope that interest rates will fall even further.

In this situation, in Keynes' view, the state is called upon to ensure that the lack of private demand is replaced by state demand and thus the economy is brought out of the crisis (underemployment equilibrium). By allowing the state to meet aggregate demand directly by increasing its spending, e.g. B. for public contracts such as the construction of roads, railways or public buildings, or indirectly, z. B. through tax breaks for investments, controls, it contributes to the revitalization of the economy. This creates new jobs and income in private households, which in turn demand more consumer goods, which in turn leads to investments by companies and creates more jobs.

The state control of the economy in the sense of a fiscal policy takes place depending on the economic situation, i. That is, in the downturn, the state is supposed to stimulate aggregate demand by spending more than it earns, thereby increasing its debt; one also speaks of deficit financing. In the upswing, on the other hand, overall economic demand must be curbed and the debts that have arisen must be repaid through tax increases. Such an anti-cyclical economic policy and global control of the economy in the sense of Keynes was also practiced in the Federal Republic of Germany in the 1960s and 1970s and is reflected in the Stability Act.

Duden Wirtschaft from A to Z: Basic knowledge for school and study, work and everyday life. 6th edition. Mannheim: Bibliographisches Institut 2016. Licensed edition Bonn: Federal Agency for Civic Education 2016.