Keynesian Economics
Categories: Education, Financial Theory
In 1936, economist John Maynard Keynes proposed a newspaper contest in which readers would select the six most attractive faces from a hundred photographs. This pre-Instagram analogy illustrated that one strategy might be to choose based on what others would find attractive.
This term, applied to investing, suggests that an investor is going to move forward by guessing what others are going to do instead of using his/her own judgment.
Keynes was a British economist and founder of modern-day macroeconomics. Popular in the 1960s. His big book? Everybody Poops. Well, yes, that one. But, uh…his big economics book? General Theory of Employment Interest and Money. Published in 1936...written in the middle of the Depression when spending was hugely declining and the notion of putting all your cash in your mattress was actually not a bad idea at all.
Keynes wrote that, once employment dropped, a new balance with low employment was created...and the Depression might continue on and on, unless the government started spending. According to Keynes, the big solution (aside from lowering taxes) was to have the government spend and spend to get things moving economically...even if it meant the government falling into debt.
With the goal being to stimulate demand, this went against the ideas that economists had before, i.e. that the economy would eventually correct itself, no interference needed.
Not everyone likes Keynes' ideas, but President Roosevelt and the rest of the administration eventually did create The New Deal, which took on a broadly Keynesian quality, characterized by major and unprecedented government interventions into the economy.
Keynes also believed that economy could not function on its own. It needed parental help to correct it. That is, in times of depression, the government needed to lower taxes and increase spending, or the economy would stay in a funk like a generally unfed, cranky child. And, at the other end of the stick, to control inflation, the government needed to raise taxes and decrease spending.
And little things matter a lot in Keynesian economics.
Witness the multiplier effect. It’s kind of like that TV commercial where the woman with the awesome hair tells two friends about her conditioner, who tell two friends, who tell two friends, who then tell everyone. That is, a government tax cut puts an extra 5 grand in the hand of a lawyer, who spends most of that 5 grand on parties, employing caterers, and deploying his friend, Mr. Walker Black, who then deploys money on wheat and rye distilleries, such that the tax cut of 5 grand ends up being an economic stimulus of some 10 to 20 times that number.
Keynesian demand-focused ideas went on to dominate academic and government thinking about political economy through the 1960s...right about the time the first edition of Everybody Poops hit the shelves. Okay, so Keynes didn’t write that one, but still. Stimulating the economy, stimulating your bowels, six of one, half a dozen of the other.
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Finance: Who is Keynes?9 Views
Finance a la shmoop. Who is Keynes? That's John Maynard and Keynes rhymes with
vaccines all right well he was a British economist and founder of modern-day [Someone getting vaccinated]
macroeconomics yeah popular in the 1960s his big book yep everybody poops well [Book titled 'Everybody Poops']
yes that one but his big economics book well it was called the general theory of
employment interest and money and that was actually the original title of [Woman running from a dinosaur]
Jurassic Park but a lot of people don't know that so you get that information
for free at Shmoop. All right well the book was published in 1936 written in
the middle of the Depression when spending was hugely well declining and [Pictures of people during the depression]
the notion of putting all your cash in your mattress was actually not such a [Hand sliding cash under a bed]
bad idea at least it didn't appear that way at the time. Keynes also wrote that [Keynes writing at a desk]
once employment dropped a new balance with low employment was created and the
depression might continue on and on and on unless the government started
spending to you know kind of stimulate the economy and fix things and get [Chargers being attached to the economy]
things going again well according to Keynes the big
solution aside from lowering taxes so that the wealthy would spend more in
hire bartenders for their wild and crazy parties was to have the government spend [Someone spraying champagne and the bartender is drinking it]
and spend and spend to get things moving economically even if it meant that the [People passing a dollar along]
government had to go into debt to do so well the big goal here was to stimulate
demand and this went against the ideas that economists had before i.e. that
the economy would eventually correct itself no interference needed well not
everyone likes Keynes ideas but President Roosevelt and the rest of the [People chucking tomatoes and Keynes presentation]
administration eventually did create what was called the New Deal which took
on a broadly Keynesian quality of bigmama government taking care of us it [American Economy as a baby]
was characterized by major and unprecedented government interventions
in the economy tons of spending and that's where that whole thing about [Someone giving out 100 dollar bills]
paying people to dig a hole and then fill it back up it all came from people [Someone digs a hole and then puts the dirt back in]
kind of did that... Well Keynes also believed that the
economy could not function on its own it needed parental help to correct it [Parents pushing a kid along on his bike]
kind of always that is in times of depression [They let go and he speeds up and starts screaming]
the government needed to lower taxes and increase spending or the economy would
stay in a funk like a generally unfed cranky child and at the other end of the [Kid sat on a toy bike crying]
stick to control inflation like when times were good and everyone was
employed and people were spending and spending and spending well then the
government needed to raise taxes and decrease spending and little things
matter a lot in Keynesian economics. Witness the multiplier effect and no [Blackboard full of complicated equations]
this has nothing to do with rabbits it's kind of like that TV commercial you know [Rabbit in snow]
or the woman with the awesome hair well she tells two friends about her
conditioner and they tell two friends who tell two friends who tell two
friends who then tell these guys it's a multiplier. [People on the phone to each other]
It grows fast that is a government tax cut puts an extra 5 grand in the
hands of a lawyer who spends most of that five grand on well yes parties [Confetti falling]
because that's what they do you got to to offset being a lawyer employing caterers
and deploying his friend Mr. Walker black who then deploys money on wheat
and rye distilleries such that while the tax cut of five grand ends up being an [Money cascading down through all the people]
economic stimulus of some ten to twenty times that number like 5 grand becomes a [Small pile labelled tax cut next to big pile of cash labelled economic stimulus]
hundred grand or something like that in GDP.
Well Keynesian demand focused ideas went on to dominate academic and government
thinking about political economy through the 1960s right about the time the first
edition of everybody poops hit the shelves... [Someone taking 'everybody poops' off a library shelf]
okay so Keynes didn't write that one but you know still stimulating the economy
stimulating your bowels yeah six and one half a dozen on the other and it's all [Someone sat in a toilet cubicle]
about your !$%*