Keynesianism

At the heart of the Keynesian economy is the use of fiscal policies (government spending and taxes) as a means to control the economy. This idea was adopted by one of the most important intellectuals of the 20th century who is named, John Maynard Keynes. Keynes's ideas gave form to Modern World Economy. Keynes is still respected and followed.

                The masterpiece of Keynes when published in 1936 named The General Theory (Employment, Interest and The General Theory of Money) has written in a response to Great Depression. Keynes upheld that governments were a task they had ignored before. This task was about keeping alive the economy during trauma. This book was written to criticize the idea of French Jean-Baptiste Say "Supply creates its own demand".According to Say's idea, product manufacturing was enough to create demand by itself in the general economy.

                 To revive the economies again There was an accepted hypothesis of economies organize themselves until Great Depression. The Invisible Hand left on its own will bring employment and economic efficiency to the optimum level. Keynes was strongly opposed to it. He upholds, during periods of economic downturn, any deduction in demand, will cause an economic downturn with a strong crisis and will increase unemployment. The task of the government is to revive the economy again. The government can make this like to be in debt and use this dept at the public sector as a creation of employment, investing cash in infrastructure problems. Falling interest prices, even if not enough, could revive the economy a little bit.

JOHN MAYNARD KEYNES 1883-1946 

J.M. KEYNES was a rare occasion:An economist who has had the chance to apply his theories.His friends called him as Maynard.He was a respected intellectual throughout his life,He was the member of Bloomsbury like famous authors Virginia Woolf and E.M.Forster.He counseled the Finance Minister during World War I, but his fame came after the war.He guessed that Treaty of Versailles can caused hyperinflation in Germany with a huge foresight.History made him legitimate.He made wealth from stock market but he lost whole of them because of 1926s collapse.With the speculation over the setup sometimes won and sometimes lost.Before he died-shortly after World War 2 - He established his base to IMF and WB with sizeable amount financing guarantee from USA.These two shape the modern economy in the following years.

                 According to Keynes, the extra expenditures the government will make will spread throughout the economy. For instance, it emerges a new workplace for construction companies. The workers of related companies spend money on food, products and services and it prevents the economy from doesn't into crisis. The key to Keynes's argument is the idea of multiplying.

                Suppose the American government ordered a $ 10 billion plane ship to shipbuilding company Northrop Grumman. You might think that this is the $ 10 billion transfer of the economic effect. However, according to the multiplying argument, the effect will be much larger. Northrop Grumman will hire more people, make more profit, and workers will spend their money on consumer goods. Total economic efficiency will increase much more than the initial money, depending on the "consumption tendency" of an average consumer.

                If the 10 million dollars increase the American economic efficiency by around 5 million dollars, multiplying is 0.5, if it increases by 15 million dollars, multiplying is 1.5.

Six Basic Principles According to former presidential adviser Alan Blinder, There are six basic principles behind Keynesianism.

1. Keynesians uphold that economy is affected by both public and private sector decisions and sometimes they uphold it can be unbalanced at any time.
2. The Short run, is more important than the long run. The Short runs in unemployment, may cause more harmful things, because it may cause permanent damage problems to the country's economy. This will remind the famous word Keynes "In the Long Run, We're All Dead".
3. Prices and especially salaries give respond to supply and demand changes more slowly. It means that your unemployment is generally higher or lower than your economy.
4. Unemployment is usually very high and variable.; the recessions and crises are not an effective market reaction to unpleasant opportunities such as invisible hand dictation, but rather an economic disease.
5. Governments should stabilize the natural sudden rising and falling actively.
6. Keynesians be inclined to struggle against unemployment more than struggle against inflation.

                   A controversial theory Keynesianism has always created controversy. Critics of it ask why we should assume that governments will better govern the economy. Economic The Great Depression of the 1930s was overcome by Keynes' ideas. Franklin D.Roosevelt's program known as the "New Deal Order" was presented as a reaction against the crisis, and it was a classic example of the government's incentive to drive the economy by spending billions during the recession. It is still discussed whether the Great Depression ended these policies or the Second World War. But the message from history is that government spending seems to work.

                   After the publishing of General Theory, governments around the world quite increased their spending. They did this for social purposes, such as improving the welfare state that will overcome the consequences of high unemployment as well as they made Keynesianism based on the emphasis that governments should control the economy. These interventions have worked for a long time, inflation and unemployment quite decreased, and the economy grew. But, in the 1970s especially the monetarists have been started to criticize Keynesian policies. Governments that implement fiscal and monetary policies regularly to increase employment would not be able to fine-tune the economy. Such as policies(like tax discounting) the time between the moment of realizing that it is necessary and the effect of policies is very long. The effect of tax reduction on the economy is longer. Even if the politicians are quick to set the issues, it takes time for the regulations to be written and approved. The effect of tax discounting on the economy is longer. Eventually, when the tax discounts started to work, the problem being solved may already be worsened or even extinct.

                    Namely, Keynes come to the fore again in the 2008s crisis. It was understood that the tax discounts, in America, the UK and other countries would not be able to prevent the recession. When It was understood that the tax discounts, in America, the UK and other countries would not be able to prevent the recession, economists upheld governments should apply tax discounting and spending by borrowing. In the end, these policies have been implemented, breaking away from the economic policies of the past twenty-five years. Despite everything, Keynes is back.

       Gist, governments must spend to prevent deepening recessions.

Read More

Debt and Deflation

Contrary to today,deflation-prices falling from year to year instead of rising-wasn't perceiving as a threat every time.The alive Economies faced that phenomenon in stages before 20th century along several century.In fact, Milton Friedman has upholded that in theory that governments should endure a certain amount of deflation..

                  While the prices in market was falling slowly,this means every dollar and pound in your pocket,were getting value.Even if your income does not increase every year,your purchasing power increases.Like an economy with high inflation,you don't need to worry about that your money value falling.

                   Deflation and Crisis The innocent deflation left its place to bad experiences with in 20th century falling prices.This status was same in 1930's crisis too.Crisis followed the pretty rising prices of share(shares was being purchased with debts instead of savings money.) in 1920s.In 1929,the investors noticed the winnings does not based on reality,it based on more hope and speculation,and the stock market collapsed.Followed by US economy and the other national economies the most darkness years were lived.The banks were went bankrupt with heavy debts,and the real estate prices were fell,companies were shut down and millions people be unemployed.The basic of in crisis the most important problem was deflation.Prices began to fall when people understood that the era of economics, defined as "The Crazy Twenties," was artificially driven by greed and frenzy.Share and real estates prices fell,but the value of the debts that people took to buy them remained stable.So while prices are falling by 10 percent per year, the cost of borrowing at the cost of $ 100-the current purchasing power- was became $ 110.Millions of people in the digits, which are not directly affected by the collapse of the stock exchange,because of unexpectedly increment of the value of debt,defeated by inflation.

                  A Hard Spiral Deflation doesn't only debtors,it affects whole economy.As prices drop, people start stacking money because they know everything will be cheaper in a few months time.The money spend unwillingness reduce prices even more.Moreoever,companies notice the money cost rises because of people salaries arranging by legal contracts.The previous was $ 1000 salary,and now its value $ 1100.It is a kind of disaster for employers because even if the employer sell the goods and services more less,employer have to fulfill the same price cost.At first sight,even if it looks good for workers,practically,it does mean companies will fire many workers for carry on.At the same way, even if the banks will take more mortgage payment from some of debtors(compared to other prices in the economy),cannot collect any payment from the other debtors.

                   Some of this symptoms reminds like during the high inflation.Both of them contain in real prices uncontrollable rising in certain products.The difference is that while inflation increase the value of consumption goods, deflation contain inflating debt and other liabilities.One of the huge risks of deflation,in response to the steady decline in prices the companies who is in retrenchment, that their losses are getting bigger and that means pulling the prices further down.This creates a situation even more difficult than the inflation spiral,because in modern economies the mechanism of struggle against inflation has developed even more.

                    Diagnosis and Solutions The economic explaing of deflation,reduction of the money quantity in system or increase in the supply of goods and services.In that case,while a lot of money is in pursuit of little goods in inflation,this situation will the exact opposite in deflation.In the period of Great Depression,the cause of this in Japan 1990s and 2000s was the shortage of money.The reason for the benign inflation of the 19th century, on the contrary, was a surplus of supply that emerged more productively.

                   Generally,central bank checks the inflation with interest rates.Even so,they cannot fall below zero of that rate.That is mean they will apply more unusual methods while the prices down. So,they have to apply more unusual methods when prices are falling.Contrary to the inflation situation where the money in the economy is being kept constant,Central Banks start to cash transpose to system.It could make it in different ways;they buy assets such as bonds and shares or increase the money in the banks of commercial banks.To all this method called as "Quantitative Easing."
   
                At the end of the millennium,in Japan,kind of methods were used in USA and UK after 2008 crisis too.From debt-borne financial crises,tried to get out of like this way.

Main Message

Declining prices could damage the economy too.

Read More