John Maynard Keynes: His theories and concepts on economics
Economy can be defined as a state of a nation with respect to the production as well as consumption of goods and services along with the supply of money.
Elements like individuals, businesses, companies or organizations and government. Initially, economy was believed to be comprising of natural resources available, labour, finance and capital.
These belief included neglecting the technological factors as well as the innovation elements.
Inflation can be defined as the general and substantial increase in the price of goods and services over a particular period of time in a given economy.
Inflation has positive as well as negative effects and influence on the economy.
In an economy, it creates uncertainty about the availability of the product or service pertaining to the increased price and demand.
Concepts of modern economists
Rational expectations is a concept of economics in which is observed that the prediction of the future value of the various variables while developing a new economic policy needs to be expected on the basis of current trend and situation of the market.
These framework expectations and estimation is developed more on an econometric model rather than on a statistical model (Buchholz, 1989).
It states that blindly following an old policy, principles or behaviour while developing a new frame of policies leads to poor structuring of the economy.
Robert Lucas Jr, was the first one to propose and use this concept of rational expectations.
Remember that rational expectations approach continuously updates their model of the economy.
This implication of rational expectations and the related model is known as the Lucas Critique.
John Maynard Keynes is considered as one of the founders of the modern macroeconomics who have made immense contribution in the world of economics.
He provided the concept of considering the overall demand instead of the earlier neoclassical economics to effectively carry and predict an economic activity.
Neoclassical economics had the concept in which the markets would provide complete employment to the workers whose wage demands had flexibility (Heilbroner, 1999).
Ideal economy according to Keynes.
Keynesian believes that overall demand is influenced by a host of economic decisions—both public and private—and sometimes behaves unevenly. The public decisions include, most prominently, those on monetary and government (i.e., spending and tax) policies.
According to Keynesian theory, changes in overall demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. This idea is portrayed, for example, in Philips curve that show inflation rising only slowly when UNEMPLOYMENT falls. Keynesians believe that what is true about the short run cannot necessarily be inferred from what must happen in the long run, and we live in the short run.
Keynesians believe that prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labour. Even Milton Friedman, one of the famous American economist, acknowledged that “under any conceivable institutional arrangements, and certainly under those that now prevail in the United States, there is only a limited amount of flexibility in prices and wages.” In current parlance, that would certainly be called a Keynesian position (Buchholz, 1989).
Theory on application of modern theory for ideal functioning of economic setup
Keynesians do not think that the typical level of unemployment is ideal—partly because unemployment is subject to the caprice of overall demand, and partly because they believe that prices adjust only gradually. In fact, Keynesians typically see unemployment as both too high on average and too variable, although they know that rigorous theoretical justification for these positions is hard to come by. Keynesians also feel certain that periods of recession or depression are economic mix, not, as in real business cycle theory, efficient market responses to unattractive opportunities (Sargent, 1993).
Keynesian economists often argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central bank and government policy actions by the government, in order to stabilize output over the business cycle. Keynesian economics advocates a mixed economy – predominantly private sector, but with a role for government intervention during recessions (Heilbroner, 1999).
Keynesian economics served as the standard economic model in the developed nations during the latter part of the Great Depression, World War II, and the post-war economic expansion (1945–1973), though it lost some influence following the oil shock and resulting stag inflation of the 1970s. The advent of the global financial crisis in 2008 has caused a resurgence in Keynesian thought (Buchholz, 1989).
Buchholz, T. G. (1989). New ideas from dead economists. New York:: New American Library.
Heilbroner, R. L. (1999). The worldly philosophers. New York:: Simon & Schuster.
Sargent, T. J. (1993). Bounded rationality in macroeconomics. Oxford [England]: Clarendon Press.