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Chapter 2
KEY CONCEPT KEYNESIANISM
demand’ in the economy, and that government can regulate demand, primarily through adjustments to fiscal policy, so as to deliver full employment. Keynesianism came to be associated with a narrow obsession with ‘tax and spend’ policies, but this ignores the complexity and sophistication of Keynes’ economic writings. Influenced by economic globalization, a form of neo-Keynesianism has emerged that rejects ‘top-down’ economic management but still acknowledges that markets are hampered by uncertainty, inequality and differential levels of knowledge.
Keynesianism refers, narrowly, to the economic theories of J. M. Keynes (1883–1946) and, more broadly, to a range of economic policies that have been influenced by these theories. Keynesianism provides an alternative to neoclassical economics and, in particular, advances a critique of the ‘economic anarchy’ of laissez-faire capitalism. Keynes argued that growth and employment levels are largely determined by the level of ‘aggregate
In The General Theory of Employment, Interest and Money ([1936] 1963), Keynes challenged classical economic thinking and rejected its belief in a self-regulating market. Classical economists had argued that there was a ‘market solution’ to the problem of unemployment and, indeed, all other economic problems. Keynes argued, however, that the level of economic activity, and therefore of employment, is determined by the total amount of demand – aggregate demand – in the economy. He suggested that governments could ‘manage’ their economies by influencing the level of aggregate demand. Government spending is, in this sense, an ‘injection’ of demand into the economy. Taxation, on the other hand, is a ‘withdrawal’ from the economy: it reduces aggregate demand and dampens down economic activity. At times of high unemployment, Keynes recommended that governments should ‘reflate’ their economies by either increasing public spending or cutting taxes. Unemployment could therefore be solved, not by the invisible hand of capitalism, but by government intervention, in this case by running a budget deficit, meaning that the government literally ‘overspends’.
TENSIONS WITHIN . . . LIBERALISM Classical liberalism v. Modern liberalism economic liberalism social liberalism egoistical individualism
developmental individualism
maximize utility
personal growth
negative freedom
positive freedom
minimal state
enabling state
free-market economy
managed economy
rights-based justice
justice as fairness
strict meritocracy
concern for the poor
individual responsibility
social responsibility
safety-net welfare
cradle-to-grave welfare
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