Week 03 Response - Keynesian Economics Advantages and Pitfalls

Image Source
Illustration of John Maynard Keynes - the founder of Keynesian Theory

Question proposed by mackenziejones
In his book, Dr. Bylund explains the theory developed by John Maynard Keynes. In short, Keynesians believe that there should be more government involvement in the economy. What are the advantages and disadvantages of this course of action?

Overview of Keynesian Economics
Keynesian economics is founded on the principle that the economy influenced greatly by the amount of demand that is out there. During times of economic downturn, recession, or dire circumstances (for example the beginning of the COVID-19 pandemic) demand would be stifled as a result of less money circulating in the economy as a whole. Here, Keynesians would argue that government intervention is necessary to stabilize such a volatile markets. Keynesian economists would also advocate for raising taxes in times of excess demand in the economy. The underlying principle of this theory is that the government must step into the economic realm in order to maintain stability during such times.

Advantages to Such an Approach

• Keynesian economics first and foremost provides stability. It allows individuals and businesses alike to count on the government in dire times
• Such government intervention on demand is generally fast acting... while it may take weeks or months to get a policy approved, once it is in place the results of it are seen quicker than manipulating the job markets, taxation, or interest rates. Thus this economic model is effective as a RESPONSE to extenuating circumstances, but is not necessarily a proactive approach

Disadvantages to This Approach

• Critics of Keynesian economics often cite inflation as a major flaw in this philosophy of government intervention. Inflation is a serious concern, and it is something we are experiencing now as a result of numerous record setting stimulus packages set out by the U.S. government in the midst of COVID-19.
• Demand is not always the central factor that mediates economic success. Keynesians would argue that all other factors such as: labor force, interest, supply, and exchange can be either mediated by the government or controlled through the manipulation of demand, but such a view is short sided and fails to acknowledge other forces and strategies
• Government intervention policies tend to be short term fixes that do not address underlying issues, leading to negative effects down the road, but not necessarily solutions for the future.

Sources:
Jahan, S., Saber Mahmud, A., & Papageorgiou, C. (2014, September). What Is Keynesian Economics? - Back to Basics - Finance & Development, September 2014. Imf.org. https://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm
The Editors of Encyclopedia Britannica. (2019). Keynesian economics | Definition & Facts. In Encyclopædia Britannica. https://www.britannica.com/topic/Keynesian-economics