FACULTY OF BUSINESS, ECONOMICS AND ACCOUNTANCY

UNIVERSITI MALAYSIA SABAH

PHILOSOPHY OF ECONOMIC THOUGHT

(BT12403)

SEMESTER 1, 2023/2024

GROUP ASSIGNMENT

TOPIC: KEYNESIAN

PREPARED FOR:

Mdm. Diana Nabila Chau Abdullah

Hereby, we declare that the work contained in this assignment is our own, except
where acknowledgment of sources is made.

PREPARED BY:

No. Name Matric No. Signature

1 IRANABILLA BINTI MOHD BB23110224 Ira

AZRI
2 MOHAMAD AZWAN BIN BB23161015 azwan
MASRIN

3 MIRRAH MAISARAH BINTI BB23110606

Mirrah
AHMAD ZAIDI

4 NURUL SOLEHAH BONGSU BB23110879 Solehah

5 SHARYANA IZYANI BINTI BB23110084 sryana

MILHAM
 TABLE OF CONTENT

1.0 INTRODUCTION................................................................................................... 1
2.0 HISTORICAL BACKGROUND..............................................................................3
3.0 MAJOR TENETS OF KEYNESIAN SCHOOL...................................................... 5
4.0 WHOM DID THE KEYNESIAN SCHOOL BENEFIT OR SEEK BENEFIT FROM7
6.0 WHICH TENENTS OF THE KEYNESIAN SCHOOL BECAME LASTING
CONTRIBUTIONS?...................................................................................................12
7.0 THE MAJOR FIGURES IN KEYNESIAN SCHOOL OF THOUGHT................... 14
7.1 JOHN MAYNARD KEYNES........................................................................... 14
7.2 ALVIN H. HANSEN........................................................................................16
7.3 PAUL A. SAMUELSON.................................................................................. 18
7.4 JAMES TOBIN................................................................................................20
8.0 CONCLUSION.....................................................................................................23
REFERENCE.............................................................................................................24
APPENDIX................................................................................................................ 25
1.0 INTRODUCTION

One of the most influential schools of economic philosophy is the Keynesian

school of thought. Keynes's The General Theory of Employment, Interest and
Money marked the start of the school which is still widely recognized in orthodox
current economics. The neoclassical school gave rise to it with Keynes being deeply
rooted in the Marshallian tradition. Keynes employed many of the tenets and
techniques of neoclassical economics, even though he harshly condemned several of
its features and combined it with Ricardian ideas to call it "classical economics". His
system was infused with marginalist ideas such as static equilibrium economics and
was predicated on a subjective psychology approach. Keynes distanced himself from
critiques aimed at the neoclassical theory of distribution and value. Keynes's ideas on
economic growth were influenced by the Great Depression of the 1930s which was
the worst the Western world had ever known.

The roots of Keynes's ideas can be traced back to the framework of aggregate
economics or macroeconomics rather than the microeconomics of the neoclassical
school. Keynes adopted this macroeconomic approach due to the growth of
large-scale industrial production and trade making the economy more susceptible to
statistical measurement and control. Keynesian thinking also had roots in the
concern about secular stagnation or a declining rate of growth. The mature
private-enterprise economies of the Western world were less vigorous after World
War I and there was no room for further geographic expansion. Keynesian policies
were advocated by many economists in the United States after the Great Depression
including public works programs, deficit budgets for the federal government and the
easing of credit by the Federal Reserve System.

Keynesian economists focused on the determinants of total consumption,

saving, income, output, and employment rather than individual firm decisions. They
stressed the importance of effective demand (now called aggregate expenditures) as
the immediate determinant of national income, output, and employment. Keynesian

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economists believed that the economy is subject to recurring booms and busts due
to erratic planned investment spending. Equilibrium levels of investment and saving
are achieved through changes in national income, rather than changes in the rate of
interest. Wage and price rigidity were also a concern, with wages tending to be
inflexible downward due to institutional factors like union contracts, minimum wage
laws, and implicit contracts. Keynesian economists advocated for active fiscal and
monetary policies to promote full employment, price stability, and economic growth.
To combat recession or depression, the government should increase spending or
reduce taxes, increase the money supply to drive down interest rates, and counter
inflation caused by excessive aggregate expenditures.

In addition, Keynesians also strongly encourage the involvement of the state

in controlling the national economy because Keynesians are more in charge of
economic conditions as opposed to classical economic thinking that runs an
independent business.Understanding keynesian economics is very important for
understanding the policies and decisions made by the government, this is because
the idea brought by John Maynard Keynes is more concerned with a short-term
focus on policy-based to increase demand in the market rather than looking for
solutions in the economic structure.

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2.0 HISTORICAL BACKGROUND

The Keynesian School of Thought was founded by John Maynard Keynes in

the early 19-century. The Keynesian economic system is well known among other
schools of thought. It began with the introduction of Keynes’s The General Theory of
Employment, Interest and Money in 1936 which remains a major presence in
economics nowadays. It happens to appear from the neoclassical school even
though Keynes himself disagreed and criticized some of the ideas made by the
economist back then, he still used any system or method he found useful and
reliable.

Keynes made his system based on psychology and pointing to the main
objective including static equilibrium economics. He defines himself by avoiding
critics and believer theory of value and distribution. This economics theory was
created because of the impact of the Great Depression in 1930 known as the worst
Western world ever. But its not the root of Keynes’s ideas because he has been
thinking of this thing long before 1929 but he has not yet concluded it as one
economic thought.

Other economists are also doing their research in the framework of aggregate
economics or known as macroeconomics, because the neoclassical school already
unravels the world of microeconomics. Keynes also adds this knowledge outcome to
his thought. World war and economic growth has impacted the overall view of the
economy. Economy becomes more vulnerable to control panels and large-scale
industrial production. This is because the macroeconomic approach was more
suitable to be applied back then and it is necessary as the public became open to
the government to deal with unemployment. Keynes believed that the government
should play an active role in the economy, especially during economic downturn.

Keynesian thought had mentioned about the decreasing rate of growth and
it’s something that must be concerned. As the world was conquered by the power of
colonialism, it seemed there was no more land to be expanded and its production
outrun consumption. Same as savings and incomes, because there was no new
investment to be made to create new inventions. As a result, the firm was struggling

3
in competition and they had to reduce the price rate to gain profit. This is causing low
economic growth and loss.

When the Great Depression started early in the 1930s, most of the United
State economists supported policies that would soon be called Keynesian. In fact,
these policies were introduced well before the publication of Keynes’s The General
Theory. Public works programs, federal government deficit budgets, and the Federal
Reserve System’s credit easing were being advocated by prominent figures from
both within and outside the field of economics.

The economists were aware of the consequences of this system, increasing

the government spending sharply. Many economists realize that the multiplier effect
of increasing government spending can have a positive impact on both spending and
income. There is a theory that states that when national income increases,
consumption spending increases less than the amount of income, and savings
increase more rapidly.

A macroeconomic thought is that wages are a source of demand for goods

and expenditure, and reducing wages is often opposed as it does not provide a real
solution to unemployment. People in the United States freely acquired these ideas
from Keynes and discussed them extensively. However, Keynes was the one who
provided the analytical framework that integrated these ideas and contributed to the
“Keynesian revolution” in economics.

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3.0 MAJOR TENETS OF KEYNESIAN SCHOOL

The Keynesian School has several key tenets that form the foundation of its
approach to understanding and managing the economic system.
2.1 Macroeconomic emphasis
Keynes and his followers in the Keynesian school of thought were more
concerned with comprehending and controlling the macroeconomic picture than they
were with the specific decisions made by individual firms. They focused on
macroeconomic variables such as total spending, income, employment and output.
Finding solutions to avoid issues like excessive unemployment and maintain
economic stability was their main goal. They studied policies that could support the
entire economy particularly in hard times by influencing factors like government
spending and taxation rather than delving into the specifics of how each firm can
optimize their earnings. Hence why it was said that they put more emphasis on
macroeconomics.

2.2 Demand orientation

In the Keynesian school of thought, they believe that the aggregate
expenditures which total spending in an economy will determine its overall health.
This includes what people spend on goods and services, businesses investment,
government spending and the difference between export and import. Firms will
produce goods expecting people to buy them but sometimes these goods are unsold
due to less spending from people. This will lead to firms to cut off workers and
reduce their production. Though when there is full employment or potential output,
less than the level of output could be produced. To fix this, the Keynesian suggest
that the government intervene by implying taxes. This can help to balance the
economy and keep it running smoothly.

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2.3 Instability in the economic
According to Keynesians, the economy goes through ups and downs because
planned investment spending is unpredictable. Changes in investment plans lead to
bigger shifts in national income and output. Instead of changes in interest rates,
equilibrium levels of investment and saving are reached by adjusting national
income. Investment spending depends on both interest rates and the expected
return on new investments. Since the expected profit rate is uncertain, the
Keynesians believe it becomes a major factor causing economic fluctuations.

2.4 Wage and rigidity

Keynesians highlight that wages and prices tend to resist going down easily.
They argue that wages often do not decrease quickly due to factors like union
agreements, minimum wage laws and informal agreements between employers and
workers not to cut wages during temporary economic downturns. When there's not
enough demand for goods and services, businesses typically respond by cutting
production and letting go of workers instead of immediately reducing wages. Prices
also tend to stay stable or decrease slowly in response to lower demand. They also
believe that actual deflation only happens during extremely severe economic
depressions.

2.5 Active fiscal and monetary policies

Keynesian economists believed that when the economy is doing poorly
government intervention is needed. They suggested two main ways which the
government can either spend more money or lower taxes which encourages people
to spend more. They also thought that increasing the amount of money available can
make it cheaper to borrow so firms might invest more. On the other hand, when
prices are rising too fast because people are spending too much the government
should do the opposite. Keynesian believe that the government can spend less
money and raise taxes to slow down people's spending or make it a bit more
expensive to borrow money by reducing the available amount. These actions aim to
keep the economy stable and balanced. Hence why it was said that Keynesian
economists advocated that the government should intervene actively through
appropriate fiscal and monetary policies.

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4.0 WHOM DID THE KEYNESIAN SCHOOL BENEFIT OR SEEK BENEFIT FROM

Keynesian economics is sometimes referred to as "depression economics,"

because Keynes's General Theory was written during a time of deep depression.
The Keynesian school emerged in response to the Great Depression of the 1930s
and emphasized the importance of aggregate demand in determining economic
output and employment. Keynesian economists advocate active government
intervention through appropriate fiscal and monetary policies to promote full
employment, price stability and economic growth.

The Keynesian school of economics aims to address various economic

challenges and promote the well-being of diverse groups. His approach provides a
framework for dealing with pressing issues such as depression and unemployment,
which can have a significant impact on individuals and groups, including laborers,
reformers, intellectuals, and farmers. Keynesian economics also supports
government intervention and spending programs, which can benefit businesses,
bankers and administrators of unemployment compensation programs. At its core,
Keynesianism advocates active government involvement in the economy to stabilize
it during economic downturns and promote stability.

Keynesian economic theory places a strong emphasis on government

involvement. Keynes asserted that governments should take the initiative to increase
employment and demand during economic downturns. Increased government
funding for social programs, infrastructure projects and other endeavors is one of the
ways this intervention is implemented. The idea is to pump money into the economy
to increase overall economic activity through a multiplier effect.

Keynes emphasized the importance of controlling aggregate demand to avoid

or reduce recessions. During periods of economic contraction, firms and consumers
typically reduce their spending, which reduces overall demand. Entrepreneurs and
buyers benefit from the theory because according to Keynesian theory the fewer
buyers there are, the fewer traders there will be. Keynesian policies use fiscal tools

7
such as tax breaks and increased public spending to try and counter these trends.
The intention behind this is to reverse the negative trend of recession by increasing
demand and economic activity.

A fundamental component of Keynesian economics is countercyclical policy.

According to this strategy, the government should operate against the current
economic cycle. Keynes advocated higher government spending during recessions
to combat recession and promote economic expansion. Instead, the government
should reduce spending during economic growth to avoid inflation and overheating.
The goal of this counter-cyclical approach is to reduce the ups and downs of the
business cycle.

Keynesian economics places a high priority on addressing unemployment.

Keynes argued that by encouraging higher government spending, more jobs might
be generated, which would lower the unemployment rate. Keynesian theory benefits
the unemployed. This method sees unemployment as a social issue that can be
addressed with focused government intervention, alongside economic inefficiency.

Furthermore, by limiting sudden changes in economic activity, Keynesian

policies seek to stabilize the economy. The goal is to promote consistent and
long-term economic growth by using government tools to control the ups and downs
of the business cycle. This stabilization objective emphasizes the importance of
preventing both protracted recessions and large uncontrolled booms.

In short, Keynesian economics had a huge impact on its time and gave
governments a framework to deal with economic issues and there were many people
who benefited. This theory focuses more on demand management, counter-cyclical
measures, government involvement, unemployment reduction, and economic
stabilization. However, it is important to acknowledge that economic theory and
practice have changed over time as a result of the emergence of many schools of
thought to deal with changing economic conditions. Although Keynesian concepts
are still applicable, more recent advances in economic theory have led to a more
sophisticated understanding of economic dynamics and policy implications.

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5.0 HOW WAS THE KEYNESIAN SCHOOL VALID, USEFUL OR CORRECT IN ITS
TIME?

Keynes argued for the importance of government intervention in the economy,

especially during periods of recession or high unemployment. The key concepts of
Keynesian economics include:

1. Aggregate Demand
Keynes emphasized the role of aggregate demand in determining economic
output. He argued that fluctuations in aggregate demand could lead to periods
of economic instability.
2. Government Spending
Keynes advocated for government intervention through increased public
spending during economic downturns to stimulate demand and boost
employment. This approach became known as fiscal policy.
3. Multiplier Effect
Keynes introduced the concept of the multiplier effect, where an initial increase
in spending leads to a more than proportionate increase in overall economic
activity.
4. Liquidity Preference
Keynes also discussed the importance of liquidity preference, stating that
individuals prefer to hold liquid assets like cash. This insight contributed to his
analysis of interest rates and the role of monetary policy.

During the Great Depression, governments adopted Keynesian principles to address

widespread unemployment and economic stagnation. The implementation of policies
such as public works projects and increased government spending played a role in
economic recovery.

However, it's essential to note that Keynesian economics is not without criticism.
Some argue that excessive reliance on government intervention can lead to
inefficiencies and long-term economic issues. Additionally, the effectiveness of
Keynesian policies can vary depending on the specific economic context.

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This school of thought emphasized the role of government intervention in stabilizing
the economy and promoting economic growth. In its time, the Keynesian School
proved to be valid, useful, and correct in this time for several reasons.

1. The Keynesian School provided a fresh perspective on the causes of economic

downturns, particularly during the Great Depression.
Keynes argued that recessions and depressions were not self-correcting, as
classical economists believed, but rather required active government intervention to
stimulate demand and restore economic stability. This insight was crucial in shaping
economic policy during the 1930s and helped to guide governments in implementing
measures such as fiscal stimulus and public works programs.

2. The Keynesian School highlighted the importance of aggregate demand in driving

economic growth.
Keynes argued that fluctuations in aggregate demand, caused by changes in
consumption, investment, and government spending, were the primary drivers of
business cycles. By focusing on managing aggregate demand, policymakers could
effectively stabilize the economy and promote full employment. This approach was
instrumental in shaping post-war economic policies and contributed to the sustained
economic growth experienced by many countries during the mid-20th century.

3. The Keynesian School’s emphasis on the role of government in managing the

economy provided a framework for addressing social and economic inequalities.
Keynes believed that government intervention could not only stabilize the
economy but also promote social welfare. His ideas laid the foundation for the
development of the welfare state, with policies such as unemployment benefits and
social security aimed at reducing poverty and ensuring a more equitable distribution
of wealth.

However, it is important to note that the Keynesian School also had its limitations.
Critics argued that excessive government intervention could lead to inflation and
distort market mechanisms. Additionally, the Keynesian approach faced challenges

10
during the stagflation period of the 1970s, when high inflation and stagnant economic
growth posed a dilemma for policymakers.

In conclusion, the Keynesian School of economics was valid, useful, and

correct in its time. It provided a new understanding of economic downturns,
emphasized the importance of managing aggregate demand, and laid the
groundwork for addressing social and economic inequalities. While it faced criticisms
and challenges, the Keynesian approach played a significant role in shaping
economic policies and promoting stability and growth during the 20th century.
Understanding the contributions and limitations of the Keynesian School can provide
valuable insights for policymakers and economists in addressing contemporary
economic challenges.

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6.0 WHICH TENENTS OF THE KEYNESIAN SCHOOL BECAME LASTING
CONTRIBUTIONS?

The Keynesian school of Economics has made a great contribution to the

formation of today's economy, so that today we ourselves can see the impact of
changing classical economic thinking because initially this thought originally led to
changes in the employment cycle and economic structure will be a lot of great
benefits to individuals as well as entrepreneurs. The emergence of Keynesian
economics was a response to the economic challenges of the Great Depression that
occurred and became a guide for controlling economic fluctuations. There are a few
tenets that became a long lasting contribution to today’s economy.

1) Aggregate demand and aggregate supply:

Aggregate demand and aggregate supply is one of the fundamental principles

of Keynesian economics.Keynesian economics is the opposite of classical economics.
This is because Keynesians claim that natural markets will be able to adapt if the
concept of government intervention occurs because Keynesians believe that the
government has the power to control and stabilize the economy. In addition,
Keynesians also stated that the fluctuation of economic aggregates will have a major
impact on the structure of the economy due to periods of unemployment and
recessions. Therefore, the government took the initiative in stimulating demand
during the recession

2) Counter-cyclic fiscal policy:

Keynesian economics is basically very supportive of this policy, this is because

Keynesians strongly emphasize the role of government in controlling the national
economy. This is because through this policy the government is actively adjusting
the country's taxation as a stimulus response to the economic cycle. During the
recession in Europe,Keynesian economic theory suggested that governments should
increase spending through tax cuts. The rationale is to stimulate economic growth.
However, if the economy is to grow rapidly, policies must be implemented to prevent

12
there is heat in the economy.such as raising taxes and reducing spending to prevent
inflation occurs

3) The role of government in stabilization

A key feature of Keynesian economics is the role of government in stabilizing

the economy. This is very contrary to classical economic theory which practices
laissez-faire market policies, this policy gives full freedom to traders and citizens to
conduct transactions without any control,this free policy is detrimental if the same
tax is imposed when the economy is getting more vibrant,this is because higher
purchasing power can lead to inflated demand which basically can cause inflation to
occur,therefore economic theory this keynesian strongly encourages the government
to act to control demand in a controlled country. This ensures that the work force is
fully utilized. This perspective is also still used today to overcome modern economic
recession and influence modern macroeconomic policy

4) Liquidity and interest rate preferences:

This new Keynesian economic theory shows the ability of banks to influence
business activities. Keynes stated that individuals or businesses will make decisions
based on the policy priorities of the liquid assets they own,therefore changes in
interest rates will affect the level of business investment in the economy. This shows
the ability of the central bank in discussing monetary policy, as well as showing the
bank as a power that can have implications for the economy, if interest rates are set
too high then of course not many people want to make loans to banks because they
do not want to bear high interest but if the interest offered is low then it can
discourage businesses from doing business activities.

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7.0 THE MAJOR FIGURES IN KEYNESIAN SCHOOL OF THOUGHT

7.1 JOHN MAYNARD KEYNES

John Maynard Keynes is the main figure for the Keynesian School of Thought
even though the name of the theory is taken from his name. Born June 5, 1883 and
raised in Cambridge, United Kingdom, a son from a well-known family. His father is a
logician and a political economist named John Neville Keynes, meanwhile his mother
is Florence Ada Keynes, a local social reformer. He soon continued his studies in
Cambridge University and he is recognized as a smart kid by the lecturers there.
Keynes became editor of the Economic Journal at his twenty-eight and soon worked
as a lecturer at Cambridge University after he graduated.

Keynes is an exemplary figure either from world practical affairs or academic

life. He managed to balance his life with his academic achievements. He was a
chairman of a life insurance company and he also holds director positions in other
companies. Known as a great worker, he soon offered to work in the Bank of
England and he took this opportunity to expand his work scope. Keynes represented
the British Treasury at the peace conference after world war 1 as the main speaker
and holds the power to speak as chancellor of the exchequer. Keynes once resigns
from his position because of different stances to peace settlement forced upon
Germany at Paris negotiations in 1919 and leads to the writing of The Economic
Consequences of the Peace.

He died on 21, April 1946 at his 63. Keynes is best known as the father of
macroeconomics because he was the founder of modern macroeconomics that
would soon be called the Keynesian School of Thought. His biggest omission is his
writing The General Theory of Employment, Interest and Money. His great era was
around the 20th century during the Great Depression in 1930 which played a big role
in England Economy. Here are some key aspects of Keynes’s contribution.

14
Keynesian Economics

Keynesianism is an economic doctrine rooted in the concepts of the modern

macroeconomic British economist, John Maynard Keynes. The theory advocates for
a mixed economy, wherein both the government and the private sector play pivotal
roles. The ascent of Keynesian economics marked the decline of laissez-faire
economics, a belief system asserting that markets and the private sector can
autonomously function without governmental interference. This means that the
overall economic climate can affect how people make decisions about their finances
and investments.

Unlike classical economic theory, which classical economic thought proposes

that economic processes rely on the growth of potential output, Keynes highlighted
the significance of aggregate demand as the primary driving force for the economy,
especially during periods of economic sluggishness. Keynes believed that the
government should make a law to help boost demand on a macroeconomic scale,
thereby mitigating unemployment and deflation. By increasing government spending,
there is a subsequent surge in the circulation of money within the community,
motivating people to engage in more economic transactions and heighten their
demand, ultimately elevating aggregate demand.

Consumption Function

The consumption function is a fundamental component of Keynesian

economics and is used to describe the relationship between disposable income and
consumer spending. Keynes stands with his belief that disposable income would
affect consumer spending, which represents the income left after deducting taxes.
He formulated the consumption function as follows:

C = C0​+ c × Yd​

C is total consumption. C0​is autonomous consumption, representing the level

of consumption that exists even when disposable income is zero. It includes
essential spending that individuals would undertake regardless of their income level.
c represents the marginal propensity to consume (MPC), indicating the portion of

15
extra income that individuals opt to allocate towards consumption. Yd​is disposable
income.The consumption function suggests that as disposable income increases,
consumption also increases. However, the relationship is not one-to-one because of
the presence of autonomous consumption and the marginal propensity to consume.

7.2 ALVIN H. HANSEN

Alvin H. Hansen (1887–1975) was a leading economist who made major

contributions to the development of modern Keynesian economics. He is best known
for his work in macroeconomics and his role in popularizing Keynesian ideas in the
United States. Hansen's initial reaction to Keynes's work was less than enthusiastic,
but after further study, he became a supporter of Keynesian economics. He joined
the faculty at Harvard in 1937 and was instrumental in promoting Keynes's ideas and
their policy implications through his Fiscal Policy Seminar. Some of his seminar
participants later became major contributors to economics and public policy.
Hansen's influence left a lasting impression on the development of macroeconomics
and public policy in the United States.

One of Hansen's important contributions was the adaptation and elaboration

of Keynesian ideas to the American economic context. After the Great Depression,
Hansen sought to use Keynesian principles to explain and address the economic
challenges facing the United States. He developed Keynes' theory, particularly in the
context of long-term economic stagnation and the role of investment in determining
aggregate demand.

Hansen introduced the concept of "secular stagnation", a term that gained

attention in Keynesian economic discourse. Secular stagnation refers to a prolonged
period of low economic growth, high unemployment, and underutilized resources.
Hansen argues that even with government intervention to boost short-term demand,
there may be underlying structural issues that lead to continued economic
stagnation. This idea became influential in shaping policy discussions in the mid-20th
century.

16
 Another major contribution of Hansen was his emphasis on the importance of
investment as a driver of economic activity. He emphasizes the role of autonomous
investment, which is independent of changes in income, in influencing overall
economic performance. Hansen's insight into investment behavior adds a dynamic
element to Keynesian analysis, emphasizing the need to understand and manage
the factors that influence investment decisions in order to stimulate economic
growth.

Hansen also played an important role in shaping the fiscal policy discussion.
He supports a more active government role in managing the economy, especially
through counter-cyclical fiscal policy. Based on Keynesian principles, Hansen argued
that governments should use fiscal tools to stabilize the economy, increasing
spending during recessions to stimulate demand and reducing spending during
periods of economic expansion to prevent inflation.

Furthermore, Hansen contributed to the development of the concept of the

"multiple accelerator model." This model integrates the multiplier effect, driven by
changes in consumption resulting from changes in income, with the accelerator
effect, driven by changes in investment resulting from changes in the rate of income
growth. The combination of these factors provides a more comprehensive
understanding of how fluctuations in economic activity can occur.

In summary, Alvin H. Hansen's contribution to Keynesian economics was

instrumental in adapting and extending Keynesian ideas to the American economic
landscape. His work on secular stagnation, the role of investment, and the multiplier
accelerator model enriched the Keynesian framework and influenced economic
thought and policy. Hansen's views on the dynamics of long-term economic trends
and the importance of government intervention in managing the economy left a
lasting impression, contributing to the evolution of Keynesian economics and its
application in addressing real-world economic challenges.

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7.3 PAUL A. SAMUELSON

Paul A. Samuelson, born in 1915, was a famous American economist. He

became well-known for his work in making economics understandable for everyone.
One of his big achievements was a book called "Economics: An Introductory
Analysis" in 1948. This book helped people understand Keynesian economics, a way
of thinking that says the government should get involved in managing the economy.
In 1970, Samuelson got the Nobel Prize in Economics, the first American to receive
this award. Samuelson also worked as an economic advisor for Presidents Kennedy
and Johnson, helping them make important economic decisions. To sum it up, Paul
A. Samuelson was a significant figure in economics, making it easier for people to
understand and his ideas are still important today.

Contribution: The multiplier- accelerator interaction

Samuelson, using different equations, showed that changes in income
(consumption) depend on how much people spend and how much businesses invest
when income changes. The multiplier, determined by people's spending habits and
the accelerator, show how much businesses change their investment when income
grows. Samuelson demonstrated that depending on the values of these factors and
whether the increase in investment continues, an initial boost in investment can lead
to different outcomes. This can range from no lasting increase in income to a
continuously growing level of income.

Samuelson's idea of the Multiplier-Accelerator Interaction looks at how

spending changes affect the economy. The "multiplier" effect says that when there's
more spending, like the government investing money, it starts a series of events.
This extra spending increases income, which then leads to more spending, creating
a chain reaction that boosts the whole economy. The "accelerator" effect works with
the multiplier. It explains that when income goes up, businesses are likely to invest
more, helping the economy grow. This, in turn, increases income even more,
creating a cycle of positive economic activity.

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The Relevance of multiplier- accelerator interaction to this day
In today's world, the Multiplier-Accelerator Interaction remains crucial for
understanding how changes in spending and investment can have significant effects
on the economy. During an economic downturn, governments often use fiscal
policies such as increasing spending or cutting taxes to boost economic activity. The
multiplier effect reveals that this initial injection can lead to a bigger overall increase
in income and production. Similarly, the accelerator effect comes into play when
increased income stimulates business investment, contributing to ongoing economic
growth. This is especially important when discussing policies aimed at promoting
long-term economic development.
In times of economic crises or recessions, understanding the
Multiplier-Accelerator Interaction helps policymakers create effective stimulus
packages. It enables them to assess the potential impact of their actions on overall
economic activity.

Contributions : The simple algebra of income determination

Paul Samuelson, in his work on "The Simple Algebra of Income
Determination," contributed to the understanding of the relationship between different
economic variables particularly in the context of income determination. In simple
terms, Samuelson used algebraic models to illustrate the relationships between key
economic variables such as consumption, saving, investment and income. The basic
idea is to express these relationships in equations making it easier to analyze how
changes in one variable can affect others and ultimately determine the overall level
of income in an economy.

Through these algebraic models, Samuelson aimed to provide a clear and

accessible framework for students and economists to understand the fundamental
factors influencing the overall economic activity of a nation. While the specific
algebraic equations may vary, the overarching goal is to simplify the complexities of
economic interactions into mathematical expressions that facilitate analysis and
comprehension.

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The relevance of simple algebra of income determination to this day
The simple algebra of income determination is still important today. It's like a
basic math framework used to understand how different parts of the economy such
as spending, saving and income are connected. This simple math helps economists,
students and policymakers see how changes in one thing can affect others in the
economy. It's useful for teaching and learning about economics and it's still used
when economists want to figure out how government policies might impact the
overall economy. While there are more advanced ways to study the economy, this
simple math foundation is a helpful starting point for understanding how things work
together.

7.4 JAMES TOBIN

James Tobin, an American economist, played a crucial role in further

developing Keynesian economics. He is best known for his work on investment and
monetary policy. Other notable figures associated with the Keynesian school include
John Hicks, Paul Samuelson, and Robert Solow. Hicks developed the IS-LM model,
which illustrates the relationship between interest rates, investment, and output in
the short run. Samuelson and Solow made important contributions to the field of
macroeconomics, including the development of neoclassical synthesis, which
combines Keynesian and classical economic theories.

The significance of Tobin’s contributions in today’s economic landscape are:

1) Tobin’s Q concept
Tobin introduced the concept of “Tobin’s q,” which measures the relationship
between the market value of a firm and the replacement cost of its assets. This
concept has been widely used to analyze investment behavior and asset pricing.
Tobin’s q has become an important tool in analyzing financial markets and
understanding the behavior of firms.

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2) Robin hood tax
One of Tobin’s most notable contributions was his development of the Tobin
Tax, also known as the “Robin Hood Tax.” This tax proposed a small levy on
currency transactions to discourage short-term speculative trading and stabilize
financial markets. Tobin believed that such a tax would reduce exchange rate
volatility and promote long-term investment. While the Tobin Tax has not been widely
implemented, it sparked a global debate on the role of financial markets and the
need for regulation.

3) Work on monetary policy

Tobin’s work on monetary policy also had a profound impact on the school of
thought. He introduced the concept of the ‘liquidity trap’, which refers to a situation
where monetary policy becomes ineffective in stimulating economic growth. He
advocated for a more active role of government in managing the economy,
particularly through fiscal policy and the use of discretionary monetary policy. Tobin
argued that monetary policy should not solely focus on controlling inflation but should
also consider stabilizing output and employment. His ideas laid the foundation for the
development of modern macroeconomic models that incorporate both monetary and
fiscal policy.

Furthermore, Tobin’s contributions to the school of thought extended beyond

his specific theories. He was known for his interdisciplinary approach, combining
insights from economics, finance, and psychology. This holistic perspective allowed
him to analyze complex economic phenomena and propose innovative solutions.
Tobin’s emphasis on the importance of behavioral factors in economic
decision-making has influenced subsequent research in the field of behavioral
economics.

The relevance of James Tobin contribution:

In today’s economic landscape, Tobin’s contributions remain highly relevant.
The ongoing debates on financial market regulation, the role of government in
managing the economy, and the integration of behavioral factors in economic models

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all draw inspiration from Tobin’s work. His ideas continue to shape the way
economists and policymakers think about and approach economic issues.

James Tobin’s contributions to the school of thought were significant and

continue to have a lasting impact on economics. His ideas on monetary policy, the
Tobin Tax, and his interdisciplinary approach have shaped the field and influenced
subsequent research. Tobin’s work remains relevant in today’s economic landscape,
providing valuable insights for economists and policymakers alike.

Overall, the Keynesian school of economics, with James Tobin as one of its
major figures, has greatly influenced our understanding of macroeconomic theory
and policy. Its emphasis on government intervention and the importance of
aggregate demand continues to shape economic debates and policy decisions to
this day.

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8.0 CONCLUSION

The Keynesian school of thought has played a privital role in developing

today’s economic policies and influencing our understanding of macroeconomic
dynamics. The original Idea brought by John Maynard Keynes itself presented a new
challenge in dealing with the era of the Great Depression that occurred throughout
Europe. Keynesian ideas have provided a new perspective on economics in contrast
to the classical theory that was common at the time,among the greatest
contributions that the keynesian school has given is the issue of emphasis on
government intervention in managing the national economy. Keynes argued that the
economic recession, the government should take an active role to engage in fiscal
policy, such as increasing public spending and reduce taxes to stimulate demand and
increase business activity. This keynesian approach has had a major impact on the
world economy to the day that this theory is still used in dealing with the issue of
economic recession that occurred.

In conclusion the enormous impact brought about by the keynesian school

has left an indelible mark in economic thought and policy. Emphasis on managing
demand, the role of government in stabilizing the economy, and flexible response
policies in the face of uncertainty in the economy it has opened up valuable new
insights while shaping and guiding economic policy makers around the world.
Keynesian economics has helped us navigate the complexities of the modern
economic landscape

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REFERENCE

Alan S. Blinder, Keynesian Economics. Keynesian Economics - Econlib

Encyclopedia, Philosophy of economics. Document13 (umich.edu).

History of Economic Thought THE KEYNESIAN SCHOOL. (1) Keynesian School- |

Orezimena Obodoagwu - Academia.edu.

Kirti Shailes, Top 5 Contributions of Paul A. Samuelson to Economics. Top 5

Contributions of Paul A. Samuelson to Economics (economicsdiscussion.net).

Murrey Jacobson, Remembering Economist Paul Sameulson. Remembering

Economist Paul Samuelson | PBS NewsHour.

Stanley L.Brue, Randy R. Grant, 2013.The Evolution of Economic Thought, eight

edition.

The Keynesian School. The Keynesian School – Introduction to Macroeconomics

(unizin.org).

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APPENDIX

John Maynard Keynes

Paul A. Samuelson

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Alvin H. Hansen

James Tobin

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