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KEYNESISM

Unite 8

BIBLIOGRAPHY:

1.Dumitru Moldovanu , Doctrine economice,


ASEM,
2. The Political Economy of John Maynard
Keynes a beginners guide Brendan Sheehan,
Leeds Beckett University,
3.www. youtube: Keynesian Theory in 5 min

KEYNESISM
8.1. Genesis of economic dirigisme. John
Keynes and his opera.
8.2. Main features of the Keynes's theoretical
system.
8.3. The theoretical Model of Keynes
8.4. Political economics by John Keynes.

Dirigisme or dirigism (from French diriger,


meaning "to direct") is an economic system where the
state exerts a strong directive influence over investment.
It designates a capitalist economy with a strong
directive, as opposed to a merely regulatory role for the
state.
The term emerged in the post-war era to describe the
economic policies of the French economy, which included
substantial state-directed investment, the use of indicative
economic planning to supplement the market system, and
the establishment of state enterprises in strategic sectors of
the French economy.

The term has subsequently been used to classify other


economies that pursued similar policies, most notably
the East Asian tiger economies, and more recently the
economy of the People's Republic of China. A related
concept is state capitalism.
Most modern economies can be characterized
as dirigiste to some degree for ex., the state may
exercise directive action by performing or subsidizing
research and development of new technologies, through
government procurement (especially military) or
through state-run research institutes.

Similar to France, state authorities in Japan also


pursued dirigiste policies prioritizing selected sectors for
rapid development and recruiting technocrats from the
nations elite schools for positions as planners in the state
administration. Following the Japanese and French models,
South Korea promoted its version of national champions,
providing long-term subsidized credit to a few industrial
groups. In Taiwan the government chose to support capitalintensive industries, such as shipbuilding and
petrochemicals.

Many attribute the collapse of dirigisme to the


increased complexities of a highly competitive and
internationalized economy as strategic planning capacities
of state technocrats became severely limited.
In South Korea, state activism in the market
economy was considered as crony capitalism. Although
dirigisme has undoubtedly given way to more marketcentred political economy in these countries, the state is
still arguably active in various ways.

KEYNESIAN THEORY
Keynesian economics is a theory suggested
by John Maynard Keynes in which
government used taxations to stimulate
the economy. This theory is also called
fiscal policies or DEMAND-SIDE
ECONOMICS.
ECONOMICS

John Maynard KEYNES


(1883-1946) is one of

the best known economists.


His work changed the
whole face of post-World
War II economic policy.
*graduate of Cambridge
--studied Classics and
Math.
His reputation does not
rest solely on the General
Theory of Employment,
Interest and Money (1936),
which initiated the socalled Keynesian
Revolution, but also on
his other writings, most
notably A Treatise on

Keynes argued that an economic slump was not a


long-run phenomenon that we should all get depressed about
and leave the markets to sort out. (Remember that Smith felt
that government should always stay out of economic
policy---laissez-faire) Keynes felt that a slump was a shortrun problem stemming from a lack of demand.
If the private sector was not prepared to spend to boost
demand, then the government should do it instead by running
a budget deficit. When times were good again and the
private sector was spending again, the government could
trim its spending and pay off the debts they had accumulated
during the slump.

Description of the Keynesian economic


.
system:
1. Keynesian believes that aggregate demand is influenced by
host of economic decisionsboth public and privateand
sometimes behaves erratically. The public decisions include,
most prominently, those on monetary and fiscal (i.e., spending
and tax) policies. Some decades ago, economists heatedly
debated the relative strengths of monetary and fiscal policies,
with some Keynesians arguing that MONETARY POLICY is
powerless, and some monetarists arguing that FISCAL
POLICY is powerless. Nearly all Keynesians and monetarists
now believe that both fiscal and monetary policies affect
aggregate demand.

2. According to Keynesian theory, changes in aggregate

demand, whether anticipated or unanticipated, have their


greatest short-run effect on real output and employment, not
on prices. 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, because prices are somewhat rigid,
fluctuations in any component of spendingconsumption,
investment, or government expenditurescause output to
fluctuate. If government spending increases, for example,
and all other components of spending remain constant, then
output will increase.

3. Keynesians believe that prices, and especially wages,

respond slowly to changes in supply and demand,


resulting in periodic shortages and surpluses, especially of
labor.
4. Keynesians do not think that the typical level of
unemployment is idealpartly because unemployment is
subject to the caprice of aggregate 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.

Some Keynesians are more concerned about


combating unemployment than about conquering inflation.
They have concluded from the evidence that the costs of low
inflation are small. However, there are plenty of anti-inflation
Keynesians. Most of the worlds current and past central
bankers, for example, merit this title whether they like it or
not. Needless to say, views on the relative importance of
unemployment and inflation heavily influence the policy
advice that economists give and that policymakers accept.

Keynesians belief in aggressive government


action to stabilize the economy is based on value
judgments and on the beliefs that (a) macroeconomic
fluctuations significantly reduce economic well-being
and (b) the government is knowledgeable and capable
enough to improve on the free market.
Keynes argued that the solution to the Great
Depression was to stimulate the economy through some
combination of two approaches:
A reduction in interest rates (monetary policy), and
Government investment in infrastructure (fiscal
policy).

If the interest rate at which businesses and


consumers can borrow is lowered, investments which
were previously uneconomic become profitable, and large
consumer purchases which are normally financed through
debt (such as houses, automobiles) become more
affordable. A principle function of central banks in
countries which have them is to influence this interest rate
through a variety of mechanisms which are collectively
called monetary policy. This is how monetary policy
which reduces interest rates is thought to stimulate
economic activity, i.e. "grow the economy," and why it is
called expansionary monetary policy.

The main conclusion of Keynesian economics, is


that there are some situations in which a depressed
economy would not quickly self-correct towards full
employment and potential output, but could remain
trapped indefinitely with both high unemployment and
mothballed factories. To the observation that these were,
in fact, the prevailing conditions throughout the
industrialized world for many years during the Great
Depression, classical models could only conclude that it
was a temporary aberration. The purpose of Keynes'
theory was to show such conditions could, without
intervention, persistant a stable, though dismal,
equilibrium.

Political economics expected by Keynes


Keynes believed the state of long-term
expectation was further destabilised by what he
termed animal spirits. Keynes believed that
animal spirits were an integral part of the human
condition; the term described the innate human
urge to act positively, to spontaneously do
something rather than nothing, whilst hoping that
something good would result.

Keynes thought that entrepreneurial business


people were very much guided by animal spirits, as they
had to commit to an investment before profits
materialised. Optimism was greatly influenced by
economic circumstance.
He thought that the state of long-term expectation
was likely to be reasonably stable in many circumstances.

The most propitious conditions for stability occurred


when:
(1)decision-makers were confident in the conventions they
applied to generate probable forecasts;
(2) enterprise, rather than speculation, dominated stock
market trading activity;
(3) animal spirits were steady.
But these conditions for stability could easily be
undermined. Keynes believed, therefore, that the specter of
precariousness inevitably haunted the sphere of wealthaccumulation.

Last, but not least, Keynes believed that in an


interdependent global economy nations states marched
forward or backwards together. He much preferred that they
collectively march forward towards long-term prosperity. To
achieve this objective, Keynes proposed the creation of a
new regime of commerce and trade. The new regime was
designed to address the problems of persistent and
destabilising trade imbalances between nations that impeded
the pursuit of global full employment.
The regime was to be built around a new supranational
financial agency - the International Clearing Union (ICU).
The ICU would have money creation powers, issuing a new
international currency (bancor) which corporations within
national borders would use to conduct inter-national trade
and capital movements.

The International Clearing Union (ICU) would act as the


banker for all nations; granting bancor overdrafts to
nation states running temporary trade deficits, and
receiving bancor-denominated deposits from nation
states with trade surpluses. In addition, Keynes proposed
that the ICU should police a new global fixed exchange
rate regime with all currencies fixed relative to the
value of the bancor currency.

Conclusions:
1. Keynes was a proud member of the British
establishment, who, in any future class war, would
willingly move the barricades of the educated
bourgeoisie. The Great Depression was the single
most important event which shaped Keynes ideas.
He realized that in order to save capitalism it had to
be reformed.
2. Keynes offered a range of middle-way proposals
to reform capitalism; in particular, to cure and
prevent serious economic instability both
nationally and globally.

3. Keynes legacy to political economy has been assessed.


The assessment concludes that Keynes was a mild theoretical
revolutionary, content to make good the deficiencies in
classical orthodoxy.
4. However a return to sustained economic growth,
especially in European, requires a massive public works
programme combined with an extension of the tax base
5. Finally, the global capitalist system is in serious need of
reform; and anyone serious about future reform would be
well-advised to re-read Keynes.

Tank you for atention