What is Traditional keynesian economics?

Question

Economics

Answer 1

It's a school of economic thought that contends that prices in general and wages in particular are sticky (downward-inflexible), as opposed to classical economists' belief that prices and wages were downward-flexible. In the defense of classical economists, prices WERE downward-flexible before 1850, but became progressively more downward-inflexible in most European countries and in the U.S. between 1850 and 1910. As a result, the economies began to respond to recessions by increasing unemployment, rather than by decreasing price levels.

Keynes maintained that while in the long-run recessions will take care of themselves (as classics believed they would), an enlightened government could greatly reduce the length and severity of recessions by implementing counter-cyclical policies. Keynes' preferred choice of policy was fiscal policy; he suggested that the government should maintain a budget surplus during booms and budget deficit during busts.

Later research showed that, while Keynes was right in principle, it is monetary, rather than fiscal, policy that is the most powerful tool of counter-cyclical policy-making (hence, the distinction between traditional and modern Keynesian economics).

Answer 2

Here is the textbook view, which is wrong:
The traditional Keynesian economics believes that business cycles are cause by sticky prices. Unlike the economists of his day, which believed that although there might be short term sticky prices and wages, they were minor and nothing can be done by the government. Instead, the economy was thought to correct itself in the long run. But, says Keynes, "In the long run we are all dead". So Keynes advocated two policies: government spending and printing money - both to increase spending and therefore return output to its full employment equilibrium value. This works because consumers and workers have a certain natural propensity to spend and save, while others have a natural propensity to invest, and these propensities do not agree with each other. Wages and interest rates do not adjust to clear the market and you get booms (inflation) and busts (under-employment).
Inflation lowers the real wage (w/p) producing high output and busts are when inflation is low so that real wages (w/p) are high, creating low output and leading to unemployment.

The "traditional' Keynesians also thought there was an exploitable trade off between inflation and employment

This little story seems so familiar because it is what they teach in economics classes with the following exception: the Keynesian model is short term - in other words they are more inclined to think that the economy will reach full employment by itself and not require day to day management. And, there is no exploitable trade off between inflation and employment.

Answer 3

Hi!

The Keynesian Theory, is an economic theory based on the ideas of 20th century British economist John Maynard Keynes.

1.Keynesian economics promotes a mixed economy, in which both the state and the private sector are considered to play an important role.

2.Keynesian economics markedly differs from, and sought to provide solutions to what some economists believed to be the failure of laissez-faire economic liberalism (which advocates that markets and the private sector operate best without state intervention).

3.In Keynes's theory, macroeconomic trends can overwhelm the micro-level behavior of individuals.

4. Instead of the economic process being based on continuous improvement in potential output, as most classical economists had believed from the late 1700s on, Keynes asserted the importance of aggregate demand for goods as the driving factor of the economy, especially in periods of downturn.

5.From this he argued that government policies could be used to promote demand at a macro level, to fight high unemployment and deflation of the sort seen during the 1930s.

6.This is in contrast to supply-side economics. Keynes believed that the government was responsible for helping to pull a country out of a depression. If the government increases its spending, then the citizens are encouraged to spend more because more money is in circulation. People will start to invest more, and the economy will climb back up to normal.

7.A central conclusion of Keynesian economics is that there is no strong automatic tendency for output and employment to move toward full employment levels. This conclusion conflicts with the tenets of classical economics, and those schools, such as supply-side economics or the Austrian School, which assume a general tendency towards a welcome equilibrium in a restrained money-creating economy. In neoclassical economics, which combines Keynesian macro concepts with a micro foundation, the conditions of General equilibrium allow for price adjustment to achieve this goal.

hope this helps!

Cheers n chin up:)

Answer 4

Keynes (correctly), didn't believe markets cleared as did the classical economists of his day.

Answer 5

2 coconuts added to 2 coconuts makes 4 coconuts