Crash Course in Economics – Keynesian Economics 101

Crash Course in Economics – Keynesian Economics 101

I started this blog so I can post about all things to do with money – including personal finance, economics and taxes.  I think I have blogged about ad naseum (hahah had to fit a little Latin jargon in there) about taxes and personal finances but very little about economics.  Notwithstanding, I had voiced my opinion about economics mostly during election season.  Want some examples?

So why now? A great blogger named Tough Money Love wrote a post Titled, Stimulus Package 2009: Lightening Round Reaction and got a comment that made me think that most people don’t under Keynesian Economics.  Here is the full comment note that it was not edited,

number 10… the disabled dont matter, they already have gov. aid.. is called disability, and if you dont qualify, get a job…. first off i would like to say the only thing the gov. needs to focus on is creating more jobs, not pumping money into the economy.. 500 dollars wont do jack for me… pay my rent for one month in my overly priced house in bfe kansas…. or pay off my christmas loans… wont do didly, we need to focus on jobs…. the other major issue is the interest rates for people like me that dont exist, they are an outrage… if i pay 10 dollars more than the min. payment on a credit card.. my bill will go up… focus on the real problems.. and last, the mass transit that everyone appears to be interested in, why doesn’t gm do that? they can get return profit for the cost to transport the people, and maybe actually make a impact on America that has so miserably failed me my 22 years of life… they should def. invest in new stuff other than cars…

First, we are going to completely ignore the fact that “Derek” thinks that America failed him or that Pres. Obama is going to pay his Visa Bill or the fact that he has a disdain for those less fortuante than him who may have disabilities or the fact that he has Christmas Loans or the inherit problems associated with gm taking over our mass transit system.  We are going to focus on,

first off i would like to say the only thing the gov. needs to focus on is creating more jobs, not pumping money into the economy..

Maybe Derrick means that we shouldn’t give a stimulus check maybe he means that the government shouldn’t take on public projects…but because of his amazing communication skills, maybe we’ll never know.  Regardless it got me to thinking, how many people do not know what Keynesian Economics even is or the theory behind it?

Two disclaimers before I start:

  1. I am not 100% behind Keynesian Economics but it is a theory that the Obama camp seems to be behind and as such I am merely trying to educate, not persuade.
  2. By the end of acadamia most economists will have written on umpteen papers on the guy and taken countless semester hours semester on macroeconomics…this is a one time post to give my readers some insight as to who the guy is (Hell! Even his wikipedia page is long).

Keynes’ most often quoted book is, “The General Theory of Employment, Interest and Money.”  Want a VERY full review check out the wiki page on just the book.   Keynes runs into classical economic theory on some issues (if there is a request I’ll explain that later on).

The easiest way to explain Keynesian Theory (by the way – a part of FDR’s New Deal Plan is actually based on Keynes) is,

Keynes argued that the solution to depression was to stimulate the economy (“inducement to invest”) through some combination of two approaches :

  • a reduction in interest rates.
  • Government investment in infrastructure – the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment

So the theory goes…if gov’t needs to induce spending it will undergo a public works project thereby paying architects, workers, accountants etc.  they will in turn spend money employing other people, who then can spend some money etc.

THIS IS THE SIMPLEST WAY TO EXPLAIN ONE PART OF A VERY COMPLEX BOOK

There are a ton of criticisms against Keynes…some I can explain others are wayyyy over my head, but I hope this relatively (considering the subject) short post helps some confusion out there!

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