Full Employment Economy With Stable Prices example essay topic

John Maynard Keynes is probably the most influential economist of the twentieth century and is often regarded as having revolutionized the perspective of the world with regards to the economy and the role of the government in society. His major work The General Theory of Employment, Interest and Money opened up the world to modern economic views and offered new methods of dealing with economic problems that countries faced. Many countries to this day have based their governments on Keynesian theories. John Maynard Keynes provided the theoretical basis for government intervention in the economy through fiscal policy to achieve full employment.

Keynes rejected the theories of the economists that believed that economy was self-correcting and could be expected to sustain low unemployment and high economic growth on a regular basis. Instead, he believed that the economy was subject to wide swings due to changing attitudes by business to investment. When optimistic, business would invest, when pessimistic, business would cut back investment. This would quickly lead to a fall in production and a rise in unemployment. Keynes did not believe that business investment decisions were made according to predictions or calculations of the market conditions, but rather on what he called "animal spirits" of businessmen. As he wrote in The General Theory of Employment, Interest and Money, "most, probably, our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits - of a spontaneous urge to action rather than inaction, and not the weighted average of quantitative benefits multiplied by quantitative probabilities".

This quote represents his views on the decisions made by businesses in general. Keynes thought that these are made depending not totally on the market and its conditions but rather on the chances taken by the businesses themselves. He did not believe that a free-market economy had the capacity to achieve sufficient economic growth to restore full employment. One reason that he referred to in The General Theory of Employment was what he called the stickiness of wages and prices. In his belief, wages and prices did not automatically decline. Therefore, the economy does not adjust to changing market conditions on its own.

This was on if his reasons for government intervention. In Keynes viewpoint, the government would boost or halt the economy through the use of different policies, such as fiscal or monetary. A fiscal policy is the use of government's taxing and spending powers to achieve full-employment economy with stable prices and to smooth out sharp swings in the business cycle. The general role of the fiscal policy is to help maintain economic growth and employment in a country.

This was one of Keyne's strongest beliefs. The government can decrease taxes and created jobs, which will increase spending; or it can increase taxes and reduce spending to hold back the level of demand and check inflation, which will help achieve a budget surplus. Ideally, over a time span of a business cycle, government spending and revenues should balance out. Although, not always will this occur, resulting in deficits and surpluses in the governments' funds.

Keynes stated that if the government does not interfere in a country's economy, there would be problems. He said that when the government has no input, there would be deficits in the economy. Prices will rise and basic necessities will be hard to get, for the lower class. As quoted from The Economic Consequences of Peace, "If, however, a government refrains from regulations and allows matters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the fraud upon the public can be concealed no longer".

Keynes focussed mainly on macroeconomics, like total investment and total consumption. He believed that the government should only play a role in stimulating the economy rather than running it and having total control. For the government to manage the economy, policies would need to be implemented. These policies would try to ensure an economic equilibrium with full employment. There are two types of policies: reflationary and deflationary. Deflationary policies are put in place when there is a dangerously high times in the economy.

Then the government will implement policies such as: Increasing taxes - to reduce demand levels of consumers Increasing interest rates - to discourage businesses from investing money The reflationary policies boost the economy when it reaches low peaks. Policies that can be implemented during these times include: Cutting taxes - to increase consumer spending Lower interest rates - to increase investment and discourage saving Keynes believed that a slump did not last for the long-run but was derived from a lack of demand. If private companies did not invest money to boost demand, the government should do so instead. It could do so by employing a budget deficit. During these times the government would increase its spending to help the economy. And the reverse method, when in the better times, it would decrease spending and therefore try to balance its budget.

This was the belief that countered the classical economic view of laissez-faire. .".. under the system of domestic laissez-faire... there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets". Keynes throughout his life published many great books that we still learn from today. During the years after WWI, he published a book called The Economic Consequences of Peace, in which he related to economic changes due to the war. More specifically, he talked about the Treaty of Versailles and its potential consequences. In 1936, he published The General Theory of Employment, Interest and Money also known as The General Theory, in which he blamed the policies implemented by the Neoclassical economists at the time.