Daniel Halliday
Aug 25 · Last update 1 mo. ago.

Is Keynesian economics the answer to financial crises?

The financial crisis of 2007-8 caused an increase in interest in, and a reconsideration of, the economic theory of British economist John Maynard Keynes. Keynes’ ideas are thought to have become a model for many nations in the economic recovery during the Great Depression, and for decades afterwards. As we seem to be possibly headed toward the next financial crisis let’s consider, what was the economic approach recommended by John Maynard Keynes, and could such policies be a more effective response to a recession or financial crisis?
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No, a classical approach would be more effective
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Yes, and growing evidence is supporting its efficacy
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No, a classical approach would be more effective

The 2008 global financial crisis ignited new interest in Keynesian theory, however theory is one thing, but as we can see in practice most politicians are unlikely or unwilling to implement optimal policies, and Keynesian economics relies on government action to effectively suppress recession. This suppression is achieved though costly spending to generate jobs and mask unemployment, this risks further inflating bubbles that may have led to recession in the first place, and may allocate resources on false or unproductive jobs. A more classical view of capitalism, such as the Austrian school of economics, would see this as the propping up of unneeded or failing enterprises, and would advocate for not allocating capital wastefully. In times of recession frugality may be necessary, and clearing budget deficits and not engaging in wasteful spending would be a more productive approach in the long run, avoiding the further escalation of ineffective parts of the economy and allowing the market to do what it does best, self regulate.

lawofmarkets.com/2015/01/04/keynes-and-keynesian-economics-in-light-of-the-financial-crisis forbes.com/sites/johnmauldin/2014/03/09/mauldin-the-problem-with-keynesianism/#54eb603ed1e0 mises.org/library/austrian-theory-perspective-0 quora.com/What-are-the-main-differences-between-the-Austrian-and-Chicago-economic-schools-of-thought

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Daniel Halliday
Dec 16
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Yes, and growing evidence is supporting its efficacy

Keynesian economics is a family of theories of macroeconomics that roughly support a managed market economy, as recession and inflation can be best mitigated through government intervention - using economic policies to even out inefficient macroeconomic outcomes. Keynes’ theories lost support following critiques from various sources, most notably that of Milton Friedman who used his critique of Keynes to predict the ‘stagflation’ of the 1970s, he instead proposed that governments have no control over a natural rate of unemployment in society, advocating a free market over government intervention. However many now see, in the light of the 2007/8 global recession, that many of the banking ills that caused this crisis were an expression of unrestrained capitalism and reliance only on a free market, sparking renewed interest in Keynes and his theories. This resurgence in interest caused many governments to adopt fiscal policies akin to Keynesian thought, which evidence seems to support the success of, and which some have argued should go much further.

hamilton.edu/documents/Romer%20lecture%20notes.pdf

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Daniel Halliday
Aug 25
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DH edited this paragraph
Keynesian economics is a family of theories of macroeconomics that roughly support a managed market economy, as recession and inflation can be best mitigated through government intervention - using economic policies to even out inefficient macroeconomic outcomes. Keynes’ theories lost support following critiques from various sources, most notably that of Milton Friedman who used his critique of Keynes to predict the ‘stagflation’ of the 1970s, he instead proposed that governments have no control over a natural rate of unemployment in society, advocating a free market over government intervention. However many now see, in the light of the 2007/8 global recession, that many of the banking ills that caused this crisis were an expression of unrestrained capitalism and reliance only on a free market, sparking renewed interest in Keynes and his theories. This resurgence in interest caused many governments to adopt fiscal policies akin to Keynesian thought, which evidence seems to support the success of, and which some have argued should go much further.
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