Daniel Halliday
Aug 25 · Last update 2 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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Yes, and growing evidence is supporting its efficacy
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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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