Can someone please explain to me the theory and reasoning behind the Keynesian economic theory. The supply side economics (Reagan) made sense to me, but when my teacher explained the Keynesian it made no sense to me.
How will deficit and more spending get a country's economy through it's troubled times?
It's simple, more money being spent = more jobs for the public which = more strippers to get paid, which means more underwear is purchased, which means they need to import more, which gets people working overseas, which means that there needs to be people at the docks to carry it from the ship to the stripper supply store, and then the cycle continues until the supply of underwear is met.
Well, it's been over 20yrs since i studied economics at school, so everything that follows may be complete nonsense, but i'll have a go.
I believe it's based on the premise that one must speculate to accumulate.
From the Governments point of view that means it has to try to stir the private sector into positive action in the hope that it results in both employment and spending within it's nation which in turn results in more revenue from taxes.
As an example, in the the UK in the 1980's the Government invested heavily in the infrastructure of deprived areas of the country, then gave huge tax breaks to large multinational companies (mostly Japanese may i add) in the hope some would take the bait and build factories in these areas (an example of this is John Delorean building his factory in Belfast, although that soon went tits up :schwitz Anyway, many foreign companies did take the bait, which resulted in increased employment in those areas, which in turn resulted in increased spending by those newly employed individuals, which in turn resulted in more revenue (income for the government) through income tax and vat etc.
So, as a result those particular areas of the country now had more spending power due to lower unemployment, which lead to more shops/leisure/entertainment outlets etc, being located there, which also lead to greater revenue through taxes for the government.
An odd fact, (although nothing to do with the topic) but, in the UK the largest retail outlets and the highest proportion of shops per person, are all in areas that have a history of high unemployment and poor health. Essentially the working classes like to spend their money, while the middle classes like to save their money. In a nutshell (and perhaps bizarrely), a nation that saves it's money has an unhealthy economy, but a nation that spends it's money has a healthy economy
Simply put, it's like an economic snowball that the government/state throws from the top of a large hill which (hopefully) gets bigger and bigger as it rolls down the hill, from which the state can then take their share.
Hopefully someone else will come along and explain it a bit better, but, that's about the best explanation i can come up with after all these years, and my memory's not all that good these days
quick edit: Lol 3 people posted at exactly the same time...and guess who came last..
It did happen here too, on a smaller scale. In Vancouver, the Pattullo Bridge was built with a similar type of idea, give a public works project, to create jobs, to give a kick to the economy. The US did the same at about the same time too.
Yes yours was written more clearly than mine, but then again you did incorporate your favourite subject....smut, at it's core, so it was bound to be clearer
Hey, with smut skills like these, you don't let them go to waste, you use them in every potential situation that you can, and especially when explaining about economies, because everyone understands smut, where as words like "Expanding the public works programs" and "bridge" confuse and make comprehension much more difficult.
Here we see the Australian, in his natural habitat, and mindset (drunk). He threatens the others who provide him with logic, with smacking them with a rock, which is actually misspelt. The Australian thrives on an ever-enlarging collection of smut and other related materials. Their primary food is Barbecued shrimp, and Fosters Beer. They also enjoy many other recreational activities, such as bowling, surfing, diving, and hunting "'roos". They are very aggressive, with little to no racing skill, and absolutely no fighting skill, making them effectively harmless.
First beware. My English is bad. My "technical" english it's terrible.
Considering that production "Y" and demand must be the same we have:
Y= C (consumes?) + Investements + Exportation/Importation + G (the public sector expenses). The easy and known IS model.
As other people already stated if you raise G, you will have a boost in economics as it CAN create more jobs, more opportunity for etc..
Where the "public sector" will find the money for that?
(S-I) + (T-G) = (B-TC) with:
S - I = the "private saving", hmm hope the translation it's ok. Like the extra money people have to spend
T - G = Taxes and public expenses. If you spend more than you can collect with taxes...
B - TC = B are the "national reserves" while TC are the "net movements" of ehrm.. "money", but it think it's a better translation: "net capital movements from and to your country". So in case people form other countrys give you the money.
So this increased public expenses must be covered somewhere, a reasonable increase will help economy a persistent high public expenses will open a new world of economic pain.
It all depends, for example a new bridge will maybe create more jobs and maybe help the trasnportation system so private enterprises of the area get a cheap, fast, whatever deliverys. Everyone is happy.
Rising the "unenployed help" (like money to people without work), maybe will help if situation it's critical, maybe will just give people more excuse to not find a work.
Well the matter it's a little more complicate, we didnt consider expectations, or the LM ("money market"?), nor the more complete AS-AD model, (try search on internet aggregate supply and aggregate demand) or any interaction between countrys.
So a little help from the public sector is more than welcome, a high and persistent "deficit" no.
Feel free to pm if you need help!
What are you studing? How much "macroeconomics" you have to do?
Edit: the Dawesdust 12 strippers example is perfect
It's all a conspiracy to keep the working class in their place
Saving is just postponing spending and spending is just using your cash flow on consumable items which will have little or no future value and more importantly will never generate income in and of itself.
Actively investing a portion of your cash flow on the other hand, will not only help the economy but will also ensure that in the future your investment will add to your cashflow and eventually become your primary source of cashflow at which point you can retire or at least choose to work rather than have to work.
My own theory, is that once a country's population has the basic needs met, food, shelter, clothing, transportation, ... then it's all "play" money after that.
The issue is that in economies, like the USA, most of the working population have jobs that don't fulfill any basic needs of society, and their jobs depend on the whims of what people want and are willing to pay for as opposed to what they need. This leaves the economy very suceptible to the whims of society. For example, if the people in the USA suddenly come to the conclusion that spending $4 for a cup of coffee is stupid, Starbucks and it's employees goes out of business, and those employees cut back on their purchases of other consumer goods, like televisions.
Economists refer to this as the multiplier effect, for every person that loses a job, x more people will eventually lose a job as a result, where x is the "multiplier". Generally speaking the effect is worse in bad times than in good times. Once people get out of the mode of consumer spending, they are likely to get more conservative and never end up spending as much as they did before.
Complicating matters in the USA is the current situation with medical care. It's not just a case of better equipment and drugs that cost more. Doctor salaries have increase by significant multiples of inflation, which is partially due to increased liability insurance cost due to malpractice suits, but still the end result is doctors make more than they did before, and they spend less time with patients than before. Hospital profits have also increased greatly over the last few decades.
Another issue is baby boomers (like me) are approaching retirement age, and social security and medicare costs will be a burden on the working generation, because of the sheer number of baby boomers and increased life expectancy.
Getting back to the "play" money theme. What would happen if the goverment just started printing money and created goverment jobs (for example research related) and paying for these jobs with the money it printed? If this was a relatively small part of the economy, would there really be any significant inflation? Currently the USA government sells very long term bonds in order to generate money to pump into the economy, and sometimes repays the debt on those bonds by selling even more bonds with an ever increasing interest rate. Which is worse, the effect of inflation due to printing money, or the ever increasing interest rates that have to be paid on these long term bonds to get investors to buy them (money the investors might have spent on consumer goods instead)?
If you let inflation loose it adversely effects the working class (most likely causing them to get disgruntled and vote out the current government or worst case overthrough them) but at the same time it plays into the hands of the wealthy (asset rich) as their assets will keep pace with inflation.
With long term bonds they a borrowing money that would have been unlikely to be spent on consumer items (the rich can only spend so much)
Having said that I'm not convinced that having monatary ploicy that adjusts interest rates to keep inflation within difined limits is such a good idea either. It still hurts the working class the most.
However, what we call Scampi in the UK (Dublin Bay Prawn/Norway Lobster/Nephrops norvegicus, almost always breaded and deep fried, served either as a starter with salad or as a main with chips) is made with Metanephrops challengeri in Australia. In fact, UK law mandates that if you call it scampi it must be Nephrops norvegicus/Dublin Bay Prawn/Norway Lobster. The irritating bit is that some of the goons on television call the same thing Langoustine, the french name. Langoustine is not crayfish (despite some popular belief) - you can eat crayfish but I don't know what it's called in france.
And in the US, they don't bread it or fry it, they do all sorts of Italian influcenced things. The Wikipedia example is with garlic butter. In the UK, if it's called scampi you know it's breaded.
Ohhh man, now you're talking, Scampi in a basket with thick chunky crispy chips and a side helping of Tartare sauce. And a nice big slice of Tiramisu to follow. All washed down with a cold one.