Last Updated on November 22, 2022 by Lily Connel
Keynesian economics focuses on macroeconomics, which deals with the way national economies work as a whole. Keynesians advocate a mixed economy where both public and private investment play a role in stimulating economic production and growth. On the other hand, Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation.
Keynesian economics was initially developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. In its early days, it was sometimes known as “relaxation theory” or “liquidationism,” reflecting the idea that economic downturns are good for reducing business excesses and promoting new investments. During his lifetime, Keynes published only one book on economics: The General Theory of Employment, Interest, and Money. It focused on how governments should manage their currencies. Many economists have expanded on Keynes’ theories since his death in 1946.
Pros and Cons Of Keynesian Economics – The Differences
| Serial | Pros Of Keynesian Economics | Cons Of Keynesian Economics |
| 1. | The Keynesian theory focuses on the economy of a nation. | Governments can create inflation by intervening too much in the market. |
| 2. | Keynesian economics advocates private investments. | Keynesian economics often leads to debt. |
| 3. | Keynesian economics advocates for government control over the economy. | In a Keynesian economy, there is an incentive to be unemployed. |
| 4. . | Keynesian economics is an effective economic theory for fighting recession. | Keynesian economics has created a dependency on government assistance. |
| 5. | Keynesian economics suggest that there is a right amount of intervention in the economy. | Keynesian economics can have negative effects. |
| 6. | Keynesian economics encourages people to save money. | Sometimes, too much government intervention can hinder people’s freedoms and interfere with their private lives. |
| 7 | Keynesian economics is one of the most famous economic theories in history. | Keynesian economics is not a cure-all for every nation’s economic problems. |
Pros Of Keynesian Economics:
1) Focused On The Big Picture
Keynesian economics is focused on the big picture of an entire economy. It focuses on national-level economic growth. This is a helpful way of looking at the economy as a whole, instead of focusing on individual businesses and markets that can sometimes fall victim to over-regulation.
2) Encourages Private Investment
Keynesian economics advocates private business investments. Keynesian economics doesn’t advocate for heavy government intervention in the market, which means people are free to make their own economic decisions without being told how to run their businesses or what kinds of goods and services they should provide. This encourages entrepreneurship and innovation because entrepreneurs have all the power when creating new products and services with no restrictions from the government. It also gives consumers more choices so they can better match their desires with products and services available on the market.
3) Stimulates Economic Growth
Keynesian economics stimulates economic growth by encouraging government spending when private spending falls short. This can help prevent a downward spiral in the economy and keep businesses and jobs afloat. Keynesian economics also advocates for tax cuts, which can also stimulate economic growth by giving people more money to spend.
4) Encourages Saving And Investment
Keynesian economics doesn’t advocate for government control over the economy, so people are free to save and invest their money as they see fit. This encourages businesses to save money so they can better weather tough times and it encourages consumers to invest in products and services that will improve their quality of life. It also allows for expansion and hiring more workers, which helps the economy grow.
5) Government Intervention Is Usually Temporary
Keynesian economics advocates for government spending, but it also encourages curbing public spending when private efforts are enough to stimulate a healthier economy. This is a nice middle ground between laissez-faire policies and heavy government involvement in the market that could lead to over-regulation and stifle economic growth. The fewer restrictions there are on businesses, the easier it is for them to innovate and provide new products and services as well as create jobs.
6) Interest Rates Remain Low
Keynesian policies promote public investment which can be helpful during difficult economic times by encouraging private-sector investments as well as helping people save more money so they have more disposable income. Low-interest rates help businesses and consumers borrow money more cheaply, which can help stimulate the economy.
7) Can Be Used To Combat Recession
Keynesian economics has been used effectively to combat recession. Increased government spending can help increase demand for goods and services and help businesses keep workers employed. Keynesian economics has been used in the past to great effect during times of economic hardship.
8) Encourages Stable Prices
Keynesian economics advocates for government intervention when necessary, but it also believes that government should stay out of the market as much as possible. This helps to ensure stable prices because businesses won’t face undue regulation from the government or inflated prices from too much government spending.
9) Prevents Over-Investment And Bubbles
Keynesian economics can prevent over-investment and bubbles because it encourages private investment, which means that businesses will provide goods and services in demand instead of investing in projects that don’t make much sense. This prevents economic problems like inflation and high-interest rates.
10) Encourages Wise Spending
Keynesian economics doesn’t advocate for heavy government intervention or an excess of regulations, so people are free to spend their money wisely without the government telling them how to run their businesses or how to invest their money. This gives people more financial freedom and encourages entrepreneurship.
11) Can Be Easily Adjusted If Necessary
If there is a need for Keynesian policies to be adjusted or revised, then they can be easily changed because Keynesian economics doesn’t advocate for heavy government involvement or an excess of regulations. This means that the economy will be much more stable in the long run and overall less likely to experience a crisis in the future.
12) Encourages Saving Money
Keynesian economics promotes private investment, which means that businesses won’t have to borrow as much money since they can rely on their own profits instead of asking customers to spend more money. Incentivizing businesses to save money is a big incentive for them not to invest too heavily in risky projects and it encourages consumer spending when it’s prudent so businesses have more opportunities to grow.
Cons Of Keynesian Economics:
1) Government Intervention Can Be Excessive
While Keynesian economics does advocate for government intervention, it also believes in staying out of the market as much as possible. This can lead to over-regulation by the government and businesses not being able to grow or innovate as much as they could otherwise.
2) Can Lead To Inflation
When the government intervenes in the market too much, it can lead to high levels of inflation because businesses will charge more for their goods and services to make up for the increased costs. This makes it harder for people to afford basic necessities and hurts the economy overall.
3) Can Cause Debt Problems
Keynesian economics often encourages government spending, which can lead to the higher national debt. This means that future generations will have to pay more taxes in order to repay the debt, and it can also cause problems with the country’s credit rating.
4) Can Lead To Unemployment
Keynesian economics often encourages government spending, which can lead to higher levels of unemployment. When the government spends too much money, it can crowd out private sector investment and businesses will be forced to lay off workers.
5) Can Be Unstable
Because Keynesian economics relies on government intervention, it can be less stable than other economic theories. If the government makes a mistake or changes its policies abruptly, the economy can quickly go into recession.
6) Encourages Dependency
Keynesian economics can create a dependency on government assistance, which can be harmful in the long run. When people are used to getting help from the government, it can be hard for them to find jobs or support themselves financially when they don’t have that safety net anymore.
7) Can Lead To Higher Taxes
Keynesian economics often encourages government spending, which can lead to higher levels of taxation. This means that people will have less money to spend on things they want, and it can also discourage entrepreneurship and investment.
8) Can Distort Market Signals
Government intervention can distort market signals, which can lead to businesses making bad decisions about what products and services to produce. This can cause shortages of goods and services and an overall decline in the economy.
9) Prevents Over-investment And Bubbles
Keynesian economics often encourages government spending, which can prevent over-investment in the private sector and stop bubbles from forming. When businesses are investing too much money in risky projects, it can lead to an economic crisis.
10) Encourages Private Investment
Keynesian economics encourages private investment, which is good for the economy because businesses won’t have to borrow as much money and they can rely on their own profits instead of asking customers to spend more money. This will help keep the economy healthy and stable in the long run.
13) Can Lead To Stagflation
When there is a high level of inflation and unemployment at the same time, it’s called stagflation. Keynesian economics can sometimes lead to this phenomenon because it relies on government intervention, which can be unpredictable and unstable.
14) Can Lead To Higher Prices
Government intervention can lead to businesses charging more for their goods and services, which can cause inflation. This makes it harder for people to afford the basic necessities, and it can also hurt the economy as a whole.
15) Can Cause Shortages
When businesses are forced to charge more for their products and services, it can lead to shortages because people won’t be able to afford them. This can cause immense hardship for the poorest members of society.
16) Doesn’t Work In Every Situation
Keynesian economics is not a silver bullet that will solve all of a country’s economic problems. In some cases, it may not be appropriate or it might not be able to help the economy recover.
17) Can Lead To A Loss Of Freedom
When there is a lot of government intervention in society, it can reduce people’s freedoms and interfere with their personal lives. People won’t have as much control over what happens in the country, and they may have to do what the government says even if it isn’t something they want to do.
19) Makes Recessions Last Longer
Keynesian economics often encourages government spending, which can make recessions last longer. When the government spends too much money without raising taxes, there will be less private sector investment and businesses will start laying off workers because they don’t have enough customers.
How Does Keynesian Economics Work?
Keynesians believe that in order to achieve prosperity and full employment, governments should intervene in the free market economy by spending money on public goods and services. They argue that when private businesses and consumers stop spending, it can lead to a downward spiral in the economy. Keynesians believe that governments should increase their spending when there are not enough private funds to support economic growth, and cut back when spending would lead to inflation. Keynesian economists tend to favour government intervention in the market through fiscal policies, such as increased public spending or tax cuts, for example.
Conclusion
Overall, Keynesian economics is not a perfect solution to the problems of the economy. It has some benefits, but it also has a number of drawbacks that should be taken into consideration. Before implementing any Keynesian policies, it’s important to understand these disadvantages and make sure that they are the best option for the country in question. Thanks for reading!
