How Does Keynesian Economics Effect You?
Economics In Simple Terms
If you have an interest in Keynesian economics than you must be interested in understanding how much of your own money you get to keep. That sounds like an awful simple direction for such a complex theory. But Keynesianism is an economic policy and a country’s economic policy does affect how much money its citizens get to keep.
Before understanding Keynesian economics you need to first understand economic theory in general. So what is economics? It’s not just for the classroom, it really does affect our daily lives. Economics is the effect that total spending has on the production and consumption of goods and services. Economists continually study the economic policy of countries to determine how they can maximize their production of gods and use their resources to achieve optimal economic growth. An economic policy effects how much the citizens are taxed, the government budget and also interest rates. The greater a government’s budget is, the more that government spends, therefore the more money they need. And guess where they get their money…from you through taxation. The more you are taxed, the less money you have leftover for yourself. That is the simplest way to understand economic policy.
The Keynesian Model
John Keynes was a British economist from the 1930’s who developed the Keynesian model. The Keynesian theory is different from the Classical economic theory (first developed by Adam Smith in 1776). The Keynesian model is based on demand (vs supply). It is based on the belief that the way to stimulate demand and create economic growth is for the government to get involved. The government should cut taxes and increase spending according to Keynesian economics. Keynes developed his economic theory around the time of the Great Depression where unemployment was at double digits, the stock market lost over eighty-percent of its value and almost half of U.S banks had closed. He believed that the government needed to step in and pull the U.S out of the Depression.
The Classical Model
The Classical economic theory on the other hand believes in little government involvement because the markets will self-correct. It focuses on supply vs demand, consumer spending not government spending and long-term solutions not quick fixes or immediate results. Obviously the Classical model allows for more freedom within a society for individuals to create economic growth based on their needs and wants. Keynesian economics involves government intervention for economic growth…and we’re still feeling the fantastic effects of Obama’s stimulus package stimulating our economy. Could there be a more perfect of example of the government getting involved to attempt to stimulate our economy?