Day 12: Sticky Wages

Keynes blames the stickiness of wages for distortions in the job market, which affect employment rates. Looking at the trends exhibited by the economy during the Great Recession of 2008, nominal wages couldn't decrease owing to the sticky nature of wages. Companies responded by increasing lay-offs to cut costs without reducing the wages of the remaining employees.

Therefore, the popular sticky wage theory postulates that employee pay tends to respond slowly to changes and exhibits resistance to decline even under deteriorating economic conditions. This can be attributed to the fact that workers will fight against a reduction in pay, so a firm will seek to reduce costs elsewhere. In a case of rising unemployment, wages of those workers who remain employed tend to stay the same or grow at a slower rate instead of decreasing with a decline in labour demand. Thus, wages are "sticky-down" as they can move up easily but experience difficulty moving down. Real wages are instead eroded through the effects of inflation.

This is a very sound theory as in reality, workers are naturally more open to pay raises than pay cuts. Companies, too, don't challenge this as they want to prevent any hit to their reputation that can be associated with pay cuts and causing dissatisfaction to labour unions.

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Day 13: Multiplier Effect

I am hungry. I buy two huge margherita pizzas. The cost of the pizzas to me is income to the seller. What the seller spends out of this income would be income to someone else. This goes on and on and on. This becomes an economy-wide chain reaction, or the "multiplier effect" as Keynes called it. Thus, consumption rather than thrift promotes economic growth, and the government should stimulate demand. Each unit of money it spends increases economic activity, not by one unit, but by one unit times a multiplier. The expenditure more than pays for itself! This seems like the panacea to all economic evils: the government should just spend and spend and this initial injection will further create waves of spending and thus, reboot the economy. However, this solution of spending more and not worrying about the incoming due bills sounds a bit too idealistic and "too good to be true" to me.

Day 14: Critiquing Keynes

Keynesian ideologies have been widely debated upon, which has led to a bifurcation in academia. Some stand by his ideas and build upon them while others strongly refute his notions and have criticized his work extensively. A critique I find very valid is that of his undue promotion of deficit spending. Keynesian Economics advocates for increasing budget deficits during recession. He failed to acknowledge the crowding out effect that would potentially ensue. For a government to borrow more, interest rates on bonds would rise which would discourage and stifle private sector investments. Yet another critique originated after observing the real world effects of Keynes's suggested expansionary fiscal policies on global economies. Fiscal expansion often tends to show up at a later stage when the economy is on its path to recovery. Thus, instead of its intended effect, it ends up causing inflation. Milton Friedman, Keynes's biggest critic, also provided a very logical argument stat...

Day 11: Tackling the Business Cycle

As emphasized priorly, Keynesians staunchly believe in activist policies to reduce the amplitude of the business cycle. According to Keynes, the business cycle is the root of all economic evils and is the most important of all economic problems. To tackle this, Keynes advocated for countercyclical fiscal policies that act against the direction of the business cycle. For example, deficit spending on labor-intensive infrastructure projects to stimulate employment and stabilize wages during periods of economic downturns. In a situation of abundant demand-side growth, Keynesians would lobby for raising taxes to cool the economy and prevent inflation. They also rely on monetary policies in certain situations (minus periods of liquidity trap) to stimulate the economy, like reducing interest rates to encourage investments.

15 Days of Keynes.

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