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.

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Day 10: The Interventionist

Out of all the contributions Keynes has made in the field of Economics, his interventionist approach is probably the one I most agree with. According to Keynes, economies don't stabilize themselves very quickly and require active state intervention to boost short-term demand. Wages and employment too, are slow in their response to the needs of the market, requiring government intervention to keep them on track. I firmly believe that interventionist policies are a massive improvement from the classical inclination to a laissez-faire stance. Such a "leave-it-alone" mentality can be downright harmful for the economy, as absolute autonomy can lead to chaos and mayhem, with private interests taking precedence over overall societal welfare. It also invariably widens the chasms of income inequality. Without government intervention, monopoly power would freely reign and such intervention can regulate markets to function more effectively, as well as cater to public and economic...

Day 9: The Bible of Macroeconomics— The General Theory

Reading Keynes's The General Theory of Employment, Interest, and Money is a life-changing experience even in the 21st century. This means it was practically explosive during his times. A time dominated by the reigning classicists and their accepted axioms and ideologies, Keynes challenged all these existing theories and his book was a radical reconsideration of some of these founding principles of Economics, provoking a widespread revolution in economic thought. Keynes's affinity and prowess for problem-solving shines throughout this masterpiece of a book. The heart of The General Theory lies in its analysis of poverty and unemployment, which Keynes saw as having permanent and tragic political and economic consequences. According to Keynes, unemployment is not caused by rigidity of wages or prices, but by lack of incentives to increase production, due to lack of effective demand in the short run and lack of knowledge of the future in the long run. Keynes also addressed the ...

Day 5: Fiscal Policy

If Keynes were to take a peek at the economic scenario of the recent past, what would he see? Most households reduced spending in a bid to repay mortgages which were larger than the values of their houses. Though businesses acquired large amounts, they were hesitant to invest owing to decline in the value of assets. Student debt increased, while consumption decreased. Most importantly, governments reduced their spending in light of austerity policies that aimed to reduce public debt. As a result of an overall decrease in spending, national income decreased and so did jobs, which adversely affected global incomes and employment as well. Central banks increased money supply to stimulate spending, but reluctance to spend was at an all-time high. We were experiencing a Keynesian liquidity trap. This situation calls for a fiscal policy rather than a monetary policy. The government's bid to increase money supply rendered ineffective as the policymaker's ...

15 Days of Keynes.

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