Day 6: Keynes and Behavioral Economics

Keynes was of the opinion that demand is liable to stay low and create issues such as prolonged unemployment in the economy. He attributed this primarily to people's perceptions and expectations, which is precisely where his views on optimism came in.

He postulated that consumers will buy less and entrepreneurs will invest less if they expect that the economy would be depressed in the foreseeable future. Keynes deemed these expectations as not fully rational, but based on human psychology and how optimistic they were feeling. He coined the term "animal spirits" to describe how people arrive at financial decisions, "a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."

I believe that this view on the human psyche and decision-making explains why government spending is vital, not only to sustain consumption, but also to nudge the public and build their confidence in the economy so as to raise their expectations.

Thus, Keynesian views are also rooted in Behavioral Economics and the study of human decision-making, which is not a result of rational calculation based on information available, but on a culmination of emotions and perceptions (which are often false).

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Day 3: In the Long Run, We are All Dead!

Today, I attended quite an interesting Public Economics lecture on government grants. My professor was talking about how the US government had approved $2.2 trillion worth of loans and grants in order to soften the blow of the COVID-19 pandemic on the most affected families and businesses. He then asked a fundamental question that left us pondering: "Do these hefty government grants and packages financed by taxpayers' money which benefits only a select few make good economic sense?" This brings us back to the 20th century, specifically the 1930's, and how Keynes's influential ideas led to aggressive government policies, rescuing the global economy from the Great Depression. Keynes was a staunch proponent of short-term policy interventions and famously believed that, "In the long run, we are all dead." Yes, things might get better in the future, but why wait for when no one will be alive to reap the fruits of the future? In times of economic crisis, the...

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 inste...

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...

15 Days of Keynes.

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