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 15: Goodbye, Keynes!

"The difficulty lies not so much in developing new ideas as in escaping from old ones." As we come to the end of our 15-day journey exploring Keynesian ideologies, I cannot help but to reflect on how much influence Keynes has exerted in not only the global economy, but in our daily lives as well. His revolutionary mind and endless vigor to challenge existing ideas paved way for new opinions and diverse outlooks in the field of Economics. The discipline was extremely rigid, unaccepting, and wary of alien inputs that varied from existing theories. However, Keynes barged in with his sunny optimism and completely revolutionized economic thinking, thus injecting flexibility in Economics and creating space for differing opinions. Though Keynes has attracted cartloads of scrutiny and criticism, it cannot be denied that his contributions to the field of Economics are invaluable and have definitively shaped the course of modern Economics and how the global economy functions. Present-...

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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