Globalism Keynesian Economic Theory Arose

Globalism

Keynesian economic theory arose in response to the inadequacies of classical theories of economic business cycles. Keynesianism offered an explanation of why the economy could not 'naturally' pull itself out of a recession or depression, and why the classical, 'hands off' solution of allowing the invisible forces of the market to correct itself could not fully explain all of the business cycle. Keynesians believed "that prices and, especially, wages respond slowly to changes in supply and demand, resulting in shortages and surpluses, especially of labor" (Blinder, 1999). For example, a Keynesian would propose that during an economic recession, people will fear for their jobs and begin to hoard money. This will further cause the economy to contract, as employer's warehouses pile up with unsold goods, and causing suppliers to lay more workers off and fueling the downward spiral of recession. The solution is for government to inject money into the economy. "Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending -- consumption, investment, or government expenditures -- cause output to fluctuate. If government spending increases, for example, and all other components of spending remain constant, then output will increase" (Blinder, 1999). "Keynesians also feel certain that periods of recession or depression are economic maladies, not efficient market responses to unattractive opportunities," as proposed by classical economists (Blinder, 1999).

Because Keynesian policies seemed so successful and also more compassionate in treating the maladies caused by the Great Depression of the 1930s, Keynesian theories held sway in most schools and governments until the 1970s. In the 1970s, massive increases in inflation and unemployment, combined with the discontent at the vast government spending of the modern welfare encouraged by Keynes caused monetarist and neoclassical theories to come to prominence once again, the Chicago School, which is made up of monetarists, has a far more devout belief in the invisible hand of the market to correct itself. The Chicago School, which inspired the rise of economic conservatism and fueled the Thatcherite revolution in England was "willing to forego careful general equilibrium reasoning in favor of more results-oriented partial equilibrium analysis," and the "guiding maxim in the Chicago approach was to preserve the Neoclassical paradigm whenever possible, never to doubt it. When there is no obvious solution to a particular problem, the recommended course was to extend the Neoclassical paradigm by incorporating new concepts into it that would make the subject matter amenable to economic analysis" ("The Chicago School," 2006, the New School) Recessions are short-term pain that can cause long-term gain, provided people 'wait them out' and provided the government has a minimal role in the economy, except to stabilize the monetary supply.