Keynesian Economics

A lot of Keynes’ more well known ideas developed as an attempt to provide solutions for the Great Depression. He starts with the assumption that there is a circular flow of money. When one person spends money it becomes another person’s earnings; this person in turn spends the money they get and it becomes another person’s earnings and so on. This circular flow of money is the normal state of affairs and it benefits all the participants. Sometimes things can go wrong and this will stop this process; if the economic climate looks bad then this will likely mean a lot of people will be afraid to spend their money. If people are hoarding their money then this is going to mean that other people aren’t earning and the circular flow of money becomes difficult and this leads to the economy failing.

Keynes believed that it was possible to rectify these difficulties with the circular flow of money by what he called ‘priming the pump’. If people are afraid to spend then the government needs to step in and get things going again. One of the famous suggestions associated with Keynesian Economics is that even paying people to dig holes and fill them in again could be a way to stimulate the economy. Keynes believed that the best approach that a government should take would be either to buy things or increase the supply of money. The idea is that you can spend your way out of an economic depression because it once again fires up circular flow of money.

Criticisms of Keynesian Economics

Keynes was a firm believer in the idea that the government should interfere with the economy. In fact he claimed that the free market just wasn’t capable of functioning appropriately without intervention. These ideas are quite different from Laissez-fair capitalism which is the other hugely influential economic school of thought that has great influence in today’s world. According to supporters of Laissez-fair capitalism the government should keep away from the economy because the interference will always lead to negative outcomes – the idea is that the economy will sort itself out so long as it is left alone. In the United States there is a lot of support for this non-intervention approach as concerns about government bailouts increase.

Even those economists who don’t agree with John Maynard Keynes will agree that his ideas have had a huge impact on our modern world. He is credited for inspiring many of the social programs that blossomed in Europe and the US during the twentieth century.

Karl Marx believed that economics was the driving force behind human society. He saw two important factors as determining how society functioned; the means of production and the relations of production. The means of production could be described as all those things that are necessary to produce goods such as labour, materials, and technology.  The relations of production refer to the way humans interact with these means of production; for example master and slave.  When combined together the relations of production and means of production are referred to as the mode of production.

Marx saw capitalism as the current mode of production but like other modes of production that had gone before it would not last. This was because it had an inherent flaw due to the fact that it required one group of people to exploit another group; the owners of industry exploit the worker. Those in power would be able to keep the lower classes in a state of false consciousness for a while, but eventually they would realize that they were being exploited and they would rise up and seize control of the means of production. After this everyone would have equal access to the means of production and there would be no need for any further conflict.

Marx believed that out of all the modes of production that had gone previously it was Capitalism that was the most exploitative. This was because it treated humans like just another part of the production process. He felt convinced that as industry grew it would lead to the workers feeling more and more alienated.

Although there have been many countries that claim to have made Marxism a reality there is much disagreement as to whether such a society has ever existed. Marx viewed his revolution occurring in a developed western country and this never really happened. His views have also been criticized for putting too much emphasis on class conflict and failing to take into account the effects of a growing middle class.

The full title of his most influential work is, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ and it was published in 1776.  He was creating his masterpiece at a time of great change in Europe; this was the dawning of the industrial revolution. The events that were occurring around him greatly inspired his thinking and he became convinced of the wonders of a free market; he felt sure that this type of economy would bring the most benefit to society.

The Wealth of Nations is actually made up of five different volumes that deal with different aspects of the economy. Smith examined how things could be improved and what the politician’s role should be in relation to wealth creation.  He also spends some time discussing taxation.

A very important idea for Adam Smith is the ‘invisible hand’.  He believed that by allowing business people to go after their own self-interests it would benefit society as a whole.  This invisible hand was a metaphor that Smith used to describe the way that the market forces are self-regulating and that they lead to the common good without any real effort on the human’s part. Smith was quite insistent that the market should not be interfered with because this would prevent it from perform correctly.  The forces that made sure the invisible hand works in the way it does are; supply and demand, competition, and self interest.

At the time of writing the Wealth of Nations, Smith could see a lot of interference in how the market was functioning. For example, the monarchy would often grant special privileges to certain business interests. Smith did not agree with this practice and always felt that the market worked best when there were no attempts at manipulation.

Many of the ideas that Smith discussed are still being argued today. His belief in the power of the free market can be heard echoed in the work of many modern day economists. There are also those who are fiercely critical of his ideas, and this has insured that his work continues to be remembered.