Keynesian Economics and Milton Friedman

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Keynesian economics is a theory of economic growth that originated during the Great Depression. This theory focuses on the multiplier effect and the government's role in stimulating the economy. In this article, we will review some of the key points of Keynes's general theory of employment, interest, and money, and explore Friedman's critique of Keynesian economics.

Keynes's general theory of employment, interest, and money

Keynes's General Theory of Employment, Interest, and Money was first published in 1936 and sparked a revolution in economic thought. It established macroeconomics as the most important branch of economics and defined key Keynesian terms. The book has remained a key source of economic theory ever since.

Keynes's General Theory of Employment, Interest, and Money (GTEM) is considered to be the father of modern macroeconomics. It introduced the concepts of consumption function, multiplier, and effective demand, and challenged conventional economic theories. However, it was not without controversy.

The multiplier effect

The multiplier effect is a theory that explains the effect of increases in economic output on aggregate demand. It assumes that there is excess capacity in industries that produce consumer goods. This excess capacity makes it possible for more producers to produce more goods and services. If there is no excess capacity, there will be no increase in aggregate demand and hence, no increase in real income or output.

To understand the multiplier effect, we first have to understand the concept of marginal propensity to save. The marginal propensity to save is equal to 1/52, which means that the marginal propensity to save is half of the marginal propensity to spend. This is also called the marginal propensity to save, or MPS.

Government's role in stimulating the economy

The government plays a large role in stimulating the economy, ensuring economic stability and growth. This is done by controlling tax rates, spending programs, and the amount of money in circulation. Through these policies, the government steers the economy in the direction of steady growth, low unemployment, and stable prices.

The government also plays a major role in redistribution. It distributes income through programs such as unemployment benefits and entitlement programs. It also provides subsidies and financial inducements, such as free land to railroad developers. Incentives such as these encourage business investment. The government also helps to set up money and capital markets, which promotes economic growth.

Friedman's critique of Keynesian economics

Milton Friedman is an American economist. He received his Master's degree from Chicago University and his Ph.D. from Columbia University. He spent his graduate years studying income distribution in the United States and working for the National Bureau of Economic Research. He also worked on statistical analysis and tax research, and was a federal government economist in the 1950s and 1960s. Friedman's critique of Keynetian economics is controversial, but his contributions have been influential in shaping the economic policies of many countries.

Keynes's theory was controversial in many ways, because it elevated public officials and economists to positions of power and importance, while pitting them against invisible market forces. Moreover, Friedman agreed with Keynes that governments should control the money supply and not let it run wild. He also believed that the central bank should regulate the amount of money entering the system.

October 05, 2022


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Keynesian Economics

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