Keynesian economics

(Part II)

But what of the classical automatic mechanism that ensured that the economy always moved toward full employment? In the long run, Keynes conceded maybe it really did work. But in the long run, noted Keynes, "we are all dead”.

Why didn't the classical mechanism work in the short run? Keynes observed that interest rates fell to about 2 percent during the Great Depression, but business firms still were not borrowing all that much to build new plant and equipment. After all, who in his right mind would invest in new plant and equipment when his factory was operating at only 30 or 40 percent of capacity? Besides, said Keynes, at an interest rate of 2 percent, many people would not be willing to lend out their savings. Why tie them up at such a low interest rate? Why not just sit on this money until interest rates rose again?

So much for the interest rate mechanism. With respect to downwardly flexible wages and prices, there were institutional barriers. Labor unions would oppose lowered wage rates, while highly concentrated industries would tend to prefer output decreases to price cuts during recessions.

Keynes also raised some objections to the quantity theory of money. Most significant, he asked what would happen to the money that would be printed if the government did increase the money supply. The classicals had assumed it would be spent, thus pushing up the price level. This could happen, conceded Keynes, but during a bad recession perhaps people would just hold their money, waiting for interest rates to rise before they lent it out.

Wouldn't they spend it, as the classicals suggested? Poor people would. But if they were poor, what would they be doing with money in the first place? If the money supply were increased during a bad recession, said Keynes, that money would simply be held as idle cash balances by relatively well-to-do people. Nothing would happen to the money until the economy was well on its way toward recovery, interest rates rose, and more investment opportunities became available.

By the mid-1930s the classical school of economics had lost most of its adherents. Not everyone became a Keynesian. Conservative economists in particular could never fully reconcile themselves to the vastly increased economic role that the Keynesians awarded to the federal government. In fact, the remaining economic schools to be considered here - the monetarists, the supply-siders, and the rational expectationists - would all rail against the evils of big government.

But big government was here to stay. Although the massive spending programs of Franklin Roosevelt's New Deal did not get the country out of the Depression, the much bigger defense spending during World War II certainly did. There was no question that Keynes had been right, but since the war Americans had been plagued not just by periodic recessions but by almost unending inflation. There was growing feeling among the populace as well as professional economists that perhaps Keynesian economics was just recession and depression economics that it could not satisfactorily deal with curbing inflation.

Keynesian economics may have reached its high point in 1964, when personal income tax rates were cut by about 20 percent. This tax cut, combined with accelerating military spending during the country's escalating involvement in the Vietnam War, brought about a rapid rate of economic growth in the mid-to late 1960s; but this growth was accompanied by increasing inflation.

12.2 Read texts 12, 13 again more carefully and point out the false statements.

a) According to John Maynard Keynes, the problem with recessions is inadequate aggregate demand.

b) According to Keynes, during the depression the cure for recession was government spending.

c) Keynes thought that if the government printed money, increasing money supply, it would cause raising prices.

d) Keynes claimed that during recessions and depressions America experienced acute shortages in all spheres of economic life.

e) Absorption of the inactive savings that businesses were not borrowing and using enhanced the economy of the country to work again.

f) The classicals had conceded that the newly printed money wouldn't be spent, thus pushing up the price level.

g) The classical schools of economics had different points of view on the role of the federal government.

h) The tax cut of 1964 together with increasing war costs of the Vietnam War primed the pump in the country.

12.3 Find in the text the English equivalents of the following words and word-combinations:

1. поворотний пункт

2. підтримувати

3. різко падати

4. різкі зміни в розподілі голосів між партіями

5. мандат, наказ

6. план, проект, програма

7. робоча сила

8. підвищення

9. споживчі розходи

10.державні витрати

11.чистий доход

12.відповідний

13.якість

14.нещастя

15.невірний, помилковий

16.визивати зростання економічної активності

17.поглинати

18.бездіяльний

19.збільшуватися

20.цілеспрямований

21.допускати, визнавати

22.потужність

23.заморожувати, накладати обмеження

24.опиратися, противитися

25.прихильник

26.примирити

27.надавати

28.лаяти, сварити

29.бідувати

30.маса людей

31.стримувана інфляція

32.прискорюючий, зростаючий

33.втягування, вплутування

12.4. Speak briefly about the main propositions of Keynesian Economics. Use the plan and the key words and phrases to help you.

a) The general theory of employment, interest and money (landmark work; great depression; to go from bad to worse; unemployment rate; to mount; to plummet; a blueprint; inadequate aggregate demand; to provide a sufficient boost; disposable income);

b) The cure for recession is government spending (marginal efficiency of investment; an upturn in investment; to raise sufficiently; to get back to work; to be much more relevant; choice; to cause inflation; to experience deflation; having trouble finding customers);

c) Budget deficits (nothing improper; to balance budget; nothing wrong; to suck up; idle savings; to get the economy moving again; to melt away; spending programs; tax receipts; to swell; to view; temporary expedient; to get the economy off deal centre);

d) Why invest in new plant and equipment when most of the capacity is idle? (automatic mechanism; long run; concede; short run; to operate at… percent of capacity; to lend out; to tie up at; flexible wages and prices; institutional barriers; labour units; to oppose; lowered wage rates; concentrated industries; output decreases; price cuts);

e) Keynes’ objections to the quantity theory of money (to print money; to push up the level; bad recession; to hold money; to rise interest rate; idle cash balances; well-to-do people; to be on the way toward recovery; investment opportunities; to become available; adherent; to reconcile to; to award to; federal government; the monetarists; to rail against);

f) Keynesian economics is valid during recessions (to deal with; curbing inflation; to reach a high point; personal income tax rates; to cut by; tax cut; accelerating military spending; involvement; rapid rate; economic growth; to be accompanied by).

13.1. Read the text 14. Write down and translate the key words of each paragraph of the text.

TEXT 14

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