Here is the bullshit that is passing for a final assignment in the class that I hate the most coz the teacher is such a numbskull...(it was a debate in which we were all split into groups and assigned different theories, this is my part). I put it here cuz half the time the comp eats my disk or gives it a virus so I can't print it out at WARC so I need to save it in more than one spot.Keynesian Debate: Part One
Before understanding Keynesian theory, one must have some basic background knowledge of economics and types of economic theories. There are three main types of economics theory: traditional, political, and development. Traditional economics is concerned primarily with the efficient, least-cost allocation of scarce productive resources and with the optimal growth of these resources over time so as to produce an ever expanding range of goods and services. Political economics is concerned with the relationship between politics and economics, with a special emphasis on the role of power in economic decision making. Development economics, in addition to the above, is concerned with economic, social, and institutional mechanisms, both public and private, necessary for bringing about rapid and large scale improvements in the levels of living for the masses of poverty stricken, malnourished, and illiterate peoples of Africa, Asia, and Latin America. It looks at the role of government and emphasises some degree of co-ordinated economic planning and broad-based domestic and international policies. This frequently includes improving the standard of living, spreading essential goods needed for survival to the entire population, and increasing the number of choices a person has in life.
These theories are usually in the framework of three types of foci - microeconomics, macroeconomics, and international economics. Micro focuses on behavior and activities of individual economic units, primarily producers and consumers. Macro looks at economy as a whole in terms of aggregate or "macro" economic variables such as consumption, saving, investment, money supply, gross domestic product, employment, and overall price level. International economics examines trading and financial relationships between nation-states both as producers of exports and consumers of imports; as such is a mix of macro and micro.
Regardless of its category, an economic theory should be capable of explaining the economic realities of nations and regions. Although based on a set of assumptions and abstractions, it must fit the realities of nations and must be appropriate to the characteristic features of economic life as revealed by observation and experience.
In 1936, John Maynard Keynes published a book called The General Theory of Employment, Investment, and Money that became probably the most influential social science treatise of the twentieth century; it quickly and permenantly changed the way the world looked at the economy and the role of government in society - no other book before or since has had such imact, although there are disputes as to its specific role. For example, Cambridge Keynesians consider the work a self-contained, new, revolutionary work. Monetarists view it as a temporary insurgency, an aberrant blip on a neo-classical thouroughfare. Neo-Ricardians see Kenyes as the unwitting gaurdian of classical policital economy.
Regardless, it is generally not regarded as a development theory; a school of thought which didn't emerge until the 1950's. Keynsian theory is a macroeconomic theory; as such it did not originally concern itself with issues pertenant to international economy and to lesser developed countries (LDCs). If it did not discuss economic development and the focus certainly was not the development of LDCs, it did contain a general theory of development. The theory says that there are four central factors that determine the rate of growth in a country (specifically speaking of post-war United States at the time):
1. success in controlling population
2. rate of accumulation (defined as output which is not consumed, but is set aside for use in future production, investment)
3. avoidance of war
4. emphasis on scientific progress
It also says that to make progress a country needs an increasing amount of investment; if a country cannot save enough on its own the government should go into debt to increase spending and stimulate the savings level. Higher expenditures would also lead to a more affluent and stable economy, conditions which would also attract investment. It states in addition that any given level of aggregate demand (whether rising or falling) producers will try to meet that demand; thus aggregate output will rise and fall according to given aggregate demand. It is a policy effective theory: it states that a government can, by manipulating expenditures, transfers, and tax levels, control economic activity. Thus, if there is not enough demand/high unemployment one should increase the demand by expanding government expenditures and/or lowering taxes; conversely if there is too much demand/inflation, one should lower demand by spending less and taxing more.
Keynesian policy, although still supported by some, went through a period of "life and death" in about 50 years. It started to fail most widely in the 1980's when the Organization for Economic Co-Operation and Development (OECD), led by the USA and UK deregulated and privitized large sectors of their respective economies. Due to the high interest rates in these countries as a result, many countries followed suit because keeping interest rates low in one country led to unavoidable capital outflows. This process was furthered in 1993 at the end of the Uraguay Round of the General Agreement on Trade and Tarriffs (GATT) which resulted in further deregulation (including the formerly sacrosanct agrocultural sector) via mechanisms such as the North American Free Trade Agreement (NAFTA) and the European Union Single Market Economy. As a consequence of the increasing subjectivity of developed country (DC) economies to forces outside the control of a "sovereign" government, and in addition as a result of new problems such as stagflation (whereby unemployment is accompanied by structural as well as demand inflation); Keynesian policy prescriptions no longer seemed relevant even for DCs. The theory also does not work well in the fragmented markets of LDCs in which modern and traditional product, resource, and financial markets co-exist; this compounded by inadequate/malfunctioning credit systems and general LDC vulnerability (par rapport to DCs) to powerful foreign economies. Thus, government control over the economy is far too low to properly apply this theory in an LDC.
There are, of course, staunch defenders of the theory. Some, such as post-Keynesians, are fundementalists that seek to build their theoretical framework on the "chapter and verse" of the general theory; while others, such as new-Keynesians (not to be confused with neo-Keynesians) do not share the central message of general theory but merely claim affiliation on the basis of the similarity of policy conclusions. (turn the mic to Kristen)
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Sources:
1. http://cepa.newschool.edu
2. http://library.thinkquest.org
3. Economic Development in the Third World. Todaro, Michael P; published by Orient Longman, 3rd ed. year unknown
4. The Rise and Fall of Development Theory. Leyes, Collin.
