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192 definitions by Abu Yahya

*noun*; a school of economic thought prevalent after World War 2; around 1980, Keynesianism was supposedly superseded by monetarism, and then by the rational expectations hypothesis. Theory is named for John M. Keynes (1881-1946), who argued against the then-mainstream view that the economy was "self correcting." Keynes' book introducing his economic theory was The General Theory of Employment, Interest, and Money (1936).

*Basic Concept*
The basic concept of Keynesianism is that each economy has a level of aggregate demand, which does not respond to price or income levels in the same way that classical economics says it should. Rising income, for example, *does not* lead to a matching increase in consumption or business investment. Business investment is driven by investment opportunity, not {only] by interest rates. Savings is driven by liquidity preference, not only by interest rates.

Keynes suggested that, for any economy, there was a marginal propensity to consume that was less than one. Hence, if the national income rose by 10%, consumption would rise by something less than 10%. This would lead to some production not being consumed, waste, and unemployment.

*What Keynesianism Says We Should Do*

In 1936, when Keynes wrote *The General Theory*, most of the world was suffering from the Great Depression. Keynes recommended that the national government stimulation aggregate demand through a policy of deficit stimulus. In other words, the country should create adequate levels of aggregate demand by spending more than it took in as taxes (fiscal policy).

Also, Keynesianism held that aggregate demand could be stimulated *up to a point* by lowering interest rates (monetary policy).

In the USA and other large industrial countries, fiscal and monetary policy has been attempted often. After 1980, the Federal Reserve chair (Paul Volcker) was a monetarist, who claimed to reject Keynesianism. Nobel laureates in economics almost unanimously attacked Keynesianism as outmoded and wrong-headed, but governments continue to use fiscal stimulus and interest rate cuts in response to recessions.
Keynesianism held out the prospect that the state could reconcile the private ownership of the means of production with democratic management of the economy.

Adam Przeworski, *Capitalism and social democracy* (1986)
by Abu Yahya March 03, 2009
A problem faced by a person with specialized expertise in any area, in which the implications of the opinion are unpopular and likely to be rejected by those who need that expertise. For example, economists may be likely to know that, in some cases, a "market solution" is inherently impossible, but proposing an alternative is an exercise not merely in futility, but career suicide among those who employ economists. It arises because the expert knows more about the field than her employers.
The statistician was asked by his boss to make a case for risk homeostasis, but knowing better, he faced an expert's dilemma: telling the truth would get him tarred as a 'socialist.'
by abu yahya June 23, 2008
an overwrought public anxiety that evil things are afoot. The term seems to have been coined by Jock Young in 1971.* The most obvious example of an ancient moral panic is the blood libel.

Other famous examples of moral panics include the 1955 Boise scandal, in which three cases of lewd conduct between men and teenaged boys, plus a noxious editorial, triggered a general war against homosexual men. In the early 1930's, the Federal Bureau of Narcotics (FBN) launched a public relations effort to have federal laws passed banning the use of marijuana; it was driven by a jurisdictional struggle between Harry Anslinger (FBN) and J. Edgar Hoover (FBI). The campaign was a success; it not only achieved the desired legislation, but created a wave of mass hysteria about the "threat" of marijuana.

* Goode & Ben-Yehuda, *Moral Panics* (1994), p.12.
In the movie *Quadrophenia*, set in Brighton, UK in the late 1960's, a recurring theme was the contemporary moral panic over the clash between Mods and Rockers.
by Abu Yahya February 14, 2009
*noun*; a method of representing the economy as the sum of many identical individuals and firms, each represented by a system of mathematical equations. The Rational Expectations Hypothesis (REH) takes its name from the premise that economic actors, i.e., everyone, do not make consistent errors about the present or future behavior of markets.

REH was devised mainly as a rebuke to Keynesian economics, and in particular, the strategy of fiscal policy or monetary policy.

According to the REH, fiscal policy does not alter aggregate demand because the "average" person recognizes that her lifetime income is not increasing--so she needs to save rather than spend the stimulus money, in anticipation of higher taxes in the future.

At the same time, monetary policy does not work because it relies on lowering interest rates to make more money available; more money means inflation, but people have to be deceived into thinking prices for their product are going up, so they will expand production. According to REH, people or firms will figure this out, and see increased demand as mere inflation. Instead of increasing output and employment, they'll want to raise prices so they can meet their future bills.

According to REH, both monetary and fiscal policy rely on illusions to work; and since people (on average) will make rational estimates o the future, they will defeat these illusions.
The rational expectations hypothesis states that we can break the realization of a return into an expected return that depends on the current information set and an unexpected component that depends only on new information.
by Abu Yahya March 03, 2009
In economics, a policy in which the authorities insist on some permanent, precise guarantee of the value of the local currency to some other thing: a unit measure of gold, the US dollar, the euro, or the pound. Historically, the US dollar had a hard peg to gold from 1946 to 1971, while other currencies in the developed world had a hard peg to the US dollar. Since 1971, most of the world's money is in floating currency (whose relative value is set by the free market).
Nonetheless, advocates of hard pegs frequently downplay the ... difficulties of establishing greater nominal flexibility in fiscal spending and wages...
by abu yahya June 24, 2008
*noun*, efforts by the government to intentionally run a deficit in order to stimulate the economy during a recession. Loosely associated with Keynesian economics.

According to basic economic theory, recessions occur because there is a basic mismatch between aggregate demand and potential output. One approach for solving this is for the government to buy more goods and services than it has revenues to cover, thereby creating conditions in which effective demand is greater than the stock of goods currently in business inventory (given recessionary prices).

Under a stimulus, the jolt of extra money in circulation creates inflation, which has the effect of lowering real prices. Customers then respond to the {de facto} price reduction by buying more, which leads to more hiring, thence to more effective demand, thence to economic recovery.

Another reason fiscal policy stimulates the economy is that the private sector is not investing or consuming its own output. Increased taxes would simply reduce private consumption, so those cannot be increased; but spending is increased to fill the breach.
I think it is possible that fiscal policy will have even more 'oomph' in this situation," Christina Romer, who heads the Council of Economic Advisers, told an economics conference.

"When households and businesses are liquidity-constrained by reduced lending, any money put in their pockets is more likely to be spent," she said.

--Reuters, "White House's Romer: Stimulus may pack more punch" (3 March 2009)
by Abu Yahya March 03, 2009
influenced by the economic theory of John M. Keynes (1883-1946); in particular, Keynes' book *The General Theory of Employment, Interest, and Money* (1936). The main point of Keynes' general theory (GT) was that market economies are not usually self-correcting, and occasionally require some sovereign intervention to prevent inflation or depression.

One of the policy prescriptions of the GT for curing recessions was to lower interest rates; another, more potent tool, was to deliberately run a fiscal deficit as a strategy for increasing aggregate demand. The GT was too late to have much of an impact on the Great Depression, but it did have a major impact on the economic policies of the Western Democracies from 1946 to the present.

During the period 1979 to 2001, Keynesianism was supposedly discredited, but national governments continued to use stimulus packages and monetary policy to resolve recessions. The policy has evolved, but remains the cornerstone of actually existing government behavior.

Attacks on Keynesianism: the most famous adversary of the GT was Friedrich von Hayek (1899-1992) of the London School of Economics, who insisted that an authentically free market would be self-correcting if it were only allowed to. Hayek's objections were ideological, but other economists such as John Muth argued that the GT expected people to make irrational, or unreasonable errors.

During the late 1970's, Keynesianism was eclipsed by the Rational Expectations Hypothesis; but REH failed to develop satisfactory policy proposals, while Neo-Keynesian economics evolved to address many of the original REH criticisms.
The treasury secretary wanted to respond to the inflationary spiral with a Keynesian strategy of tax increases, spending cuts, and interest rate hikes.
by Abu Yahya February 14, 2009