The main provisions of the Keynesian model of economics. Summary: The Keynesian model of macroeconomic equilibrium and the possibilities of its use in relation to
Introduction
1. The main provisions of the Keynesian model
1.1 Macroeconomic equilibrium and effective demand
1.2 The multiplier and the paradox of thrift
1.3 Inflationary and recessionary gaps in the Keynesian model
2. Practical application of Keynesian theory
2.1 Managing demand through discretionary fiscal policy
2.2 Impact on the economy of non-discretionary fiscal methods
3. Advantages and disadvantages of the Keynesian approach
Conclusion
Literature
Introduction
Economics, like any other, is in constant development. Various stages of this development are associated with certain scientists-economists who offered the world any new discoveries, ideas, concepts. The second third of the 20th century in economics was marked by the teachings of the English economist John Maynard Keynes.
The emergence of new scientific research predetermined the global economic crisis of 1929-1933, these studies do not lose their relevance today, since their main content is the state regulation of the economy in a market economy. Since then, two theoretical directions aimed at solving these problems originate. One of them is based on the teachings of J. M. Keynes and his followers and is called Keynesian (Keynesianism). A peculiar understanding of the consequences of the longest and most difficult economic crisis 1929-1933 reflected in the provisions of the published J.M. Keynes in London book entitled " General theory employment, interest and money" (1936). This work brought him wide fame and recognition, since already in the 30s it served as a theoretical and methodological basis for economic stabilization programs at the government level in a number of European countries and the USA.
"General Theory" J.M. Keynes largely determines the economic policy of countries at the present time. Its main new idea is that the market system economic relations is by no means perfect and self-regulating, and that only active state intervention in the economy can ensure the maximum possible employment and economic growth. In addition, innovation economic doctrine Keynes methodologically manifested itself in the preference for the microeconomic approach of macroeconomic analysis, which made him the founder of macroeconomics as an independent section. economic theory.
Later, the theory developed by J. M. Keynes was studied and supplemented by other scientists, on its basis a theory called "neo-Keynesianism" arose.
The object of study in this paper will be the model of effective demand in Keynesian theory. The aim of this work is to study the main aspects of this model. In accordance with this goal, the following tasks will be solved in this work:
To reveal the meaning of the main terms used to describe the Keynesian model of effective demand, to describe the main factors operating within the framework of this model and to show their interaction;
Show features practical application theoretical provisions of the Keynesian model of effective demand;
Point out the advantages and disadvantages of the Keynesian model.
1. MainprovisionstoainsianOhmodelAnd
1.1 macroeconomicequilibriumAndeffectivedemand
It can be said without exaggeration that John. M. Keynes at one time proposed an absolutely new vision of the capitalist economy, fundamentally different from the postulates of the classical theory that dominated before. Trying to find reasons. which determine the level of national income and employment, J. M. Keynes came to the conclusion that factors inherent in the economy itself can lead to protracted recessions - states macroeconomic equilibrium with a low level of production and involuntary unemployment. On the other hand, there are no internal mechanisms in the economy that can eliminate recessions. Capitalism, according to John. M. Keynes, is not a self-regulating system.
Let us consider the main postulates of the Keynesian model, taking into account the generally accepted graphical and mathematical illustration of this model, proposed by the followers of J. M. Keynes, in particular J. Hicks.
The Keynesian model lacks price flexibility. The reason for this is that the existence of long-term contracts between suppliers and consumers, the monopolization of markets and other factors prevent prices from changing quickly under the influence of market conditions. Also J. M. Keynes emphasized that nominal salary in the short term is fixed, as it is determined by long-term labor contracts, legislation on the minimum rate wages, as well as contracts between enterprises and trade unions. Since the factors that, according to the classical model, are regulating the balance of supply and demand, according to J.M. Keynes are not such, then there is no mechanism for self-regulation in the economy. Moreover, full employment in an unregulated economy also does not exist or can arise only by chance. The equilibrium of supply and demand, as a rule, does not correspond to the full employment of resources, and the equilibrium volume of production is always lower than potential.
The Keynesian model of general macroeconomic equilibrium describes the economy as an integral system in which all markets are interconnected, and a change in the equilibrium conditions in one of the markets causes a change in the equilibrium parameters in other markets and the conditions of economic equilibrium as a whole. The determining factors in the Keynesian model are aggregate or effective demand and aggregate supply.
The aggregate supply in the Keynesian model is the actual value of the volume of production (national product) at the prices available in the economy for factors of production (labor, capital, land, technology), which remains unchanged in the short run. This cost represents the actual costs at different levels of employment in the economy.
The principle of effective demand introduced by J. M. Keynes is that in a closed economy (that is, one where net exports are equal to zero) with the presence of reserve capacity, the level of output (and, therefore, employment) is equal to the planned total spending, consisting of consumer and investment spending.
The planned total expenditure function can be defined as follows:
E = C + I(1.1.1),
where FROM- consumer spending;
I- investments of firms;
Government spending and fiscal policy are not taken into account at this stage of the review for ease of analysis.
According to Keynesian theory, household spending (consumer spending) occupies the largest share in the planned total expenditure. At the same time, what part of the income households will spend and what part they will save is determined by the amount of this income - that part of the income that remains after the implementation of all consumer spending is saved. The consumer spending function looks like this:
C = a + b * (Y - T)(1.1.2.),
where a is autonomous consumption, that is, the minimum necessary expenses that exist even in the absence of income - due to past savings or life "in debt";
b- marginal propensity to consume;
Y- income;
T - tax deductions
(Y - T)- disposable income (income after taxes), usually indicated in the macro economic models how Yd.
marginal propensity to consume ( MPC) is the share of the increase in consumer spending in any change in disposable income:
where ? FROM- increase in consumer spending;
? Yd- an increase in disposable income.
According to Keynesian theory, in the short run, as current disposable income rises, the share of consumption costs decreases, and, accordingly, the share of savings increases.
The second element of the planned total expenditure - investments - can be represented as the sum of autonomous and stimulated investments. The function of investments autonomous from the total income has the form:
I = e - dR (1.1.4.),
where e- autonomous investments determined by external economic factors(mineral reserves, etc.);
d- empirical coefficient of sensitivity of investments to the dynamics of the interest rate;
R is the real interest rate.
With the growth of aggregate income, autonomous investments are supplemented by stimulated ones, the value of which increases with the growth of GDP. At the same time, with the growth of total income, not only production investments increase, but investments in inventories and housing construction. The dependence of investment on income can be represented as a function:
I = e - d R + ? Y(1.1.5.),
where ? - marginal propensity to invest;
Y- total income.
The marginal propensity to invest is mathematically defined as the proportion of the increase in investment spending in any change in income. It should be noted that J. M. Keynes considered investment costs to depend both on the objective factors mentioned above (interest rate, availability of capital reserves and other economic resources), and on the subjective factor - the expected return on investment. Thus, in the Keynesian model, investment spending can be subject to sudden and significant changes. The buildings and equipment that are purchased today are designed to produce goods that will be consumed in the future, and the main characteristic of the future is uncertainty.
Graphically, the line of planned total expenditures can be built by vertically adding consumption and investment schedules.
The line at each point of which the actual total income and the corresponding real expenses are equal to the planned total expenses, that is, the line at each point of which macroeconomic equilibrium is achieved at different levels of resource use (employment), passes at an angle of 45?. Equilibrium in the economy and the corresponding equilibrium level of national income and employment will be achieved at the point of intersection of this line with the line of planned total expenditures. This chart is called the Keynesian cross.
Rice. 1.1. Model "income - expenses" ("Keynesian cross")
If, for example, the economy is to the right of the equilibrium point, that is, the actual output Y1 exceeds the equilibrium Y0 , then this means that buyers buy less goods than firms produce, that is, effective demand is less than aggregate supply. Unsold products take the form of inventories, which increase. The increase in stocks forces enterprises to reduce production and employment, which ultimately reduces GDP. Gradually, the actual volume of production decreases to the level Y0 , that is, income and planned expenses are aligned. Accordingly, the balance of aggregate demand and aggregate supply is achieved.
Conversely, if the actual output Y2 , less than the equilibrium Y0 , then this means that firms produce less than buyers are willing to purchase, that is, aggregate demand is greater than aggregate supply. Increased demand is met by unplanned destocking of firms, which creates incentives for firms to hire new workers and increase output. As a result, GDP gradually increases to Y0 and balance is restored.
1.2 MultiplierAndparadoxfrugality
The equilibrium level of output may fluctuate in accordance with the change in the value of any of the components of total expenditure. An increase in any of them shifts the planned expenditure curve upward and contributes to an increase in the equilibrium level of output. The decline is accompanied by a decline in employment and equilibrium output. At the same time, an increase (decrease) in any component of equilibrium costs causes a slightly larger increase (decrease) in total income due to the multiplier effect.
For the first time, the multiplier model was proposed in 1931 by R.F. Kahn; it was developed in detail by J. M. Keynes. In the model of J.M. Keynes, the autonomous expenditure multiplier is the ratio of the change in equilibrium GNP to the change in any component of autonomous expenditures:
where m- autonomous spending multiplier,
?Y- change in equilibrium GNP;
?BUT- change in autonomous costs, independent of the dynamics of GNP.
The multiplier shows how many times the total increase (decrease) in total income exceeds the increase (decrease) in autonomous spending. The multiplier effect J. M. Keynes explained by a chain reaction of income and expenses. That is, a single change in any component of autonomous spending generates a multiple change in GNP. So, let's assume that there was an increase in investments in the amount of 100 million euros. Additional investments will be directed to the purchase of investment goods and will become the income of those market agents from whom these goods will be purchased. Income recipients will increase their consumption in line with the marginal propensity to consume. Let's pretend that MPC= 0.8. In this case, 80% of the increase in income (or 80 million euros) will be spent on consumer goods and services, that is, income will increase in industries that produce consumer goods. The recipients of this income, in turn, will spend 64 million euros (80 x 0.8), and so on. Moving on to more general concepts, we can say that if autonomous consumption increases by some amount ? CA, it increases the total cost and income Y by the same amount. This, in turn, causes a secondary increase in consumption (due to an increase in income), but already by the amount MPC ? ? CA. Further, total expenses and income increase again by the amount MPC2 ? ? CA and so on according to the scheme of circulation "income - expenses". The chain comes up:
? CA^ AD^ Y^ C^ AD^ Y^ C^ AD^ Y^ etc.
This simple diagram shows that total income Y repeatedly responds to the initial impulse ? CA^ , which is reflected in the value of the autonomous spending multiplier.
The sum of increasing incomes, taking into account the above reasoning, will be as follows:
Y = Y + Y ? MPC + Y ? MPC2 + Y ? MPC3 + … (1.2.2.)
We have a decreasing geometric progression, the sum of which is defined as follows:
Thus, the multiplier formula will look like this:
The multiplier effect means that relatively small changes in the quantities C or I can cause significant changes in employment and output levels. The multiplier is thus a factor economic instability amplifying fluctuations in business activity caused by changes in autonomous spending. On the other hand, the practical significance of the multiplier lies in the fact that it allows you to set the required amount of growth in autonomous spending (for example, investment or government purchases) in order to obtain a given increase in national income.
J. M. Keynes came to the conclusion that the multiplier effect can have a destabilizing effect on the economy, provided that savings increase. According to the basic psychological law derived by J. M. Keynes, with the growth of income, the share of savings in income increases. As a result, the "paradox of thrift" can be observed. Its essence lies in the fact that the desire of people to save can outstrip the desire of entrepreneurs to invest. As a result, the increase in income is reduced, since the increase in savings means a reduction in consumer spending, which, due to the multiplier effect, will increase compared to the initial increase in savings.
Let's illustrate this effect graphically.
Rice. 1.2 - The Paradox of Thrift
Suppose the economy is at the point BUT(See Fig. 1.2.). Households tend to save more for whatever reason, the savings schedule shifts from S before S". At the same time, investments remain at the same level I. As a result, consumer spending is relatively declining, which causes a multiplier effect and a decline in total income from Y0 before Y1 . Since total income has decreased, savings also decrease and end up at the point B the same as at the point A, but at a much lower total income (GDP).
If, simultaneously with the growth of savings from S before S"planned investments from I before I", then the equilibrium level of output will remain unchanged and there will be no decline in production. On the contrary, in this case, investment goods will prevail in the structure of production, which will create good conditions for economic growth, but may to some extent limit the level of current consumption of the population.
Thus, the "paradox of thrift" is found in the fact that an increase in savings can lead to a reduction in personal consumption and GDP. At the same time, one should be aware that the paradox of frugality is determined within the framework of a simple linear model without the participation of the state, without taking into account the functioning banking system, as well as in a closed economy. The simultaneous fulfillment of all these conditions today is difficult to consider realistic.
1.3 InflationaryAndrecessionarybreaksinKeynesianmodels
Above, we showed that when macroeconomic equilibrium is reached, the planned total expenditures of economic entities coincide with the actual ones, that is, everything that is produced in the economy is realized. However, according to Keynesian theory, this usually does not achieve full employment in the economy. The lack of balance between the real and potential levels of output can lead the economy to two negative effects for it - inflationary and recessionary (deflationary) gaps.
An inflationary gap is a situation in the economy in which planned spending exceeds the potential level of aggregate output, or (if we consider the equilibrium in the investment-savings system), planned investment exceeds savings corresponding to a situation of full employment. In other words, the supply of savings lags behind the investment needs of enterprises.
Rice. 1.3. The inflationary gap in the Keynesian model
In this situation, there is no possibility in the economy to increase investment, therefore, there is no possibility to increase production, that is, the aggregate supply. The population will direct most of its income to consumption, increasing demand in the markets for goods and services. The consequence of this will be an increase in prices, which will increase due to the multiplier effect. Thus, the economy will not be able to come to a state of equilibrium on its own, and the inflationary gap will increase.
Overcoming the inflationary gap involves containing aggregate demand and “moving” the equilibrium from the point A exactly B. On the graph (Fig. 1.3.), the inflationary gap corresponds to the value of the segment BK and represents the amount by which aggregate demand must fall in order to bring equilibrium aggregate output down to the non-inflationary level of full employment.
A recessionary (or deflationary) gap is a situation in the economy in which the planned aggregate spending is less than the potential level of aggregate output, or the planned investment is less than the savings corresponding to a situation of full employment. Under these conditions, the population will save most of the income, demand will decrease, which will cause overproduction, a decrease in the price level, and as a result, a decline in production and layoffs of workers. The decline in income in the economy and the decline in employment will continue until the multiplier effect ends. Thus, the recessionary gap will gradually decrease, the economy will come to a state of equilibrium on its own, however, this will be accompanied by a decline in production and unemployment. To overcome the recessionary gap and ensure full employment of resources, it is necessary to stimulate aggregate demand and move the equilibrium from point A to point B. In the graph (Fig. 1.4.), the recessionary gap corresponds to the value of the segment BK and represents the amount by which aggregate demand should increase, to raise aggregate output to the non-inflationary value of full employment.
Rice. 1.4. The recession gap in the Keynesian model
2. PracticalAppendixKeynesiantheories
2.1 Regulationdemandthroughdiscretionaryfiscalpoliticians
To prevent or reduce the negative consequences of inflationary and recessionary gaps, to ensure that the economy achieves equilibrium at a level as close as possible to the level of full employment, John. M. Keynes proposed measures for state regulation of the economy. At the same time, according to his theory, fiscal policy seems to be the most effective. Keynesian theory considers effective demand to be the main factor to be influenced.
Fiscal (fiscal) policy is a kind of economic policy of the state, which is a change in income and expenditure state budget to achieve macroeconomic balance. Fiscal policy can be discretionary or non-discretionary.
discretionary fiscal policy- this is a change in revenues and expenditures of the state budget, carried out by decision of the government to overcome the consequences of an unfavorable economic situation.
task public policy during a recession is to overcome the recessionary gap, for which it is necessary to achieve an increase in output to full employment by increasing aggregate demand. To this end, the government can take the following steps:
1) increase in public procurement of goods and services, including an increase in public investment;
2) tax cuts.
As a result of tax cuts, the disposable income of households increases, as a result of which the aggregate demand function shifts upwards (Fig. 2.1, a). An increase in government purchases of goods and services brings a similar effect. At the same time, the value of effective demand grows, and the equilibrium point shifts from the position E into position F.
Rice. 2.1. Equilibrium in the real sector of the economy with full employment of resources as a result of stimulating fiscal policy
Enterprises respond to the growth of aggregate demand by increasing production volumes to the size of potential output from Ye before Yf ( rice. 2.1b). From figure 2.1. it can be seen that output and real income increase by a larger amount than the size of the increase in, for example, government purchases. As shown above, this is due to the multiplier effect. The growth of aggregate output should lead to an increase in employment and the elimination of involuntary unemployment.
A prime example of such a policy was new course» President Roosevelt in the USA. Part of Roosevelt's course was the organization of large public works, for which more than $3 billion was allocated, the construction of roads, airfields, schools, hospitals and other facilities, mainly in the field of infrastructure. To organize these works, tent camps were built, where the unemployed were gathered. These jobs reduced unemployment and increased the market because the former unemployed were now getting paid and buying goods. In addition, building materials, building mechanisms and much more were purchased from the market for the work itself. In this way, these works absorbed goods from the market without producing goods, and this dissolved the crisis. These activities represented an increase public spending, which led to an increase in aggregate demand and employment, although they were carried out even before the publication of the theory of J. M. Keynes.
It should be noted that the application of such a policy inevitably leads to an increase in expenditures and a decrease in state budget revenues, and, most likely, to the formation and (or) increase in the state budget deficit. Obviously, during a recession, such fiscal policy will have the greater effect, the more budget deficit she will be followed.
In a boom period, in order to eliminate the overheating of the economy, government policy should be the opposite - to reduce aggregate demand, it is necessary to reduce government spending and increase taxes. Such measures will lead, respectively, to an increase in revenues and a decrease in state budget expenditures, that is, to the formation of a budget surplus (a positive difference between revenues and expenditures). It can be noted that during an economic boom, discretionary fiscal policy will be the more effective, the larger the budget surplus it will be accompanied by.
2.2 Impacton theeconomynon-discretionaryfiscalmethods
While the task of discretionary policy is to eliminate the negative effects of fluctuations in aggregate demand and income, the task of non-discretionary policy is to smooth fluctuations in aggregate demand, aggregate output and employment. To do this, the state has such a tool as a “built-in stabilizer”.
The built-in stabilizer is economic mechanism, which automatically smooths out cyclical fluctuations in aggregate output and employment. This mechanism is implemented through the economic legislation of the country, which is in force continuously and relatively permanently. A typical example of a built-in stabilizer is the unemployment benefit system. During a recession, when the number of unemployed rises, the volume of transfers in the form of unemployment benefits automatically increases and does not allow aggregate demand to fall to the level that it would be in the absence of such a built-in stabilizer. For example, in the United States during the Great Depression, which led to the emergence of unemployment benefits, the unemployed made up a quarter of the country's labor force. It is clear that the amount of benefits paid to so many people was a significant amount and could not but affect the aggregate demand.
In contrast, during an economic boom, when employment becomes surplus and aggregate income rises beyond potential output, unemployment benefits are automatically reduced, which has a cooling effect on the economy.
Another well-known type of built-in stabilizer is household income taxation. Three types of tax rates can be applied for taxation. If the rate at any value of income remains unchanged, then such a tax is called proportional. If the tax rate increases with income, such a tax is called progressive. If tax rate as income decreases, such a tax is called regressive.
The stabilizing effect of income taxation is as follows: during a period of depression, when output and aggregate income decline, tax payments to the budget are automatically reduced, thereby stimulating aggregate demand without government intervention. During the period of overheating of the economy, when the aggregate output grows, the amount of tax deductions automatically increases, exerting a restraining effect on the economic situation.
Obviously, the role of the built-in stabilizer will be most effectively played by progressive taxation, since in this case, in the conditions of an economic downturn and a reduction in income, the tax rate will decrease, during the period of recovery it will increase. As a result, the range of fluctuations in disposable income will not be as large as the range of fluctuations in total real income.
From the economic meaning of fiscal instruments, it is obvious that in the presence of built-in stabilizers, the value of multipliers (multiplier of government spending, tax multiplier) will decrease. Built-in stabilizers, by definition, dampen the impact of autonomous spending shocks on aggregate output and employment. On the other hand, since any multiplier economic sense represents the ratio of the result and costs of public policy, that is, reflects its effectiveness, insofar as the presence of built-in stabilizers leads to a decrease in the effectiveness of discretionary fiscal policy.
Thus, Keynesian theory showed that the equilibrium state market economy does not coincide with the situation of full employment of factors of production. Even if the economy is in a state of equilibrium, such negative phenomena as an inflationary or recessionary gap can take place in it. The economy cannot overcome such gaps on its own; this may be the result of targeted regulation by the state. The method of regulation should be the impact on effective demand through the implementation of fiscal policy.
3. AdvantagesAndlimitationsKeynesianapproach
The undoubted advantages of the Keynesian approach include the fact that J. M. Keynes proposed a fundamentally new view of the economy, taking into account the recognition of the importance of psychological factors, the recognition of the uncertainty of the future and the inability to predict the long-term consequences of the actions of economic entities. J. M. Keynes proposed a new theoretical toolkit that was much more in line with contemporary economic reality than the classical views that had prevailed before.
J. M. Keynes expressed and proved the position that the capitalist system does not have an internal equilibrium mechanism that allows, after a reduction in aggregate demand, to return to the previous level of production and employment, recognized the danger of falling economic system into a long-term trap of depression. Thus, he acted as a critic of capitalism and the doctrine of the free market, but his criticism was fundamentally different from that that existed before. From the point of view of the distribution and redistribution of resources, the system of free competition seemed to be the best and ensures the growth of aggregate production and consumption, despite the fact that heavy social consequences The free market mechanism was recognized by many. John. M. Keynes showed that the system of free market competition fails precisely in the field of distribution of resources and does not ensure the full use of the most important resource - labor. Thus, J. M. Keynes substantiated the need state regulation economy. Moreover, using the concept of effective demand, Keynesian theory provides specific recipes for government action to improve the efficiency of the economic system and approach the level of full employment.
However, like any other, Keynesian theory is not comprehensive and explains everything and has a number of weaknesses.
Thus, the Keynesian model, developed during the period of mass unemployment in the 1930s, suggests that an increase in aggregate spending leads to an increase in output at the existing, or current, price level. But this is not always true, the aggregate supply and demand model shows that the price level increases with the growth of aggregate demand in the intermediate and classical segments of the aggregate supply curve. With an increase in the price level, ceteris paribus, the interest rate rises, which in turn leads to a reduction in investment and total spending. The so-called interest rate effect works like this: at a higher price level, more money is required for purchases, and at a fixed money supply, an increase in the demand for money raises the interest rate and reduces the cost of investment. Conversely, a fall in the price level causes a reduction in the demand for money, a reduction in the interest rate, and an upward shift in investment and aggregate spending. Inflation also has an impact on the multiplier, the action of which, due to inflation, is reduced to nothing. It follows from what has been said that for each given initial increase in aggregate demand, the associated increase in real national product will be the smaller, the greater the increase in the price level. Thus, the effective demand model is not sufficient to explain the situation when a change in aggregate spending (and hence aggregate demand) causes a change in the price level. This shortcoming manifested itself in the second half of the 60s, when a phenomenon called "stagflation" arose - high inflation accompanied by high unemployment.
It should also be noted that certain Negative consequences can have application in practice of the Keynesian policy of economic regulation. As noted above, the policy of increasing effective demand by increasing expenditures and reducing state budget revenues leads to the formation or increase in the state budget deficit. Here the problem of financing the state budget deficit immediately arises, which cannot always be successfully solved.
If we ignore the purely economic concepts, the following can be noted. According to J.M. Keynes, it turns out that in the case of investment optimization from the point of view of the state ( national economy) the growth of national income as a function of marginal propensity to nothing but income, consumption not limited, tends to infinite expanded reproduction. Thus, the nature of the model of a developing economy according to J. M. Keynes is purely consumerist. But is the condition of an unlimited propensity to consume feasible? After all, on the way to the development of the boundless propensity of each member of society and all citizens together to consume (from meeting vital needs to extreme forms of luxury), an insurmountable obstacle is the obvious limited resources on Earth (from minerals to living space for the family, nation, humanity as a whole) . It seems that J. M. Keynes could not but understand that within the framework of an isolated national capitalist system, due to the exhaustibility of resources, achieving prosperity for the nation in the form of full employment with an unlimited propensity to consume is a practically impossible task. From here to reach constant growth national income, turning into consumption, it follows the need to implement a policy of economic expansion. Such a policy assumes that the goods produced by the national economy are of high consumer value are exchanged for cheap raw materials of nations and peoples that have lagged behind in the economic development. However, such a policy cannot be infinite in time.
On the other hand, the unattainability of the state of full employment as the welfare of the nation within the framework of a state with a market economy is confirmed by the well-known curve of A.U. Philips, built in the coordinates wage- unemployment rate. This curve was drawn from the statistics of wages and unemployment in England from 1861 to 1913, when England was a colonial power with an almost ideal exchange of goods for the raw materials of the colonies for the national economy. The curve shows that as unemployment approaches zero (i.e., towards full employment), wages also tend to fall to almost zero.
Rice. 3.1. Phillips Curve
Thus, it can be argued that one of the main shortcomings of the theoretical system of John. M. Keynes is the reduction of the effective development of the economy to consumer goals.
Conclusion
In this paper, we have examined the main provisions of the Kensian theory, in particular, the model of effective demand. Keynesian theory convincingly shows that the equilibrium state of a market economy usually does not coincide with the situation of full employment of factors of production and may be the result of purposeful regulation by the state. The method of regulation should be the impact on effective demand through the implementation of fiscal policy.
However, the Keynesian model provides a recipe for dealing with such negative phenomena in the economy as inflation and unemployment separately, in the presence of a situation of excess (underemployment) of production factors. In this case, an impact on the economy that leads to a decrease in inflation can cause an increase in unemployment and vice versa. However, the combination of high unemployment and high inflation that arose in the second half of the 20th century did not fit into the framework of the Keynesian model, which demonstrated its certain weaknesses and required the emergence of new economic ideas and new recipes for regulating the economy.
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Consumption modeling. The consumption model of J. Keynes
The study of the aggregate consumption of households is one of the most important tasks of modern macroeconomic theory. It is necessary for the following reasons. First, consumption accounts for the largest share of total expenditure, so in order to explain fluctuations in income, i.e. to understand the nature of business cycles and achieve macroeconomic equilibrium, it is necessary to analyze under the influence of what factors it changes. Secondly, the savings behavior of the private sector, and hence the volume of investment in the economy, depends on consumer decisions. Investment causes an increase in the capital stock, which is one of the main sources of economic growth. Thus, the study of the determinants of consumer demand is also necessary for understanding the processes of economic growth.
Under consumption patterns refers to equations or their system that reflects the dependence of indicators of consumption of goods and services on a set of socio-economic factors (total household expenditure or income, price level, family size and composition, etc.).
In other words, a model explaining the formation of consumption should describe the factors on which the volume of consumption depends, and the mechanism of influence of these factors on consumption.
There are many consumption models that differ in methods for assessing their indicators, directions of use, variables included in the model, etc. Starting from the 1st half of the 20th century, scientists have focused their attention on building a consumption formation model depending on income as the only factor.
Consider the most famous and significant consumption models in macroeconomic theory: Keynesian (J. M. Keynes), intertemporal choice (I. Fisher), "life cycle" (F. Modigliani), permanent (permanent) income (M. Friedman).
John Maynard Keynes(1883-1946) - English economist, founder of the macroeconomic trend in economic theory. A significant part of his famous work "The General Theory of the Employment of Interest and Money", published in 1936, Keynes devoted to the analysis of the factors that determine the dynamics of personal consumption.
Let us single out the assumptions on which Keynes' consumption model is built:
1. The value of the marginal propensity to consume, that is, the share of consumption in each additional unit of income, is between zero and one. Keynes stated that "the basic psychological law is that people tend, as a rule, to increase their consumption with an increase in income, but not to the same extent as income increases."
2. The ratio of consumption to income, called the average propensity to consume APC = C/(Y - T), decreases as income rises. Keynes believed that savings is a luxury, and therefore rich families save more of their income than the poor.
Since 0< МРС < 1, это означает, что, во-первых, с ростом располагаемого дохода потребление растет, а с падением уменьшается; во-вторых, из каждой дополнительной единицы располагаемого дохода на потребление тратится только часть, а остаток сберегается.
Keynes believed that if income falls, then people try to maintain their usual level of consumption, so they reduce it to a lesser extent than income fell. If income rises, then consumption rises to a lesser extent, since saving is a luxury item, and as income rises, people spend more of it on savings than before.
Statistics show that as current income rises, MPC tends to decrease and MPS tends to rise. But this pattern is distorted by many circumstances, among which:
Economic instability that weakens incentives to invest;
Inflation, which devalues the savings of the population and provokes high consumer activity;
Lack of protection of deposits of the population, when excessive demand increases, specific types of savings accumulate in the form of consumer goods and luxury.
3. Disposable income is the main factor that determines consumption, and believed that the interest rate does not play a significant role.
This premise differed from classical ideas about the determining influence on consumption of the interest rate. The classical approach to the analysis of consumption proceeded from the idea of the primacy of savings decisions, which are influenced by the interest rate. Consumption, from this point of view, falls with an increase in the rate and grows with its decrease. Keynes believed that the impact of the rate is negligible and can be neglected, believing that interest rates can affect consumption only in theory. The scientist wrote that “the main conclusion, which, it seems to me, follows from previous experience, is as follows: in relation to a short period, the influence interest rates for individual consumption at a given level of income should be recognized as secondary and relatively small.
Based on these three premises, Keynes's consumption function is written as follows:
C = C a + c y ∙ Y d
0 < с y < 1,
where C is consumption;
Са – autonomous consumption (a);
c y is the marginal propensity to consume (b).
Often in economic models, a variant of this function is used, which has the listed properties C = a + b ∙ (Y - T). Generally, linear view The consumption function uses the assumption of invariance for each particular economy of the marginal propensity to consume, which is consistent with empirical observations.
A graphical representation of the consumption function is shown in Figure 1.
Figure 1.1 - Functions of consumption and savings from income (according to Keynes)
For Y< Y 0 потребление превышает доход, и поэтому сбережение – величина отрицательная. При Y < Y 0 доход целиком расходуется на текущее потребление и сбережение равно нулю. Если Y >Y 0 , part of the disposable income is saved.
Shortly after Keynes proposed his interpretation of the consumption function, economists began collecting and analyzing data to test his assumptions. There were works devoted to the statistical verification of the hypotheses put forward by him.
Early research showed that Keynes's consumption function accurately describes the patterns of consumer behavior. The scientists analyzed household budgets and collected data on consumption and income. They found that higher-income families consume more, meaning that the marginal propensity to consume is greater than zero. In addition, higher income families were found to have more savings, indicating that the marginal propensity to consume is less than one. These data supported Keynes's first hypothesis that the value of the marginal propensity to consume lies between zero and one. In addition, higher-income families were found to save the majority of their income, supporting Keynes' hunch (his second hypothesis) that the average propensity to consume declines as income rises. Families with higher incomes consumed more and saved more of their income than families with lower incomes.
In other studies, researchers analyzed consumption and income between the two world wars. These data also confirmed the correctness of the derived consumption function. In years when incomes were initially low, such as during the Great Depression, both consumption and savings were low. the value of the marginal propensity to consume was between zero and one. Moreover, during these years low income the ratio of consumption to income was high, confirming Keynes's second hunch. Finally, because the relationship between income and consumption was so strong, no other variable was significant in determining consumption. Thus, the data obtained also confirmed Keynes's third assumption that the size of consumption is primarily determined by the size of income.
Based on these studies, the hypothesis of the so-called eternal stagnation . Its essence can be illustrated as follows. From the condition of equilibrium in the market of goods and services in a closed economy (Y = C + I + G) it follows that
C/Y + I/Y + G/Y = 1. (1.1)
It can be seen from (1.1) that if the share of consumption in income falls, then in order to maintain equilibrium at the level of full employment, the share of investment must increase adequately. Since there is no reason to believe that such growth will actually occur, government purchases need to grow faster than income.
During the 2nd World War, government purchases in Western countries grew quite rapidly, so many economists believed that after the war this growth would stop and eternal stagnation would begin. However, this did not happen. Consumption increased significantly after the war. One explanation for the post-war rise in consumption was that, due to consumption rationing during the war, people turned their surplus into securities, mainly in government bonds. After the war, the surplus of these bonds was converted into increased consumer demand. Thus, the influence on consumption of such a factor, not taken into account by the Keynesian function, as well-being, i.e. amount of assets.
In 1946, S. Kuznets studied data on consumer behavior in the United States since the Civil War. They found that, on average, the share of consumption in income was constant over this period, while falling during booms and rising during recessions. This observation is called Blacksmith's riddle .
Since the confirmation of Keynes's hypotheses was obtained on the basis of a study of short time series, the assumption arose that the average propensity to consume in the short run and the long run are different, i.e. that the consumption function in the long run is steeper than the consumption function in the short run (Figure 1.2).
Figure 1.2 - Short-term and long-term consumption functions
Thus, in the late 40's. of the last century, it became obvious that the theory of consumption should explain the following empirical observations.
1. Budget surveys have shown that MRS< АPC.
2. The C/(Y – T) ratio falls during booms and rises during recessions.
3. In the long run, C / (Y - T) is a constant and MPC = APC.
4. Wealth (value of assets) influences consumption.
To explain these facts, two theories have been put forward: the life cycle hypothesis of Franco Modigliani and the fixed income hypothesis of Milton Friedman. Previously, these theories were considered competing, but modern macroeconomic theory sees them rather as complementary.
Both of these theories suggest that in making consumption decisions in the present period, people are guided not only by their current income, but also by the income they expect to receive in the future.
All modern theories of consumption are based on microeconomic models of consumer demand that describe the intertemporal optimization behavior of households that make decisions under existing budget constraints.
The fundamental model illustrating the dependence of current consumption on future income was proposed by Irving Fisher. Let us describe a simple version of this model and analyze how its results have been used to develop life cycle and permanent income theories. Then we consider the interpretation based on it of the hypotheses of Modigliani and Friedman.
To the subjective factor refers to the "psychological" propensity of people to consume, and to objective factors- the level of income and its distribution, stocks of wealth, cash (liquid assets), prices, the rate of interest, etc.
Studies have found that consumption moves in the same direction as income. However, consumption depends not only on income, but also on the so-called marginal propensity to consume and the average propensity to consume. In economics, this pattern is understood as a "psychological law" that reflects the desire of people to buy consumer goods.
Average propensity to consume expressed as the ratio of the consumed part of the national income (C) to the total national income (Y), i.e.:
The marginal propensity to consume expresses the ratio of any change in consumption to the change in income that caused it. Mathematically it looks like this:
(15)
The following functional relationship is reflected here: when the real income of a society increases or decreases, its consumption will increase or decrease, but not with such rapidity. The amount of consumer spending is determined mainly by the level of income. Consequently, the MPC will always be less than one, since U > C. The conclusions follow from this:
1) if MPC = 0, then the entire increase in income will be saved, since saving is that part of the income that is not consumed;
2) if MP = ½, this means that the increase in income will be divided equally between consumption and saving;
3) if MPC = 1, then the entire increase in income will be spent on consumption)
Under propensity to save is understood as one of the psychological factors, meaning a person's desire to save. The average propensity to save (symbol “APS”) is expressed as the ratio of the saved part of the national income (S) to the total income (Y), i.e.
(16)
marginal propensity to save (symbol “MPS”) is, like MPS, the ratio of any change in savings to the change in income that caused it:
(17)
It is easy to see that if C + S = Y (i.e., total income breaks down into consumption and savings), then ∆C + ∆S = ∆Y.
Then the sum of the marginal propensity to consume and the marginal propensity to save is 1:
(18)
The interdependence of the two indicators allowed the American economist P. Samuelson to say that the marginal propensity to consume is the Siamese twin of the marginal propensity to save.
Consumption can be productive or unproductive. This will depend on the nature of the savings. If an entrepreneur accumulates part of the profits in the form of money capital in order to invest later, then economists also consider this as "saving", and do not make any distinction between an entrepreneur and a wage worker who has set aside some money to buy some object or to "black day".
KEYNSIAN MODEL OF ECONOMY
(Keynesian) The concept of economics based on the model of D. M. Keynes or any other economist who holds the same views. According to the Keynesian model, the capitalist economy can be in a certain equilibrium for a long period of time, suggesting a significantly lower output than would be compatible with full employment. While the economy is in this state, output is largely determined by the magnitude of demand, so that the level of output can be influenced by monetary and fiscal policy. This view of the economy must be distinguished from another view, sometimes called "classical" or "neoclassical", according to which the economy tends to approach its natural rate of activity. Therefore, the main role of economic policy is to stimulate economic growth on the supply side, for example by encouraging savings and increasing competition in the markets. Keynesianism has been criticized for trying to expand output through demand management at a time when supply-side policy is needed. Keynesian politics can actually contribute to inflation.
Economy. Dictionary. - M.: "INFRA-M", Publishing house "Ves Mir". J. Black. General editorial staff: Doctor of Economics Osadchaya I.M.. 2000 .
Economic dictionary. 2000 .
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Keynesianism is a collection of different theories about how the aggregate demand (consumption of all subjects) has a strong impact on production in the short term, especially during recessions. The origin of this school is associated with the name of a famous British economist. In 1936, John Maynard Keynes published his General Theory of Employment, Interest and Money. In it, he contrasted his teaching with the classical supply-oriented approach to the regulation of the national economy, this approach was almost immediately put into practice. Today, Keynesianism is no longer one school, but several currents, each with its own characteristics.
general characteristics
Representatives of the Keynesian approach consider the aggregated (total) supply as an indicator that is equivalent to the production capacity of the economy. They believe that it is influenced by many factors. Therefore, aggregate demand can rise and fall chaotically, influencing general release, employment and inflation. This approach to the national economy was first applied by the British economist John Maynard Keynes. The supply-side views that dominated at the time did not meet the needs of the time, being unable to solve the problem of the consequences of the Great Depression.
Features of the theory
Keynesianism is a trend that advocates active government intervention in the economy. Its representatives believe that decisions in the private sector are the cause of inefficiency in the national economy. Therefore, the only "cure" is an active monetary and fiscal policy on the part of central bank and governments. It is on the latter that the stabilization of business cycles depends. Keynesians advocate a mixed economy. Preference is given to the private sector, but during recessions the state actively intervenes in the national economy.
Historical context
Keynesianism in the economies of developed countries was the standard model at the end of the Great Depression, during World War II and during the post-war period of growth (1945-1973). However, it lost its dominant position after the energy crises and stagflation in the 1970s. Currently, we can observe a re-increase in interest in this direction. This is due to the inability of classical market models to cope with the consequences financial crisis 2007-2008. New Keynesianism is a school that assumes the rationality of the expectations of households and firms, as well as the existence of "failures" of the market, which require government intervention to overcome. We will dwell on the features at the end of this article.
Keynesianism: representatives
Many scholars have taken this view economic school. Among them:
- John Maynard Keynes (1883-1946);
- Joan Robinson (1903-1983);
- Richard Caan (1905-1989);
- Piero Sraffa (1898-1983);
- Austin Robinson (1897-1993);
- James Edward Meade (1907-1995);
- Roy F. Harrod (1900-1978);
- Nicholas Kaldor (1908-1986);
- Michal Kaleki (1899-1970);
- Richard M. Goodwin (1913-1996);
- John Hicks (1904-1989);
- Paul Krugman (1953 -).
Scientist's contribution to science
The school of economics, which advocates state intervention in the national economy, especially during recessions, is named after its founder and main apologist. The ideas that John Maynard Keynes outlined changed theory and practice modern science. He developed his theory of the causes of cyclicality, and is considered one of the most influential economists of the 20th century and the present. Keynesianism in economics has become a real revolution, because it dared to refute classic ideas"invisible hand" of the market, which can independently solve any problems. In 1939-1979, the views of this economic school dominated the developed countries. It was on them that the policy of their national governments was based. However, it was only after the Second World War that sufficient loans were taken out to eliminate unemployment. According to John Kenneth Galbraith, who was responsible for controlling inflation in the United States during this period, it would be difficult to find another better period to demonstrate the possibilities of applying the Keynesian approach in practice. Keynes' ideas were so popular that he was called the new Adam Smith and the founder of modern liberalism. After the Second World War, Winston Churchill tried to build his election campaign on criticism of this direction and lost to Clement Attlee. The latter just advocated an economic policy based on the ideas of Keynes.
Concept
Keynesian theory deals with five questions:
- Salaries and expenses.
- Excessive savings.
- Active fiscal policy.
- Multiplier and interest rates.
- Investment-savings model (IS-LM).
Keynes believed that to solve the problems associated with the Great Depression, you need to stimulate the economy (encourage investment) through a combination of two approaches:
- Reducing interest rates. That is, the application of elements of monetary policy central bank countries (US Federal Reserve).
- Government investment in building and maintaining infrastructure. That is, through an artificial increase in demand through government spending (fiscal policy).
"The General Theory of Employment, Interest and Money"
This most famous Keynesian theory was published in February 1936. It is considered a key work in the field of economics. The General Theory of Employment, Interest and Money laid the foundations of the terminology and shaped the modern theory. It consists of six parts and a preface. The main idea of this work is that employment is determined not by the price of labor as a factor of production, but by the expenditure of money (aggregate demand). According to Keynes, the assumption that competition in the market in the long run will lead to full employment, since the latter is an indispensable attribute of the equilibrium state, which is established if the state does not interfere in the economy, and everything goes on as usual, is incorrect. On the contrary, he believed that unemployment and underinvestment were normal in the absence of good government management. Even lowering wages and increasing competition does not bring the desired effect. Therefore, Keynes in his book defends the need for state intervention. He even admits that the Great Depression could have been avoided if everything had not been left at the mercy of a free and competitive market during that period.
Modern Keynesianism
After the global financial crisis, there has been a renewed increase in interest in this area. New Keynesianism, whose representatives are increasingly strengthening their positions in the economic community, appeared in the late 1970s. They insist on the existence of "failures" of the market and the impossibility of perfect competition. Therefore, the price of labor as a factor of production is inflexible. Therefore, it cannot immediately adapt to changes in market conditions. Thus, without government intervention, a state of full employment is unattainable. According to representatives of the new Keynesianism, only the actions of the state (fiscal and monetary policy) can lead to efficient production and not laissez faire.