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Keynes Rethinking Economics ​Bachelor Thesis

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Keynes Rethinking Economics ​Bachelor Thesis Keynes Rethinking economics Bachelor thesis ​ Author: Ridwan Shadid ​ ​ ​ Student number: 10765360 Supervisor: Dr. D.F Damsma January 2018 Amsterdam School of economics University of Amsterdam Statement of Originality This document is written by Student Ridwan Shadid who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents. 1 Contents List 1. Foreword….…………………………………………………………………………..3 2. Introduction…………………………………………………………………………..4 3. Keynes………………….....……………..………………………………………….....5 4. Neo-Keynesian economics…………....…………..…………………………………..7 5. New-Keynesian economics..……………….………………………………………..10 6. Post-Keynesian economics..…………......…………...……………………………..16 7. Discussion and Conclusion…………………………………………………………20 8. Biography……………………………………………………………………………22 9. Afterword……………………………………………………………………………24 2 Foreword My fascination with economics began with the financial crisis of 2008. As I was watching the news, I could not understand much of what the news anchor or prominent economists were explaining about the most significant economic downturn since the Great Depression. Many of the public did not understand the financial crisis, though everyone felt the consequences of the economic downturn. The nationalization of large banks, the loss of millions mostly ​ ​ middle-class jobs, the Euro Crisis as a successor of the 2008 crash, and the fear of a total breakup of the European Union were all topics that dominated the newsfeed when I was in high school. Inspired by these issues I decided to choose an economics major at UVA. However, from the beginning I noticed some discrepancy between the theories I had to study and the economic reality I read in the newspapers. Many courses remained unchanged and the disadvantages of the capitalistic system we live in, such as external effects like climate change, were not part of the curriculum. During my time at UVA, I attended several lectures at Room for Discussion, Rethinking economics and several meet-ups from the TV Program Tegenlicht, about the faults in our economic thought. For this reason, choosing a topic for my ​ bachelor thesis was an easy one. I want to thank Dr. Damsma who assisted me while writing this thesis and who often offered me great articles from economists with remarkable innovative views about the financial crisis. Writing this paper gave me even a deeper insight into the alternative of the "mainstream economic thought". I hope that my fellow students from all kinds of disciplines are going to read my thesis. Since economics is one of the most influential social sciences, it must, therefore, be discussed by all academic disciplines. Which is often difficult since economic papers mainly used algebra to calculate the obvious or to divert attention from the common sense. For this reason I have written a paper that is therefore easy to read for people with no economic background. I hope you enjoy reading this thesis! Kind regards, Ridwan Shadid 3 Introduction The financial crisis had a tremendous effect on the world economy. Many governments were forced to spend billions of tax dollars to prevent a financial meltdown, and millions lost their jobs during the next recession. National debt levels increased, governments had to cut spending, and the lives of many citizens changed. As the effects of the financial crisis were so severe, many countries entered an era of low economic growth for a long time. Until this day many economists argue that Europe experienced a lost decade that is in many ways comparable to the lost decade of Japan in the 1990s. Although many countries have shown economic recovery, all face the inheritance of the extensive effects of the recession. Millions of middle-class jobs were lost and later replaced by low paying flexible jobs when economic recovery started, national debt levels are far higher than before the crisis, and the public still feels the many cutbacks on government spending to this day. Although policymakers are celebrating the economic upturn of the past few years, the state of the economy is on many fronts not on pre-crisis levels, especially for southern European countries. As the 1970s economic downturn caused a crisis in the mainstream economic thought of the Keynesians, so did the 2008 financial crisis, in which the "mainstream economic thought'' inspired mainly by the neoclassical school was faced with its shortcomings. Up to the 2008 crash, many economists saw no dangers in our financial system and claimed that the market is an efficient functional machine that always depicts the right prices. After the 1970s economic recession, the neoclassical thought gained more attention, and the Reagan administration started with economic legislation that was supported by the neoclassical methodology. This economic theory spread around the globe, and many countries, especially in Western Europe, followed the neoliberal laws, first in Great Britain with Margaret Thatcher, and later in other countries. As the world experienced one of the worst financial crises in history, many economists regained an interest in the theories of John Maynard Keynes; this attention was later called the Keynesian Resurgence. The critique of the mainstream economic thought resulted in the launch of several new institutions that urged for new economic theories, such as The Institute of New Economic Thinking, founded in New York by prominent economist George Soros. The mission its states are "to nurture a global community of next-generation economic leaders, to provoke new economic thinking, and to inspire the economics profession to engage the challenges of the 21st century". Many other organizations around the globe followed. The Keynesian Resurgence gave me the idea to write a thesis about the Keynesian school and its developments throughout time. This paper will give you an historical overview of the Keynesian School and its developments throughout the 20th and beginning of the 21th century. The central question I like to answer at the end of this paper is how the Keynesian school and its sub theories have developed over time and how its current sub theories should interpret the financial crisis of 2008. 4 Keynes After Roosevelt took office during the Great Depression, he introduced in many ways revolutionary stimulus packages that were summed up as the New Deal. The now famous governmental projects for infrastructure, the introduction of social security, unemployment programs, etc., made the American Government an essential factor in the U.S economy. Roosevelt radically changed the economic policies from his predecessor, Herbert Hoover who was convinced that the government should never intervene in the market economy. Roosevelt's policies made the American Government a demand creator during the Great 1 Depression. Roosevelt also set up various rules, in an attempt to gain more control over the financial system. On March 1933 after a period of multiple bank runs, the newly elected President Roosevelt declared a national banking holiday that shut down the entire banking system. During the Bank Holiday, the U.S. government took action and past the Emergency Banking Act, to reform and restore the trust in the financial sector. In Roosevelt's first Fireside Chat, Roosevelt convinced the public to trust the financial system and to re-deposit their savings. Within two weeks the public re-deposited more than half of all the currencies at the banks. The Banking Act later that year, introduced legislation to prevent any future banking crises. The most effective part of this Banking Act was the Glass Steagall Act, that 2 separated commercial and investment banks. The Government's vision on to what extent the market must be regulated, the importance of a welfare state, and the level of taxes each have significant implications on how the economy will develop. Most industrial countries are mixed economies, which is an economic system that features both capitalistic and socialistic elements. In a mixed economy, the government protects private property, unlike a communist regime, and legislation allows a certain level of economic freedom. The government has the function in the mixed economy to interfere in economic activities and to achieve social goals. Thanks to the ideology of Keynes and the democratic adaptation of his ideas, every western country has some modern welfare state in 3 which the government plays a prominent role in the economy. Keynes as one of the most influential economists to this day fundamentally changed the theory and practice of economics and the economic policymaking of governments worldwide. Keynes’ most substantial counterpart is the neoclassical theory. This approach argues that the government should be as small as possible to pursue the highest economic growth. The two economic schools are both not only academically discussed, but also on the societal level: Republicans support the neoclassical theories of free markets and Democrats believe in the ​ ​ Keynesian view of an interventionist government. The methods of Keynes are also a debate between the right and left of the political spectrum. Since the 1980s, the neoclassical theory gained its way into the mainstream economic theory. Today, mainstream economics is inspired mainly
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