Keynesian Economics Concepts Explained with No Math!

Summary

This video delves into Keynesian economic theory, explaining its role in countering economic recessions through government intervention. It contrasts the laissez-faire approach of the 19th and 20th centuries with the active government spending during downturns, as exemplified by Roosevelt's New Deal. The script also discusses the ongoing debate over government's role in economic recovery, using the 2008 recession and Obama's stimulus package as recent examples. It concludes with a quote from Paul Krugman, emphasizing the relevance of Keynesian ideas in today's economy.

Takeaways

• 🌟 Capitalist economies naturally experience cycles of growth and recession, but overall show an upward trend in growth over time.
• 🏛️ Before the Great Depression, laissez-faire economics dominated with minimal government intervention in economic affairs.
• 📉 The Great Depression exposed the limitations of laissez-faire economics, with unemployment rates reaching as high as 25%.
• 💡 Keynesian economics emerged as a response to the Great Depression, advocating for government spending to stimulate the economy during recessions.
• 👷‍♂️ Government spending on infrastructure and public works can create jobs and put money back into the economy, stimulating demand.
• 💼 Keynes suggested that taxes should be kept low during recessions to maintain consumer spending, and potentially raised during booms to prepare for future downturns.
• 💸 Deficit spending, or going into debt, can be a method for governments to finance stimulus during economic downturns, with the intention of repaying when times improve.
• 📈 Keynes believed that government intervention could moderate economic cycles, leading to less extreme booms and busts and a steadier overall growth.
• 🇺🇸 The New Deal under President Franklin D. Roosevelt was a significant application of Keynesian principles, with massive government spending to create jobs and stimulate the economy.
• 🌐 Keynesian economics continues to influence economic policy today, with governments using stimulus packages to mitigate the effects of recessions, as seen in responses to the 2008 financial crisis.

Q & A

What are the typical phases of a business cycle in a capitalist economy?

A capitalist economy typically goes through cycles of periods of growth and periods of economic contraction, known as recessions. These cycles continue on, but the general trend is upwards, indicating overall growth over time.

How did laissez-faire economics approach economic downturns prior to the Great Depression?

Prior to the Great Depression, laissez-faire economics dominated, with very little government intervention in the economy. The belief was that the market would self-correct without government interference, even during economic downturns.

What was the impact of the Great Depression on economic thinking?

The Great Depression led to a significant shift in economic thinking. The high unemployment rates and economic hardships highlighted the limitations of laissez-faire economics, leading to the rise of Keynesian economics, which advocated for government intervention during economic downturns.

What is the primary driver of a capitalist economy according to Keynesian theory?

According to Keynesian theory, the primary driver of a capitalist economy is consumer spending. When people have money and spend it on goods and services, it stimulates business growth and economic prosperity.

How does government spending during a recession fit into Keynesian economics?

Keynesian economics suggests that government spending during a recession can stimulate the economy by putting money back into people's pockets through initiatives like infrastructure projects, which in turn can increase spending and help mitigate the effects of the recession.

What are some methods the government can use to fund spending during a recession according to Keynesian principles?

The government can fund spending during a recession through methods such as raising taxes during boom times to create a buffer, or through deficit spending, which involves going into debt with the intention of paying it off when the economy improves.

How did the New Deal under President Franklin D. Roosevelt attempt to combat the effects of the Great Depression?

The New Deal involved massive government spending on programs and projects designed to put people back to work and stimulate the economy. This included the creation of 'alphabetical agencies' that focused on areas like infrastructure, arts, and energy infrastructure.

What was the role of World War II in ending the Great Depression in the United States?

While the New Deal helped to stimulate the economy, it was the massive spending associated with the United States' participation in World War II that ultimately led to the country's recovery from the Great Depression.

How does the concept of government stimulus relate to Keynesian economics?

Government stimulus programs are a direct application of Keynesian economics, where the government intervenes in the economy during recessions by spending money to create jobs and stimulate consumer spending, thereby lessening the impact of the downturn.

What was the American Recovery and Reinvestment Act, and how did it reflect Keynesian principles?

The American Recovery and Reinvestment Act was a stimulus package introduced by President Barack Obama in 2009 to recover from the 2008 recession. It involved spending on healthcare, education, and infrastructure, and included tax credits, reflecting Keynesian principles of government intervention to stimulate the economy.

Why is there still debate around the use of Keynesian economics in modern times?

There is ongoing debate because some argue that government spending during a recession, when tax revenues are low, can lead to unsustainable debt. Others believe that the potential benefits of stimulating the economy and reducing the severity of recessions outweigh the costs.

Outlines

00:00

🌟 Understanding Keynesian Economics and the Business Cycle

This paragraph introduces the concept of the business cycle in a capitalist economy, highlighting the historical shift from laissez-faire economics to Keynesian economics in response to the Great Depression. It explains how Keynesian theory emphasizes the importance of government spending during recessions to stimulate economic growth by putting money back into the pockets of consumers, which in turn drives demand and business prosperity. The paragraph also touches on the methods by which governments can finance such spending, such as through taxation during economic booms or deficit spending. The discussion concludes with the idea that Keynesian policies aim to smooth out the business cycle, reducing the severity of recessions without altering the overall upward trend of economic growth.

05:01

🏛️ The New Deal and Government Intervention in the Economy

The second paragraph delves into the historical application of Keynesian economics through President Franklin D. Roosevelt's New Deal. It outlines the creation of various government agencies, known as alphabetical agencies, designed to stimulate the economy and reduce unemployment during the Great Depression. Examples include the National Recovery Administration (NRA), which aimed to improve working conditions and wages, and the Works Progress Administration (WPA), which invested in infrastructure and cultural projects. The Tennessee Valley Authority (TVA) is also mentioned for its focus on hydroelectric power and job creation. The paragraph notes that while the New Deal helped initiate recovery, it was World War II and its associated spending that ultimately pulled the United States out of the Depression. The discussion continues into modern times, acknowledging the ongoing relevance and controversy of Keynesian economics, particularly in the context of government stimulus programs like the American Recovery and Reinvestment Act of 2009.

10:03

🌐 The Ongoing Debate on Government Spending in Economic Downturns

The final paragraph summarizes the ongoing debate about the role of government spending in economic downturns. It acknowledges the persistence of Keynesian principles in modern economic policy, despite the controversy surrounding deficit spending during recessions. The paragraph concludes with a quote from Nobel Prize-winning economist Paul Krugman, who emphasizes the continued relevance of Keynesian ideas in today's world and warns against the perils of ignoring the potential benefits of government intervention in times of economic crisis. The paragraph ends with a call to action for viewers to subscribe for future content, indicating the video's intent to keep the audience informed on economic topics.

Keywords

💡Business Cycle

A business cycle refers to the periodic fluctuations in economic activity that occur in capitalist economies. It encompasses periods of economic growth, known as booms, and periods of economic contraction, known as recessions. The video script discusses how capitalist economies have historically experienced these cycles, with the general trend of growth being upwards over the long term. The concept is central to understanding the context within which Keynesian economic theory was developed, as it addresses the issue of economic downturns and how to manage them.

💡Laissez-Faire Economics

Laissez-faire economics is an economic system in which transactions between private parties are free from government intervention such as regulation, privileges, or subsidies. The script mentions that for much of the 19th and 20th centuries, laissez-faire economics dominated, with minimal government involvement in the economy. This approach was challenged during the Great Depression, leading to a shift towards more government intervention as proposed by Keynesian economics.

💡Great Depression

The Great Depression was a severe worldwide economic depression that lasted from 1929 to the late 1930s. It is used in the script to illustrate the failure of traditional laissez-faire economic thinking and the high unemployment rates that necessitated a new approach to economic policy. The Great Depression is a pivotal event that led to the development and adoption of Keynesian economic theories.

💡Keynesian Economics

Keynesian economics is an economic theory of total spending in the economy and its effects on output and inflation formulated by John Maynard Keynes. The script explains that Keynes proposed government intervention during recessions to stimulate demand and employment by increasing government spending. This concept is central to the video's theme, as it contrasts with the laissez-faire approach and offers a strategy for managing economic downturns.

💡Unemployment

Unemployment refers to the situation where people are without jobs and actively seeking work. The script highlights the high unemployment rates during the Great Depression, with 25% of the workforce unemployed. This was a critical issue that Keynesian economics aimed to address through government spending to create jobs and stimulate the economy.

💡Government Spending

Government spending is the expenditure by the public sector. In the context of the video, it is discussed as a tool for economic stimulation during recessions. Keynesian economics advocates for increased government spending on infrastructure and public works to create jobs and put money back into the economy, as exemplified by the New Deal policies during the Great Depression.

💡Deficit Spending

Deficit spending occurs when a government's expenditures exceed its revenues, resulting in a budget deficit. The script explains that Keynesian economics supports deficit spending during economic downturns as a means to stimulate the economy. It is a strategy to inject money into the economy with the intention of paying off the debt when economic conditions improve.

💡New Deal

The New Deal refers to a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States during the 1930s in response to the Great Depression. The script describes the New Deal as a set of government initiatives aimed at providing jobs, stimulating economic recovery, and reforming the financial system, which aligns with Keynesian economic principles.

💡Economic Stimulus

Economic stimulus refers to government policies enacted to stimulate a struggling economy. The script mentions that Keynesian economics supports the idea of government stimulus programs during recessions to boost economic activity. An example from the script is the American Recovery and Reinvestment Act of 2009, which was an economic stimulus package aimed at recovering from the 2008 recession.

💡Paul Krugman

Paul Krugman is a Nobel Prize-winning economist and a prominent advocate of Keynesian economics. In the script, Krugman is quoted to emphasize the ongoing relevance of Keynesian ideas, particularly the notion that government intervention can be necessary to prevent economic failure during periods of low consumer and investor spending. His commentary underscores the video's theme of the continued debate over the role of government in economic management.

Highlights

Capitalist economies experience cycles of growth and recession, with an overall upward trend.

Laissez-faire economics dominated the 19th and 20th centuries with minimal government intervention.

The Great Depression challenged traditional economic thinking due to unprecedented unemployment rates.

Keynesian economics emphasizes the importance of consumer spending and government intervention in recessions.

Government spending during recessions can stimulate the economy by putting money back into circulation.

Infrastructure projects are a common method for governments to create jobs and stimulate spending.

Keynes suggested maintaining low taxes during recessions to keep money in consumers' pockets.

Governments can save during boom times to have funds available for spending during recessions.

Deficit spending is a strategy used by governments to combat recessions by incurring debt.

Keynes believed that government intervention could moderate the extremes of business cycles.

Herbert Hoover's adherence to free market principles during the Great Depression was ineffective.

Franklin D. Roosevelt's New Deal involved massive government spending to revive the economy.

The New Deal created jobs through the establishment of government agencies focused on public works.

World War II and its associated spending played a significant role in ending the Great Depression.

Keynesian economics continues to influence government policies during recessions today.

Controversy exists over the extent of government involvement in economic recovery.

The American Recovery and Reinvestment Act of 2009 exemplifies modern Keynesian stimulus.

Nobel laureate Paul Krugman affirms the ongoing relevance of Keynesian ideas in managing economic downturns.

Transcripts

now before we get into the details of

keynesian economic theory

let's talk more generally about the

business cycle

in a capitalist economy generally

speaking over time we've learned

that a capitalist economy goes through

cycles

of periods of growth and periods of

economic contraction which

we call recessions and over time

these cycles continue on but the general

trend

is upwards so overall the global economy

has

seen tremendous growth over the last

couple of hundred years

but it goes through these periods of

boom and bust

now for most of the 19th and 20th

centuries during

the explosion of capitalist economics

laissez-faire economics really ruled the

day with very little government

intervention

in the economy regardless of the market

forces that were happening

with some minor tweaks during the

progressive era in terms of things like

breaking up monopolies

other than that the government stayed

fairly hands-off

the great depression however changed

everything all of a sudden

we were seeing 25 unemployment that's

one in four people

losing their jobs and this traditional

way of economic thinking

just wasn't able to solve the problems

of the day now when we think about

keynesian economics

let's think about what actually drives a

capitalist economy

right one of the most important things

is that people have money and that

people are spending that money

in the economy people are buying goods

people are spending that money on

services

and that's what allows businesses to

grow and the economy to prosper

now when you have 25 unemployment that's

a lot of people who aren't

spending that money to get the economy

going

right so for free market economics to

work people need to be spending

and people are driving demand

that businesses are able to supply and

that

lets businesses prosper right so keynes

devised

this economic theory that government

should actually spend

money during recessions when the

economic situation is bad in order

to put money back in people's pockets

and while how does the government do

that

a government can do that by spending

money on putting people

back to work this might mean the

government during a recession

spending money on infrastructure

projects building roads and highways

improving airports

and those kinds of things that create

work

that puts money back in people's pockets

and

people can then spend that money in the

economy

now where does the government get this

money to begin with right if we're in

the middle of a recession

well they're getting less money from

taxes and so on

so does the government raise taxes

during a recession

well that's one way of doing it but

really what keynes envisioned

was that taxes would be kept low during

a recession because that too

keeps more money in people's pockets

that they can spend so the alternative

to that

is a government having the foresight to

maybe raise some taxes when times are

good when we're in the middle of an

economic boom when

those tax hikes aren't going to be felt

as severely

and the government can then make a

little bit

of a buffer so that they have money to

spend

when times get bad another option is

through deficit spending

so spending money and going into a

little bit of debt

with the intention of paying that debt

off again once

times get better and so let's think for

a second about how that affects the

business

cycle right so the business cycle the

cycle of booms and busts

that overall creates this upward trend

in an economy

well keynes believed that what would

happen is the trend line would remain

similar and still there's gradual growth

but

if you save a little bit more money or

if the government saves a little bit

more money

during those boom times well maybe those

boom times won't be quite as booming

but at the same time if the government

spends a little bit of money to prevent

the extreme hardships of an extreme

recession well

the recessions won't negatively affect

people

as much so the trend line might continue

exactly the same in terms of

overall growth but those booms and busts

will be less

extreme and therefore more palatable to

people and the economy just keeps a

little bit more of a steady

growth right so let's go back to the

great depression

because the president at the time

herbert hoover when the depression

started believed that

free market principles would rule the

day and eventually the market would

correct itself as the depression kept

getting worse unemployment kept getting

worse it was becoming pretty clear

that this old classical way of thinking

just wasn't going to solve

these issues so that when the election

happened in 1932

president franklin delano roosevelt won

a massive

victory campaigning on what he called

the new deal

where through massive government

spending people could go back to work

and money would be circulating through

the economy again

and now under the new deal roosevelt

promised these massive spending

programs in order to put people back to

work and get people spending money again

he did this through what were called the

alphabetical agencies which were

these new government agencies that were

created again with the intention of

putting people back to work

and they were commonly known by their

acronyms so for example

one was the nra and no not the nra we

think of now

but the national recovery administration

and

this one tried to get business and labor

together to try and create

just better working conditions for

people

and higher wages and more opportunities

for employment through the private

sector using some government

legislation another one was the wpa

or the works progress administration and

this one

was the massive government spending plan

and

roosevelt's administration spent

billions of dollars

on building the interstate system in the

united states for example

it spent money on things like building

arts and culture infrastructure and you

know thinking about ways to

make the united states a little bit

better a little bit stronger while at

the same time

putting people back to work on these

massive projects

another one was the tennessee valley

authority which focused on

building dams in the tennessee river

valley in order to generate

hydroelectric power again putting lots

of people to work

and improving the american energy

infrastructure at the same time

now all these policies during the great

depression aim to

lessen the impact of these negative

economic effects on people

generate more jobs and therefore get

people spending money

in the economy once again now the new

deal did lead to

some growth and the united states slowly

started to move towards recovery

however ultimately what brought the

united states out of the depression

was the participation in the second

world war and all of the

spending that came along with it now

though

fast forward to today and keynesian

economics is still very much

alive and well whenever we see

recessions come along and we continue to

see that boom and bust cycle happen

recession's happening every once in a

while

one of the major economic trends is for

the government to

spend money in order to lessen the blow

of

those recessions now this remains

controversial because again

conventional thinking also goes along

the lines of you know maybe the

government shouldn't be spending money

during a recession because well there's

no money to spend and

during smaller recessions well maybe you

don't need the government going into

debt in order to solve those right so

there's

constant debate around how much the

government should be involved

in helping the economy recover from

recession nevertheless these keynesian

principles continue to be used through

the form of government stimulus programs

for example and we saw a major one

in 2009 which barack obama's

administration used to try and recover

from the great recession of 2008.

and his program called the american

recovery and reinvestment act or

spent 800 billion dollars in trying to

reinvigorate the american economy after

that recession in 2008. it involved

massive investments

in healthcare in education in

infrastructure again repairing roads

and bridges and other civic

infrastructure and so on and it also

included

some tax credits in order to try and

keep more money in people's pockets so

that they could spend it on goods and

services and

keep the economy moving along and so

these keynesian economic principles are

still

very much alive and well and i'll give

the last word here

to noble prize winning economist

and keynesian economic thinker paul

krugman

who wrote about keane's that now i'm not

saying that keynes was right about

everything but the essential truth of

keynes is big idea

that an economy can fail if consumers

and investors spend too little

and that the pursuit of sound money and

balanced budgets is sometimes not always

folly is as evident in today's world as

it was

in the 1930s and in these dangerous days

we ignore or reject that idea at the

world economies

peril right so this idea that you know

maybe the government

can and should act in order to try and

bring

countries out of tough economic

situations and that total free market

laissez-faire economics aren't always

the answer

but again this remains controversial

because government spending money

when times are bad and there's no money

to spend seems crazy

right but maybe there's something to it

and

every new recession every new economic

downturn

always sees this debate resurface around

whether the government should act and

should spend money

or should free market principles try and

deal with the situation and with that

thank you for watching make sure to

subscribe so that you don't miss

anything in the future and we will see

you again

next time