In this video I explain Keynesian economics, the idea of the multiplier effect, the broken window fallacy, and the tradeoffs of government spending to get out of a recession. Be sure to leave a comment and tell me what you think of John Maynard Keynes. Thanks for watching. Please subscribe!
But i know that my name is john maynard keynes and welcome to a cdc economics today we are going to learn about keynesianism the greatest thing that’s ever happened in the history of mankind whether you like his ideas or not you have to admit that john maynard keynes was one of the most influential thinkers in modern times his ideas and theories have influenced the
Lives of millions of people i was born in england in 1883 a let’s skip all the history junk and get straight to the economics in 1936 keynes wrote a book called the general theory of employment interest and money in that book he challenged classical economic theories that insisted that economies self-correct over time and that government involvement will always do
More harm than good instead keynes focused on spending he suggested that if consumer spending falls then the government can stimulate the economy by increasing spending and increasing the money supply in his book he outlined the logical and mathematical reasoning for his conclusions and he believed in the idea so much that he gave an often misunderstood but clearly
Ridiculous suggestion i suggested that the government could deliberately bury bottles of money and have people dig it up to reduce unemployment seriously you said that quite so keynes wasn’t really suggesting the government should bury money he was just pointing out the government shouldn’t sit around and do nothing and wait for the economy to self-correct instead
The government should actively stimulate the economy stimulates ha ha i like it cain’t pointed out that government spending in the economy leads to more spending economists call this the multiplier effect here’s the idea when the government spends money it becomes somebody’s income and they save a portion of that and they spend the rest that’s pending becomes somebody
Else’s income and they save some and spend some that keeps happening over and over again and that’s called the multiplier effect an initial change in spending caused a ripple effect to the entire economy and leads to more total spending and that total amount depends on how much people spend of new income this is the idea of what keynes called the marginal propensity
To consume the more people spend the larger the multiplier effect by the way i made a video explaining this idea of geometric series and how to calculate the multiplier it’s right here take a look the idea of the multiplier also explains why we have recessions if people think the economy is going to be bad and they might lose their job they’re likely to decrease the
Amount they spend perhaps going out to eat less often restaurant owners see their sales drop so they lay off some workers and these workers have less income and they buy less of other stuff causing other workers to lose their job again there’s a ripple effect but now it’s pulling down the economy to simplify keynesian economists believe that government spending is
Needed when there’s a recession because the multiplier effect will mean more spending more jobs and hopefully more growth but in real life this idea of expansionary fiscal policy becomes tricky first there’s the debate of whether it’s worth going into debt to stimulate the economy but even if economists and politicians agree to increasing government spending how
Much should they spend in the textbook it makes it look easy but the multiplier is difficult to calculate and there’s no way of knowing exactly how much people are going to spend and economists disagree on how much government spending actually improves the economy for example there’s the broken window fallacy it’s a parable created by a french economist frederic
Bastiat the story goes that a boy breaks a shopkeepers window and is praised by onlookers for helping the community since the storekeeper now has to spend money on fixing the window that spending will allow the glass man to spend more money on other things in town which will increase total spending so in the onlookers eyes breaking the window was a good thing but
That doesn’t really make any sense and if it did all we have to do to get a recession is break a bunch of windows great idea perhaps we can bury the windows first the money that was used to fix the window could have been used by something else the shopkeeper actually wanted but now that spending will never occur the same idea applies to government spending when
The government uses tax revenue to pay for public projects and services there’s more spending in some areas but less spending in other areas if i give my money to the government then i can’t spend that money myself now that’s not really a problem if the governments buying things that i would want anyways like schools and national defense but it is a problem if
It’s going to the agency that’s bearing bottles full of money but what about if the government borrows the money well even in that case the money isn’t free if the government borrows money then that leaves less money for companies to borrow that can lead to higher interest rates and less investment economists call this crowding out but even if there’s plenty of
Money to borrow there’s still a problem with debt whatever the government borrows eventually they’re going to have to pay back now i know it seems like i’ve been kind of mean to keynes in this video and that’s not my goal the goal is to show you that keynesian policies like all policies have a trade-off that being said a lot of economists agree that the keynesian
Policies of increase in government spending during the financial crisis significantly reduce the depth and length of the great recession but the question is was it worth it well i don’t know tell me what you think in the comments below ok until next time thanks for watching acdc economics if you’d like to learn more about the multiplier click right here if you like
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Transcribed from video
Keynesian Economics and Deficit Spending with Jacob Clifford By Jacob Clifford
