by Richard Riehle
It goes without saying that we are in the midst of an economic downturn (understatement alarm!). If you read the news you would see that there is a lot of coverage about the nature of the economy as well as the efforts of the current administration to address these woes. There is also a lot of economic news coming from the EU (Greece, Spain, et.al.). Throughout all of these news reports the term ‘Keynesian Economics’ has been thrown around as a sort of implied meme…
I say an implied meme because many don’t know that much about macro-economics (in a general sense), and even TV pundits seem to wallow around with this term to the point that I think that there is a need for many to gain a little insight.
As with yesterday’s post, I have a lot of reading material attached to this post (there are some links further down the page…). And as with yesterday’s post, I think that the topic (the ‘big idea which this represents) is important enough such that you should think about reading these links…
But first I suppose I should try to define what Keynesian Economics is:
The central Keynesian insight is this: when you decide to hoard some extra cash rather than spend it, income in the rest of the economy goes down by the exact same amount, which then has a knock-on effect on your income. A recession ensues: a period when we work and produce less than we would like, and as a result get paid less too.
To illustrate the point while keeping things simple, let’s say there are just two people in the world – me and you. This is an unrealistically small economy, but as we will see, the basic lesson applies to economies of any size.
In this make believe world, I make £100 a week by selling bread to you at £1 a loaf, and you make £100 a week by selling chocolate to me at £1 a bar. The total income in this economy (its Gross Domestic Product or GDP) is £200, which corresponds to 100 loaves of bread and 100 bars of chocolate.
Now, let’s say that one fine day you decide to save £20 out of your £100 and keep it in cash. As a result, my income falls to £80, and the total income in the economy is now £180 – with the economy producing 20 chocolate bars fewer than before. In the following week, I only have £80 to spend, which means that your income also falls to £80, and you end up buying fewer of my loaves.
In the end, both our incomes are lower and we produce and consume less than our potential. Our economy is in recession.
So, with that covered, here they are:
Of course, I don’t expect you to read all of these in one sitting, but they might serve some purpose in a longer term. It is early August, and this will give you nearly three months to go through some of these articles to better understand what the midterm elections in the USA may represent.