During the Great Depression there were 2 notable voices when it came to economics. That of John Maynard Keynes, and that of Friedrich Hayek. Both exceptional in their own way, they debated over the right course of action to boost the economies out of recession. This is how the Neoclassical and Keynesian views came to life.
Hayek believed that prices and wages in an economy are non-sticky (that they change with the market conditions), and therefore thought that the market would always be able to fix itself through the adjustment of prices and wages. This however proved to be a tough occurrence, as it is quite difficult to tell a worker that they will be doing essentially the same job for the same amount of hours, but getting paid less. While theoretically, his model made sense, practically it was a different story.
This is where Keynes came in, arguing that the only way to come out of a recession was for the government to invest into the economy. Not only did he encourage investment, he also mentioned that once the government invests, there will likely be a higher change in GDP as a result. So let’s break it down, how exactly would this occur?
The Keynesian multiplier effect comes into play in the following scenario: when the government invests money into the economy, say by building infrastructure or funding public projects, it creates jobs and increases income for workers. These workers then spend their earnings on goods and services, which in turn boosts demand and encourages businesses to expand and hire more employees. This cycle of spending and re-spending magnifies the initial investment, leading to a greater overall increase in economic activity and GDP than the original amount spent. This ripple effect illustrates why Keynes advocated for government intervention during economic downturns.
You might be thinking, how is this useful? Well not only policymakers or economists care about the Keynesian view nowadays, you can too! The idea that if you put your energy into something useful for your future or for your self-development, it will definitely come back as something positive towards yourself should be cherished and applied in everyone’s life, regardless if there is a multiplier or not.
Bibliography:
https://www.investopedia.com/terms/k/keynesianeconomics.asp
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