Keynesian Economics Concepts Explained with No Math!

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 upward. 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. 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. 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. 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 well, 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 this 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 aimed 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've continued to see that boom and bust cycle happen, recessions 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. 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 ARRA, spent $800 billion 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 Nobel Prize-winning economist and Keynesian economic thinker Paul Krugman, who wrote about Keynes that, now, I'm not saying that Keynes was right about everything, but the essential truth of Keynes' 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 economy's peril. So, this idea that 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. 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.