Post Keynesian Theory and Policy

Post Keynesian Theory and Policy

A Realistic Analysis of the Market Oriented Capitalist Economy

New Directions in Post-Keynesian Economics series

Paul Davidson

How did economic “experts” worldwide fail to predict the financial crisis of 2007-2008? Eminent economist Paul Davidson discusses how mainstream economic theory may not be applicable to the world of experience. Post Keynesian theory is designed to be applicable to the real world, and this book demonstrates how applying it to policy formulation could help practically resolve economic problems. Davidson goes on to demonstrate how many Post Keynesian economists warned of the impending financial crisis as early as 2002.

Chapter 6: Creating full employment policies

Paul Davidson

Subjects: economics and finance, history of economic thought, post-keynesian economics

Extract

The cause of persistent unemployment in the economy is a shortage of aggregate market demand for all the products and services industry can produce at full employment. It is, therefore, obvious that government must develop policies to assure there will always be sufficient market demand to encourage entrepreneurs to believe that it will be profitable to hire all workers who want a job. This means creating additional market demand by policies that (1) produce incentives for private sector decision makers to spend more by either reducing the savings propensity of some groups in the private sector or by encouraging some decision makers to borrow to spend more, that is, by encouraging dissavings, and/or (2) provide more spending by government deficit spending on investment projects that provide useful services for the population. Monetary policy can encourage additional borrowing. An easy monetary policy that lowers the market rate of interest on various types of loans can encourage private sector spending decisions. Unfortunately, encouraging some forms of loans to induce additional private sector spending may not always produce permanent good consequences. For example, permitting households to spend more on producible goods and services by increasing significantly their credit card debt can create problems. With the recession resulting from the financial collapse of 2007–2008, many households lost jobs and incomes and therefore faced increased difficulties in paying their credit card obligations. The result was an increase in credit card defaults and ultimately even less total spending by household borrowers.

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