Post-keynesian economics

Definition

Post-Keynesian economics is a school of economic thought that builds upon and extends the ideas of John Maynard Keynes, emphasizing the role of uncertainty, effective demand, and the importance of historical context in economic analysis. It critiques mainstream economic theories that rely heavily on equilibrium models and advocates for a more realistic approach to understanding economic fluctuations and policy implications.

5 Must Know Facts For Your Next Test

1. Post-Keynesian economics stresses the importance of uncertainty in economic decision-making, arguing that it affects consumption, investment, and overall economic activity.
2. This school of thought critiques the assumption of rational behavior prevalent in neoclassical economics, promoting a more behavioral perspective.
3. It emphasizes the role of financial markets in affecting real economies, particularly how financial instability can lead to significant economic downturns.
4. Post-Keynesians advocate for policies that address income inequality and emphasize the social dimensions of economic welfare.
5. They also argue against the idea of self-correcting markets, asserting that economies can remain in prolonged periods of disequilibrium without government intervention.

Review Questions

• How does post-Keynesian economics build upon the ideas presented by John Maynard Keynes, particularly regarding uncertainty and effective demand?
  • Post-Keynesian economics builds on Keynes's ideas by placing a stronger emphasis on uncertainty as a driving force behind economic behavior. While Keynes introduced the concept of effective demand, post-Keynesians elaborate on how uncertainty influences consumer spending and business investment. They argue that in an unpredictable economic environment, individuals and firms often make decisions based not only on available information but also on their expectations of future events, which can lead to fluctuations in economic activity.
• In what ways does post-Keynesian economics critique mainstream economic theories, particularly regarding market equilibrium?
  • Post-Keynesian economics critiques mainstream theories by rejecting the idea that markets naturally move toward equilibrium. Instead, it posits that economies can experience prolonged periods of disequilibrium due to factors like uncertainty and behavioral influences. This school argues that relying on equilibrium models overlooks real-world complexities and the impacts of financial markets on the economy, advocating for a more dynamic analysis that considers historical contexts and actual market behaviors.
• Evaluate the implications of post-Keynesian economics for contemporary economic policy-making, especially in addressing income inequality and market instability.
  • Post-Keynesian economics has significant implications for contemporary policy-making as it advocates for active government intervention to stabilize economies and reduce income inequality. By recognizing that markets do not self-correct efficiently, policymakers are encouraged to implement measures such as progressive taxation, social welfare programs, and regulatory frameworks to mitigate financial instability. This approach promotes policies that prioritize social welfare over purely market-driven outcomes, aiming to create a more equitable distribution of resources while ensuring economic stability.

Related terms

Keynesian economics: A macroeconomic theory that advocates for government intervention to manage economic cycles and promote full employment through fiscal and monetary policies.

Effective demand: The total demand for goods and services in an economy at a given time, which drives production and employment levels.

Heterodox economics: An umbrella term for economic theories that challenge the mainstream neoclassical framework, including post-Keynesian economics, institutional economics, and Marxist economics.