“Economics” A study which involve the understanding on how well a country’s economy on a Macro scale whereby it look at the GDP, national output, inflation rate and unemployment. The other side will be the Micro scale of the economy, which is the study of the composition of output such as the supply and demand for individual goods and services, how they are traded in markets and patterns of their relative prices.
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The beginning of economics started in year 1776 from Adam Smith, the first economist, which he came out with a theory “Classical Economics” follow by “Keynesian Economics” created by John Maynard Keynes as he put forward a book “The general Theory of Employment, interest and Money, Published in 1936 in response to the Great Depression of the 1930s. (Skousen 2007, 3-9)
Neoclassical synthesis was then created by John Hicks 1937 (on his IS/LM Curve) However, it was only popularize by Paul Samuelson (1948) with his textbook “Economics” which Paul Samuelson (Economist 2011). Which make him awarded the second Nobel Prize for Economics in 1970. However, this model falls out of favor in the 1960s.
This paper will be explaining in depth on the KNS model on it strength and weakness, follow by a critical analysis on this model. What make this model failed in the 1960s and what aspects have remained in the current model of the Keynesian Neoclassical Synthesis.
Keynesian Neoclassical Synthesis
As we know this theory basically come from John hicks on his IS/LM curve on his article in the 1937 and popularize by Paul Samuelson with his famous textbook “Economics” in 1948. The Keynesian Neoclassical Synthesis is created after the World War II as the war had is the roots cause of the financial and economics to collapse. “The Great Depression” in the post 1930 was the result after the World War II.
The Keynesian approach to the macroeconomics in the neoclassical theory and the importance of a mixed economy was stressed in “John Maynard Keynes” Book: The General Theory of Employment, Interest and Money. He believes that having a balance between both micro and macro can provide a balance to the system. Beside that the Keynesian approach to the macroeconomics into the neoclassical theory had also help most part in the western world to regain supreme.
Keynesian neoclassical Synthesis major idea was to have government management to be involved in order to control recessions or economics depressions. The model believes that government intervention could be the most effective at time of economic depression under the private sector of the economy. For example at time of low demand or high unemployment, they believe that government management could help the economy to stimulate in boosting employment and control inflation. Hence, to reduce unemployment and control inflation is the key objective under the KNS model. The model believe the by government increase their spending can be seen as a reduction in the interest rates and an investment infrastructure to be the most effect role of the government in order to boost the economy when it is on the down side.
The theory also believes that by government involvement could create an economics positive feedback cycle. For example government investment would create employment as more workers are required, more workers mean more income and more income increases the spending, which also increase production and with more production needed, unemployment will decrease and more jobs available so on and so forth.
However, Keynesian agreed that government involvement is required to achieve in reducing unemployment and also control inflation. There are numbers of economists who are concerned with the KNS model, namely the effectives of the market mechanism in generating stable full employment equilibrium without the involvement of the government. This is still in the debate between economists.
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Main feature of the KNS Model
Upon the born of KNS model, the model itself have a couple of important features and point which this model explained. The points will be explained in the below paragraph.
“Money one of the most important factors among the economy. Keynesian believe that money is not neutral as compared to the thinking under the classical theory where it believe the money does not impact consumer behavior, employment and output. Money is treated as endogenous. (Gail M. Hoyt 2012, 642) However, under the classical model it argue that money is neutral where people only hold money for transactions motive and if they are not doing any transactions the money will then be use for investment with the assumption that a rational person would not hold money if they are not using them for transactions or investment purposes. (Net 2009 – 2011) The question is how true this is?
Under the KNS model is disagree with the classical model where people do keep their money and not spending them all way under several reasons: Uncertainly for the future, interest rates, liquidity and animal spirits. These factor will then be explained in the below paragraph.
Why the model falls out of favor in 1960s?
500 – 800
What aspects have survived in contemporary model?