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Comparing Two Idealogies Neoliberalism And Keynesianism

1502 words - 7 pages

Our lives are greatly affected by our culture, ecological environment, political environment and our economic structure. The overarching method of organizing a complex modern society relies heavily on the founding economic theories regarding method of production, method of organization, and the distribution of wealth among the members of. This paper, specifically deals with the views and theoretical backgrounds of two dominant theories of the past century, Keynesianism and Neo-liberalism. Our social economic order is product of the two theories and has evolved through many stages to come to where it is today. The two ideologies rely on different foundations for their economic outcomes but ...view middle of the document...

Keynesianism provides a stable system that encourages growth and equality, while mitigating the recessionary effects of the business cycle. This allows both labourers and capitalist to effectively plan for the future and produce accordingly.
One of the main contending points that differ in the two viewpoints is the level of employment that should be encouraged in the economy. The unemployment rate is the percentage of the people in the labour force who are unemployed. The labour force is defined as total number of people who have a job or are looking for one. This measure is extremely important in understanding the health of the economy and evaluating the maximum capacity of production. A Keynesian would argue for high levels of employment. Low levels of employment cause significant loss of income and production. When the economy operates at a level well below the optimal capacity, it destroys economic value of idle resources, specifically lost human capital. In contrast, a Neo-liberal would argue for a market determined level of employment that may be high or low depending on the business cycle. The Neo-liberal would reason that governments of all levels should not play any roles in managing or interfering with the level of employment and allow the powerful forces of the labour market to control wage rate and level of employment.
Keynesianism is an economic theory developed by John Maynard Keynes during the 1930s. This theory focuses on the overall aggregate economic system and looks at ways of steering the economy as a whole. This theory was developed in particular response to the economic crisis of the time, the great Depression. At the time of the Great Depression, the neoclassical economic theory was predominantly practised. This theory could not put forth a satisfactory solution to the Great Depression and thus lost mainstream support. John Maynard Keynes provided a solution by critiquing the supply side economics of neoclassical theory. He claimed that wages are sticky and don’t respond in the ways projected by the neoclassical theory. He derived this notion from workers’ attitude towards declining real wage rates. He noticed that unions had the psychological propensity to resist declining real wage rate and this behavior was part of the social customs and structure of the economy. This was a barrier that prevented the labour market from self-correcting by lowering wage rates. Moreover, he judged recession to be the product of a drop in investment relative to savings. From his analysis, he concluded that during a recession, the onus is on national government to stimulate the economy and bring it back to full employment. This would mitigate the recession and provide a stable and predictable environment for investors to seek profit. Keynesian theory relies on very different fundamental objects for its predictions of human economic behaviour, and its logic is quite different from the dominant neoclassical theory of the 1930. Keynes rejected...

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