Can someone explain the Keynesian Business Cycle to me? It seems that it claims that whenever people change their consumption/investment habits on a macro level, a recession takes place to adjust to a new point of equilibrium. Perhaps I’m not understanding it correctly.
keynesians believe capitalists are really great at producing stuff. they produce lots. and lots and lots . too much. consumers dont want to buy the stuff. so it sits on shelves. not enough demand. but with people not buying stuff, capitalists start laying off workers that they dont need and shutting down their businesses. and doesnt this sound terrifying?
But what is the reason they give for consumers not buying and firms overproducing goods?
they need reasons??!? (j/k)
stuff like, evil capitalists driving wages low so that even if people wanted to buy loads of stuff theyt cant afford it. and the fact that people have limited material needs that once met cease to be demanded. so they wouldnt buy the stuff even if the could afford it ,cause why have a second car..
yes, its insane!
don’t they also believe in menu cost externalities making it hard for supply and demand to equilibriate?
Correct me on this if I’m wrong…
Oh yes, and animal spirits.
Why would they think firms would continue producing undesired products on a global scale? Or that all firms would make the exact same mistake of over anticipating demand?
It just doesn’t make much sense to me.
Because they don’t believe that the market adjusts quick enough in the short run.
It blows me away that people can think that government adjust faster than…well, anything.
Then how do they explain why recessions aren’t more frequent?
i guess, government intervention with inflation and credit expansion and welfare must be working !
Keynes focused on expectations of future economic conditions. If people all of a sudden had a wave of panic, then the economy would slow since less financial institutions would be willing to provide finance. Hyman Minsky, a post-Keynesian economist, expanded Keynes’s theory. He believed that in a normally functioning economy, financial institutions finance only “hedge” borrowers, or borrowers who can repay the loan with their own cash flows. When the economy starts growing well, then these financial institutions start lending to “speculative” borrowers, or borrowers who can only partially repay the loan with their cash flows, while the rest needs to be either refinanced or used from their assets (e.g. bonds, land, stocks). When the economy really heats up, financial institutions lend to “Ponzi” borrowers who cannot repay their loans at all without refinancing or selling their assets. This is when the economy is very fragile, according to Minsky, and small disruptions, like a sudden wave of uncertainty or rising inflation, can cause the bubble to burst.