Philosophy of Society

Philosophy of Economics (Economic Theory)

Keynesianism

In 1929, a massive global economic crisis began, during which trade volumes plummeted by more than 50%, and unemployment in the United States soared to 25%. This crisis, known as the Great Depression, profoundly impacted political economy. The economies of wealthy nations at that time were predicated on principles of free markets and non-intervention by the state, operating under the belief that the invisible hand of the market would lead all to prosperity and happiness. However, this belief was severely challenged. The Great Depression revealed that the absolute separation of state regulation could be beneficial under normal circumstances but proved inadequate in times of crisis. A new economic system was required to navigate the world out of the Great Depression, and such a system was proposed by the British economist John Maynard Keynes (1883-1946). In 1936, he published his seminal work, "The General Theory of Employment, Interest, and Money," which stands as one of the most significant economic studies in history. The principal philosophical and economic ideas of Keynes were as follows:

• The free market can regulate the economy effectively only under normal conditions. In times of crisis, external intervention becomes necessary. This model of Keynes can be likened to an organism: when the organism is healthy, intervention is unnecessary; however, when it is unwell, a doctor must intervene to correct the processes within. In this analogy, the state serves as the doctor for the economy. Just as a doctor administers medicine or performs surgery to aid an ailing body, so too must the state conduct necessary interventions and inject funds into the economy for its recovery. Keynes argued that during a crisis, the state must resort to a variety of measures—such as subsidies, credit provision, and tax reductions—to save the economy. Influenced by Keynes, Franklin Delano Roosevelt (1882-1945), the 32nd President of the United States, initiated agricultural subsidies, organized public works to create new jobs, infused capital into companies, and extended assistance to allied nations.
• For the economy to function effectively, all agents of economic activity must possess a foundational understanding of it. The subjects of economic relations include not only politicians, entrepreneurs, and economists, but all individuals. Therefore, the fundamentals of economics must be communicated to everyone. Not all can engage professionally with economics or grasp mathematical calculations and specialized terminology. To render economics comprehensible to all, it must be taught in accessible language, minimizing mathematical formulas and calculations, while also being made engaging and captivating for everyone.
• The construction of a sound economic system is a moral imperative for humanity. Wealth serves as a pathway to morality; thus, humanity must strive for wealth for all, thereby fostering the moral advancement of society.

Following the Great Depression and World War II, as the global economic landscape stabilized, Keynesian ideas of state intervention began to lose relevance. Given that classical theory of the free market functions effectively under normal conditions, interest in it surged; yet, economists were not quick to abandon Keynesianism. The search for the optimal economic model resulted in a synthesis of classical economic theory and Keynesianism, known as neo-Keynesianism or the Keynesian-neoclassical synthesis. The most notable founders of neo-Keynesianism included three Nobel laureates: Sir John Richard Hicks (1904-1989), Paul Anthony Samuelson (1915-2009), and Franco Modigliani (1918-2003). Neo-Keynesianism proposes a middle ground between the absolute non-intervention advocated by classical economists and the state support during crises championed by Keynesians.

In the 1970s, the global economic situation shifted again, necessitating a reevaluation of these changes. During this time, transnational corporations emerged as key players in the economy. Keynes advocated for supporting enterprises during crises but envisioned this support directed at companies operating within the nation. Assisting transnational corporations, however, effectively means transferring funds out of the country. Conversely, the country's economy relies on the effective functioning of transnational corporations. Resolving this dilemma became a central issue of post-Keynesian thought, represented by two schools that did not harbor ideological divisions: the English school, which included Piero Sraffa (1898-1983), Baron Nicholas Kaldor (1908-1986), Joan Violet Robinson (1903-1983), and the American school, which featured Sidney Weintraub (1914-1983), Hyman Philip Minsky (1919-1996), and others. Post-Keynesians criticized neo-Keynesians, asserting that they had strayed from Keynesian principles and become overly enamored with classical theory.

• They maintained that the role of the state is an essential element of economic regulation. The state must have an active presence in the economy even under normal conditions. Its primary task is to ensure the enforcement of forward contracts (contracts whereby enterprises commit to obligations towards other economic agents). If the state does not oversee their enforcement, then contracts lose all meaning, as there would be no guarantee of their fulfillment. For post-Keynesians, since they viewed forward contracts as foundational to economic relations, the role of the state was of utmost importance.
• The free market is not an ideal organism; it tends to create monopolies, wherein some enterprises displace others from the market. The state's duty is to implement antimonopoly policies that ensure equal conditions for all market participants. If monopolies are unavoidable, the state must ensure that they do not abuse their power and cause poverty among the populace. These ideas led to the establishment of antimonopoly committees.

By the end of the 20th century, Keynesian ideas underwent another reevaluation, termed new Keynesianism. Its proponents include Robert Emerson Lucas (b. 1937), Thomas John Sargent (b. 1943), Robert Joseph Barro (b. 1944), and others. They accept the existence of monopolies and transnational corporations as a given and seek to address how the state can regulate the economy under these conditions. Neither subsidies nor punitive measures suffice to compel monopolies or transnational corporations to adhere to norms established by the state. The sole viable means for the state to influence the economy lies in monetary policy.