Lecture 2 POLS 1090.docx

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15 Apr 2012
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Keynesian welfare state
Started to developed in the second world war
- took shape after 1945 *after end of wwII (1939-1945)
Historical period - 1945 - early 1979's --> New state of business relations, during the Keynesian welfare
state
Before Keynesian
Crisis of 1930's -- Mass unemployment.
Context of crisis - orthodox or mainstream economics. This relied on market forces to solve the problem
Conclusion of mainstream analysis was that wages should be allowed to fall. -> i.e demand for
labour would rise (employers) -> fewer workers would offer labour, since they get less wages i.e
deceased supply. (employees)
Findings -> that you do not nee systematic state intervention to solve the problem.
|-> Market can be relied on by its own self regulating mechanisms (free market ideology)
New approach is put forward in the 1930's which challenges the orthodox free market approach.
John Maynard Keynes -> cambridge
* Published an impt book - "General Theory of Employment, Interest and money"
Keynes criticised mainstream orthodox economics theory -- argued orthodox approach to solve
problems of unemployment is faulty, it would only make matters worse.
How?
Crucial determinant of employment, level of production in economy was -- aggregate demand.
What is affregate demand? - Overall level of demand in the economy for g/s
four other sub categories
1. Consumption -> demand for g/s by consumers, individual consumption
2. business investment -> most unstable due to business confidence. Dependent on bus.
confidence
3. Gov't spending. -> on g/s
|-> in context of 1930's gov't spending was decreasing.
|-> due to austerity (strict) measures, cuts on gov't spending -- done out of reliance on
balanced budget. -- thought that gov`t are no diff than households, must avoid
longterm accumulation of debt (revenue < expenditures)
As economics crisis continued gov't revenue fell.
As more people are unemployed, they don't pay same amount on taxes on income.
Reduce consumption because of lowered income -- decrease in sales tax.
|-> fiscal pressures in which gov't revenues fall and budget deficits increase.
Approach is that balanced budgets must be sustained through spending decreases, by governments.
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