Keynesian Theory

Critical Review
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Critical Review
Keynesian economics focuses on state intervention. The interventions are sound only to a certain point. State interventions across different economies have had both a positive and negative effect. The collapse of the Asian tigers in the 1980s illustrates the fallacies the Keynesian theory affirms and which needs correction before implementation. Practically, the state needs to offer direction and leadership, through fiscal and monetary policy. However, Keynes opined that states had to have budget deficits during recessions, which affects the ability of private companies from accessing investment (Kates, 2016). Recession hurts businesses, which need finances to survive the turbulent conditions. Increased appetite for firms for finances, raises interest rates, which deny stressed industries from accessing funds at reasonable interest rates. Similarly, the situation rises competition between enterprises and the government for limited funds.
Keynes reverse causation implores that the market will always deviate to become equilibrium. The government will increase taxes to fund its expenditure or borrow from the economy. Increase in taxes will decrease savings among households and investments among businesses in the short run. Similarly, loans will lead to crowding out, squeezing businesses out of the bonds markets. However, the long-run adjustments will lead to full employment. Imperatively, Keynes failed to consider in cases of depressions or catastrophes, leading to loss of jobs and destruction of property.

The reverse causation model is also unlikely to work in the cases of stagflation, hyperinflation, and deflation. High inflation will force households to desave while firms will reduce their capital investment through reduced production, closure of some facilities, and loss of employment among household. Keynes reverse causation depends on assumptions which are only permissible in the short-term. Thus, governments need to plan of the long-term to ensure the stability of the economy.
References
Kates, S. (2016). What’s wrong with Keynesian economic theory. Cheltenham, UK
Northampton, MA: EE, Edward Elgar Publishing.