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Current time:0:00Total duration:12:05

Video transcript

what I want to do in this video is start introducing and we've already talked about them a little a little bit so actually they've already been introduced but maybe flesh out a little bit more Keynesian thinking so this right here is a picture of John Maynard Keynes and I often mispronounced him as Keynes because that's how it's spelled but it's John Maynard Keynes and he was an economist who did a lot of his most famous work during the Great Depression because in his view classical models did not seem to be of much use during the Great Depression and so to understand this a little bit better let's compare kind of purely classical aggregate supply aggregate demand models to maybe more one of that's more Keynes Ian and some of what we've talked about or Keynesian I should say I already did my first mispronunciation one that's a little bit more Keynesian Keynesian right over here and in some of the conversations we've already begun to introduce a little bit of Keynesian thinking but in this video we're going to try to show the difference between the two and it's not to say that one is right or one is wrong in fact Keynesian felt that in the long run the classical model actually made sense but he also famously said in the long run we are all dead and I also want to emphasize that this isn't a defense of Keynesian economics that there are some points to what he has to say but there are other schools of thought unfortunately they often get very dogmatic but they also have some reasons to be wary of Keynesian economics and we hope to go over some of that in future videos but in this one we just want to understand what Keynesian economics is all about and how it really was a fundamental departure from classical economics so in classical economics so I'm going to use aggregate demand and aggregate supply in both so this is classical this is price this right over here is real GDP real GDP and I'm going to do it for the Keynesian case as well so this is price and this right over here is real GDP real GDP now in both in both views of reality or both models you have a downward sloping aggregate demand curve for all the reasons that we've talked about in multiple videos its aggregate demand that is aggregate demand right there now and we've already seen it the classical view is in that in the long run in the long run the an economy's productivity or a productive capacity or its output shouldn't be dependent on prices so we've seen the long-run aggregate supply curve something like this this is the aggregate supply in the long run or sometimes it's L you'll have long-run aggregate supply sometimes it'll be referred to that and saying look all prices are their way to signal what people want and demand and things like that but at the end of the day prices and money they're just facilitating transactions and you go to work and you get paid and all that but then you go and use that money to go buy other things that the economy produces like food and shelter and transportation so all money is a way of facilitating the transactions but the economy in theory based on how many people it has how what kind of technology it has what its productive what kind of factories it has what kind of natural resources it has it's just going to produce what it's going to produce and if you were to just change aggregate demand if the government let's say we're to print money and aggregate demand were to and just distribute it from helicopters in this classical model you would just have aggregate demand shift to the right but you have this vertical long-run aggregate supply curve so the net effect is it didn't change the output in this classical model all that happens is that the price goes from this equilibrium price to this equilibrium price over here so you have the price would go up and you would just experience inflation with no increased output and there's multiple ways you could have shifted that aggregate demand curve to the right you could have a fiscal policy where the government maybe it holds it's maybe it holds this tax revenue constant but it increases spending or it or it or it or does the other way around it it it does not decrease it doesn't change its spending but it lowers tax revenue either of those it kind of tries to pump money into the economy and pushes that aggregate demand curve to the right and in this purely classical view it says in the long run that's not going to be any good just will lead to inflation the only way that you can increase the output of economy is by making it more productive maybe in making some investments in technology make the economy more efficient maybe your population grows so the only way is to really shift their this curve to the right on the supply side on the supply side right over here and Keynes did not disagree with that but he's sitting here in the middle of the Great Depression saying look all of a sudden people are poor in the 1930s factories did not get blown up people didn't disappear in fact there are factories that want to be run but they're being shuttered down because no one is demanding goods from them there are people that want to work but no one is asking them to work they could work and produce the wealth that could then be distributed to site but it's no-one's demanding for them to do it so he suspected well something weird was happening with aggregate demand especially in the short run so in a very pure very very very short run model I know we have talked about kind of a short-run aggregate supply curve that is upward sloping so something that might look something that might look something like that and that is actually starting to put some of the Keynesian ideas into practice and what I like to think of is kind of something in between but if you think in the very very very very short term Keynes would say well prices are going to be very sticky so especially especially shown the short run in the short run and I'll call it the very short run the very short run you have especially especially if the economy is producing well below its capacity like it seemed to be doing during the Great Depression prices are sticky prices are sticky and that makes intuitive sense if the economy is trying to get overheated people are being overworked you want them to work more hey I want over time you want factories to operate faster people are going to start and the utilization is high people are going to start charging more and more but if I'm unemployed and I'm desperate to work I'm not going to ask for a pay raise if my factory is at 30% utilization and someone wants to buy a little bit more that's not the time that I'm going to say hey I'm going to raise prices on you I'll say yeah at this exact same price yeah you want another 5% of my factory to be utilized sure that sounds great so in the very short run it kind of has the opposite view of the aggregate supply curve then the classical model it says it says at any level of GDP in the short-run prices won't be affected it won't be affected and so in this model right over here so this is aggregate supply in I'll call it in the very short run very short run and you can debate what short run or very short run means whether we're talking about days weeks months or even a few years here but once you start looking at the world this way then something interesting happens in this model right over here the only way to increase product the only way to increase GDP was on the supply side in this model right over here the only way to increase GDP is on the demand side to actually either through monetary policy print more money or through fiscal policy lower taxes while holding spending constant or maybe or maybe do both you essentially deficit spending some way without what may be holding taxes constant but the government spending more whatever shift the curve to the right and that might be a way that might be a way to increase to increase the overall output and Keynes's real realization was was that look the classical economists would tell you if you have a free and unfettered market the economy will just get to its natural very efficient state and kane says yes that is sometimes true but that sometimes not true and we'll talk about different cases and by no means do I think the Keynesian model is the ideal I don't think even Keynes would have thought the Keynesian model describes everything depends on the circumstance but Keynes would say look let's think about very simple a very simple idea let's say you have a person a person B person C and person D and let's say person a sells to person B person B sells to person C person C sells to person D and person D sells to person a and let's say that they're all selling two units of whatever good and service that they offer and for whatever reason let's say C is getting a little bit C is just all of a sudden got a little bit pessimistic had a bad dream woke up on the wrong side of the bed and says you know what I'm not feeling so good about the economy I'm going to hold off for my purchase from B instead of two units I'm going to purchase one unit well bees as well gee I'm my business as bad now I'm only going to produce purchase one unit and a does the same thing for the same reason D does the same thing well now it all came back to C and now C sees wow I was right that dream was predictive but it was a self-fulfilling prophecy and now going to operate in this state and there might not be any natural way to get them bumped up to that state where they were all buying two units from each other without maybe some some outside especially some government actor maybe all of a sudden saying hey be ok if she doesn't want to buy - I'm going to buy - temporarily and there are dangers to this huge dangerous and we'll talk about in future videos but then someone else let's say the government tries to shift the aggregate demand curve through fiscal policy and they say hey well I'll buy one from you I'll buy one from you bee and so then bee says ok now I can buy two again and a can buy two again and then D could buy two again and then C could buy two again and in an ideal world and this is the danger of the government the government would step back and say okay everything is fine again I don't have to buy this but as we know it's very hard once the government starts spending money in some way to actually cut this spending right over here but this was the general idea behind the Keynesian versus a classical he says look there are circumstances like the Great Depression where the economy is operating well below its potential and in those circumstances you need to have a stimulus on the demand side not just the supply side now the correct answer is with all things is probably something in between a probably a more accurate model is something like this so let's draw so this is price this is real real GDP right over here and we'll still draw our downward sloping aggregate demand curve aggregate demand curve and the more accurate thing might look something like this let's say that this is the absolute theoretical maximum output if the if everywhere the country isn't sleeping the factories are just being run to the ground that's the absolute theoretical output and let's say that this is its potential just a healthy state where the where the economy might be operating the real kind of medium run supply curve or short-run supply aggregate supply curve so this is aggregate supply in the very long run so this is in the long run aggregate supply the best model would be something that's in between it might look something like this so our aggregate supply curve might look something like I went in a different color let me do it in magenta so it might look something like this might look something like this so if whatever and maybe someone has a bad dream or a bunch of people have a bad dream or something scary happens aggregate demand gets you the stock market crashes something happens aggregate demand shifts over there so when when we're out here now all of a sudden our output is well below potential we have a lot of excess capacity and now the Keynesian ideas seem maybe they'll make sense maybe there should be out some outside stimulus happening now on the other side if we're performing well at potential and then all of a sudden the government wants to do Keynesian policies and we'll see in future videos the government will always want to do Keynesian policies even if they're not justified it might do it will push aggregate demand out out here and then the net effect is especially the more vertical this is the more this net effect will be true that you really just get more inflation and you don't really get a lot of increase in output so it really depends on the circumstance but a aggregate supply curve that starts flat at low levels of output and then becomes it gets higher and higher slope and becomes almost vertical in your high levels of output this is probably a better model that takes into consideration both the classical and the Keynesian ideas