Neokeynesianism is an economic theory that is a development of the classical Keynesian theory proposed by John Maynard Keynes in the 1930s. This theory was born as a criticism of classical Keynesianism which was considered unable to explain several economic phenomena that occurred at that time, such as high inflation rates and unemployment rates that remained high even though the government had implemented fiscal and monetary policies.
Neokeynesianism introduces several new concepts that are more accurate in explaining this economic phenomenon. This theory assumes that markets do not always reach equilibrium, especially in the short run, and that government intervention is necessary to solve economic problems.
The main difference between classical Keynesianism and Neokeynesianism lies in the assumptions about price flexibility. Classical Keynesianism assumed that prices adjusted quickly to reach equilibrium, whereas Neokeynesianism assumed that prices tended to be inflexible in the short run, requiring government intervention to get the economy back on track.
Neokeynesianism also developed new macroeconomic analysis models such as the IS-LM model and the theory of declining returns (TMTK). In its development, the theory of Neokeynesianism has made a major contribution to modern economic thought and remains one of the relevant theories in dealing with current global economic problems.
Basic Concepts of Neokeynesianism
The basic concept of Neokeynesianism is the idea that markets do not always reach equilibrium, especially in the short run. This theory assumes that economic imbalances can occur due to market failures, such as lack of investment and low demand.
The concept of aggregate demand and supply is important in Neokeynesian theory. According to this theory, in the short term, aggregate demand can become the main factor affecting economic growth, while aggregate supply cannot fully adjust quickly in the short term. In this context, the government can intervene to stimulate demand and avoid economic imbalances.
Government intervention in the form of fiscal and monetary policies is very important in Neokeynesianism. Fiscal policy can be carried out through government spending and taxation, while monetary policy can be carried out through setting interest rates and the money supply in the market.
In addition, Neokeynesianism also views that the concept of price flexibility does not always apply in the short term. This theory assumes that prices tend to be inflexible in the short run, especially in terms of labor and wage prices. Therefore, government intervention is needed to stabilize the economy and promote economic growth.
Overall, the basic concepts of Neokeynesianism suggest that markets cannot always achieve equilibrium automatically. In the short term, economic imbalances may occur and government intervention is required to address these problems. This concept continues to be the basis for many current economic policies, especially in dealing with increasingly complex and diverse global economic problems.
IS-LM method
The IS-LM method is one of the macroeconomic analysis models in Neokeynesianism which is often used to explain the interaction between goods markets and money markets in the economy. This model describes the relationship between the two main curves, namely the IS curve and the LM curve.
The IS curve depicts the relationship between the interest rate and the level of national income. This curve shows that the higher the interest rate, the lower the national income level and vice versa. The LM curve describes the relationship between the interest rate and the amount of money circulating in the market. This curve shows that the higher the interest rate, the less money circulating in the market and vice versa.
In the IS-LM model, economic equilibrium occurs when the IS curve and the LM curve intersect, indicating that the interest rate and national income have reached balance. This model is used to explain government intervention in the form of fiscal and monetary policies. For example, if the government wants to increase national income, it can lower interest rates and increase government spending to boost demand.
Although the IS-LM method is often used in Neokeynesianism, there are some criticisms of this model. Some economists argue that this model is too simple and does not accommodate the complex changes in the global economy. However, this model remains an important tool in analyzing the relationship between the goods market and the money market in the economy.
Theory of Declining Profit Rates (TMTK)
Theory of the Trend of Declining Profit Rates (TMTK) is one of the important concepts in Neokeynesianism which describes a tendency for profit rates to decline in the long run. This theory was put forward by Karl Marx in the 19th century and adopted by many Neokeynesian economists.
TMTK explained that in the long term, the company’s profits tend to decrease due to competition in the market, rising production costs, and market limitations. In the short term, companies can increase their profits through innovation and cost savings, but in the long term, profits tend to decrease due to increasingly fierce competition.
TMTK has significant implications for economic policy. According to this theory, the gap between capitalists and workers will increase as corporate profits decline. Therefore, government intervention is needed to reduce this gap and improve social welfare.
In Neokeynesianism, TMTK is also associated with the concept of effective demand. Effective demand is the amount of demand that is sufficient to induce companies to invest their money and increase production. In the context of TMTK, effective demand is very important because it increases company profits and promotes long-term economic growth.
However, there are also some criticisms of the TMTK theory. Some economists say that TMTK does not consider technological advances that can increase production efficiency and reduce production costs, so that the company’s profits do not always decrease in the long term. Nonetheless, TMTK remains an important concept in Neokeynesianism and continues to form the basis for many economic policies today.
Theory of Interdependence between Fiscal and Monetary Policy
The Theory of Interdependence between Fiscal and Monetary Policy is an important concept in Neokeynesianism which describes the complex interaction between fiscal and monetary policies in regulating the level of economic growth. This theory states that fiscal and monetary policies influence each other and must be integrated into an effective economic strategy.
In Neokeynesianism, fiscal policy is used to regulate government spending, including spending on social programs and infrastructure. Monetary policy, on the other hand, regulates the supply of money and interest rates to control inflation and influence the rate of economic growth. This theory assumes that in the short term, fiscal and monetary policies can offset each other to achieve the same economic goals, namely increasing economic growth and reducing unemployment rates.
However, in the long term, fiscal and monetary policies are interdependent and the interaction between the two becomes more complex. Overly aggressive fiscal policies, such as increasing government spending without proper regulation, can increase inflation and exacerbate economic problems. Conversely, monetary policy that is too tight can reduce economic growth and increase the unemployment rate.
In Neokeynesianism, an effective economic strategy must consider the interaction between fiscal and monetary policies and find the right balance between the two. For example, moderate fiscal policy can be combined with aggressive monetary policy to achieve a steady rate of economic growth and control inflation. In this case, fiscal and monetary policies work synergistically to achieve the same economic goals.
However, there are also some criticisms of the Theory of Interdependence between Fiscal and Monetary Policy. Some economists say that this model is too simple and does not consider other factors such as international factors that can affect the economy. Despite this, the theory remains the basis for much of today’s economic policy and continues to be an important concept in Neokeynesianism.
The Impact of Neokeynesianism on Economic Policy
Neokeynesianism has had a significant impact on current economic policies. This theory provides the basis for many of the fiscal and monetary policies implemented in many countries around the world. Following are some of the important impacts of Neokeynesianism on economic policy:
1. Strong influence on fiscal and monetary policy: Neokeynesianism strengthens the role of fiscal and monetary policy in overcoming economic problems. Fiscal policy is used to regulate government spending, while monetary policy regulates interest rates and money supply. These two policies influence each other and are interdependent in achieving economic goals.
2. Priority on unemployment: Neokeynesianism pays great attention to the problem of unemployment. This theory emphasizes the importance of creating jobs and reducing the unemployment rate to achieve stable and sustainable economic growth.
3. Government intervention in the economy: Neokeynesianism emphasizes the importance of government intervention in the economy to achieve desired economic goals. The government must play an active role in regulating public spending and regulating markets to achieve stable and sustainable economic growth.
4. The important role of financial markets: Neokeynesianism recognizes the important role of financial markets in governing the economy. Interest rates and money supply must be controlled to control inflation and affect economic growth.
5. Anti-cyclic economic policies: Neokeynesianism reinforces the importance of anti-cyclic economic policies. During a recession, the government must increase public spending and lower interest rates to promote economic growth. While in times of rapid economic growth, the government must reduce public spending and raise interest rates to control inflation.
Overall, Neokeynesianism has had a significant impact on current economic policies. This theory provides the basis for many fiscal and monetary policies around the world and places unemployment as a top priority in achieving stable and sustainable economic growth.
Conclusion
Neokeynesianism is an economic theory that has had a major impact on current economic policies. This theory states that the economy can experience short-run imbalances caused by a lack of aggregate demand and recognizes the important role of government intervention in regulating the economy.
The IS-LM method is used to show the relationship between interest rates, output levels and spending in the economy. Theory of Declining Profit Rates (TMTK) explains that in the long term, profit rates will tend to decrease and affect company investment.
The Theory of Interdependence between Fiscal and Monetary Policy emphasizes the importance of coordination between fiscal and monetary policies in achieving the desired economic goals. Neokeynesianism also reinforces the role of financial markets in regulating the economy and emphasizes the importance of anti-cyclical economic policies to overcome short-term imbalances in the economy.
Overall, Neokeynesianism made important contributions to improving the economy and provided the basis for many economic policies around the world. In dealing with complex economic problems, Neokeynesianism provides an integrated view and appropriate solutions to achieve stable and sustainable economic growth.
