Economic Crises Case Study

US Financial Crisis: Is Keynesian Economics Still Relevant?

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Abstract:
This case was written primarily to debate on the relevance of Keynesian principles in the wake of the US financial crisis (2008). J.M. Keynes in his classic, The General Theory of Employment, Interest and Money, not only demolished many a classical myth such as paradox of thrift, supply creates its own demand, wage cut expands employment and so on, but also presented a cogent doctrine to lift the economy from the depth of depression. Keynes’ brilliant insight could detect that instability is the name of the game in a capitalist economy; and to fight it, the artillery is government intervention – but not to the extent that the Marxists leered for. Whether Keynesian economics is a real remedy for the downslide or whether it is worse than the malady is a stimulating question that the case poses and ponders over. Whether Keynesianism suffers from the ‘Broken Window Fallacy’ or it breaks free the economies of the world from the shackles of slump are among the aspects discussed to revive the debate about the relevance of the great economist Lord John Maynard Keynes.

Pedagogical Objectives:

• To understand the classical macroeconomic view
• To analyse why full employment is not the norm of a capitalist economy
• To understand the mechanism of Keynesian economic strategy
• To discuss the situation of stagflation that Keynesian economic strategy fails to address
• To debate whether Keynesian economics has again come to claim relevance in the context of the US financial crisis (2008).

Keywords : US Financial Crisis, Toxic Assets, Housing Bubble, Credit Crisis Indicators, Bailout Plan, Keynesian Economics, John Maynard Keynes, Great Depression, Liquidity Trap, Money Illusion, Monetary Policy, Deficit Financing, Paradox of Thrift, Phillips Curve, Stagflation, Laffer Curve, Broken Window Fallacy