The Bankruptcy of Keynesian econometric Models

Evans, Michael M.
January 1980
Challenge (05775132);Jan/Feb80, Vol. 22 Issue 6, p13
Academic Journal
The article focuses on the bankruptcy of Keynesian econometric models. The most important of these may be summarized as follows: spending stimulates aggregate demand whereas savings retards it; when private sector demand slackens, it should be supplemented by greater public sector spending; demand can be increased without any noticeable effect on inflation; and an increase in government spending will stimulate the economy more than an equivalent decline in taxes. The fundamental problem which has plagued the U.S. economy for the past decade has been the slowdown in the growth of productivity. This slowdown has been responsible both for the higher rate of inflation and the lower rate of growth in real gross national product. The logic behind Keynes' Law is that as demand rises, stimulated perhaps by government spending or an increase in handouts, the rate of return on invested capital will rise because firms will be producing more goods per unit of capital. As this happens, they will expand their productive facilities and thus increase total capacity. If more labor is needed, it can be attracted by offering higher wage rates. Thus productive capacity will increase apace with rising demand, and Keynes' Law is fulfilled.


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