Economics and the 2008 crisis: a Keynesian view

Introduction

Decisions, decisions, decisions. Governments need to make decision about how much to spend, how to finance their debt and how much revenue to collect, in order to ensure their citizens’ welfare is as high as it can be, given that there is a limited amount of resources available or borrowable against future repayments. These decisions become even more pressing and their consequences more acute in times when the economy is not growing; or worse, in moments when it is actually shrinking. As the famous economist Paul Krugman wrote in 2012, 'times of crisis are when economists are most needed. If they cannot get their advice accepted in the clinch – or worse yet, if they have no useful advice to offer – the whole enterprise of economic scholarship has failed in its most essential duty'.

In this OpenLearn course you will work through seven sections in which you will engage with some of the major aspects of economic policy:

• What types of problems are governments concerned with?
• Which policy instruments do they have at their disposal?
• How do they make decisions about the effectiveness of alternative courses of action?

One of the most challenging aspects of economic policy and decision making is the study of how changes in economic variables influence the more immediate and the future economic response. As Charlie Bean, the deputy governor of the Bank of England in the early 2010s, puts it, 'people describe the steering of the economy like driving a car when all you can do is look through the rear view mirror'.

Figure 1

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This shows a boy on a ladder, spray painting graffiti on a wall. There is already writing on the wall which says, in large letters, ‘Running the economy’. The boy has sprayed out the first ‘n’ and has replaced it with an ‘i’ – changing it to ‘Ruining the economy’.

Figure 1

So, any claims as to what will happen in the future as a result of current policy are grounded in economic models about how economies, people, firms and industries within them, will respond. In this course you will discover that different economists have different theories about how the economy works, and different theories lead to different results, depending on the state of economies. This creates considerable controversy over which policies are right – you might already have your own views too.

You will also learn about the ways in which John Maynard Keynes’s theories revolutionised the thinking about how economic crises appear and how the government can solve them. In doing so, you will start to build an economic model to explore Keynes’s ideas.

Keynes’s thinking was very influential with economists and policymakers for several decades following the 1930s, but then fell out of favour for a time. The economic downturn that started in 2008 led to a widespread revival of interest as economic conditions seemed to resemble those seen in the 1930s. So a study of Keynes’s ideas is not just of historical interest but highly relevant to modern policymaking too.

This OpenLearn course is an adapted extract from the Open University course DD209 Running the economy [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] .