Keynesian Economics

Keynesian Economics

The Keynesian economics continues to be one of the most important school of thought in world economy today. The article will provide you with the basics of Keynesian economics as well as some brief information about John Maynard Keynes, the mastermind behind it.

"Long run is a misleading guide to current affairs. In the long run we are all dead." - John Keynes 
 
Keynesian economics is basically a macroeconomic theory based on the ideas of John Maynard Keynes, a British economist of the 20th century. One of the most important school of thought in economics, this theory is also referred to as the Keynesian theory or Keynesianism. The Keynesian theory played a pivotal role during the resurrection of the economy after the Great Depression, the second World War and the period between 1945 and 1973, which is referred to as the post-war Golden Age of Capitalism. 
 
John Maynard Keynes 
The great mind behind the Keynesian economics theory was that of John Maynard Keynes, an eminent economist hailing from England. Several ideas put forth by Keynes in the 20th century have a great influence on the macroeconomics that we practice today. Owing to this contribution to the world of economics, Keynes is widely regarded as the father of modern macroeconomics as well as one of the most influential economist of the 20th century. Other than being an economist, Keynes also worked as a civil servant, writer, director of the Bank of England and private investor. However, his claim to the fame was based on his ideas which provided a platform for the Keynesian economics school of thought and other branches related to it. 
 
What Keynesian Economics is All About? 
The Keynesian economics is purely based on the ideas mentioned by John Maynard Keynes in his book 'The General Theory of Employment, Interest and Money', published in 1936. Private sector and public sector are the two components of economy. Keynesian economics stresses on the fact that the decisions taken by the private sector, in several cases, result in poor macroeconomic outcomes in an economy. In order to resolve this problem, Keynesian economics theory suggests that the public sector should step in and respond through active policies, so as to stabilize the output in the business cycle. This was totally against Laissez-fair capitalism, which believed in exclusion of public sector from the market. 
 
According to the Keynesian theory, the spending of one individual results in earning of another, which means when an individual is spending his earnings, he is in fact supporting the earnings of another individual. The same process which goes on continuously, forms the base of a normally functioning economy. Through this, Keynes gave the most appropriate explanation for the cause of the Great Depression. When the Great Depression occurred, the first thing that came to people's mind was to save money, which eventually led to hoarding of money. According to Keynes, this mindset of the people stopped the flow of money, which forms the base of normal functioning economy, and brought the economy to a standstill. 
 
The solution for a poor economy, according to the Keynesian theory of economics, is 'pump priming', wherein the government would step in to increase the spending, either by increasing the money supply or buy things from the market. Keynesian economics believes that the government's intervention is absolutely necessary for ensuring proper growth and stable economy. This is against the basics of classical economics wherein it is believed that any irregularities in the market would be corrected automatically. Read more on classical economics vs Keynesian economics.  
 
More importantly, Keynesian economics warns that the practices such as too much saving or too much spending are not good for the economy, but it does supports the redistribution of the wealth, if required. Keynes believed that if the poor people were given money, they would spend it rather than save it and thus, would contribute to the well-being of the economy. This theory also stresses on the fact that the trends at the macroeconomic level influences the consumer behavior at the microeconomic level in a disproportionate manner. 
 
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The policies based on Keynesian economics were widely criticized and held responsible for the inflation in 1970s. Owing to this, the policies were gradually replaced by monetarism and microeconomic policies, which are largely influenced by neo-classical economics and were opposed by Keynes. More recently, yet another school of economic thought - the post Keynesian economics, which is greatly influenced by Keynes ideas, has emerged.