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Keynesian Economics Essay

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Keynesian economics is an economic theory based on the ideas of an English economist, John Maynard Keynes, outlined in his book: The General Theory of Employment, Interest and Money, published in 1936, in response to the Great Depression of the 1930s. Keynesian economics promotes a mixed economy, where both the state and the private sector play an important role. The rise of Keynesianism promoted the intervention of the government even in capitalist economy. Keynesian economics served as the standard economic model in the developed nations during the later part of the Great Depression, World War II, and the post-war economic expansion (1945–1973). It lost some influence following the oil crisis and stagflation of the 1970s. The advent of the Global Financial Crisis in 2008 has caused many to revisit Keynesian thinking.
Keynes believed in the circular flow of the economy. His theory suggested that when the spending in an economy increases, the income level of workers also increases, which will lead to more spending and income in the future. During an economic recession, Keynes advocated increased government spending and lower taxes to give people more disposable income to spend, in an effort to stimulate demand and get the economy out of the depression. As a result, a demand side theory was developed which refers to the idea that optimal economic performance could be achieved (and preventing economic slumps) by manipulating aggregate demand through stabilization and policies enforced by the government which include monetary easing and fiscal expansionary policies. Similarly Keynes, in times of economic growth, advocates consumerism, but asks for higher taxation to reduce budget deficits.

What is Keynesian Economics?

In Keynes’ ...

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...dor, Robert Solow and Paul Davidson. New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It has developed partly as a response to criticisms of Keynesian macroeconomics. One of the new Keynesian economists, Robert Solow, advocated many Keynesian interventionist policies as senior economist to the Council of Economic Advisers during the Kennedy administration, which became conventional wisdom. In his words “My view is that we know no better way of running an economy than market capitalism”, however “there are times when there will be prolonged unemployment and governments ought to try to fix that.” This is abundant proof that the basic Keynesian approach is still relevant today as in a recession or depression; use of public spending to boost spending and employment is effective.
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