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Keynesian Economics

Keynesian Economics

Is Keynesian economics, which was used by John M. Keynes to explain why the Great Depression occurred, still as relevant as it was back then?
Abhijit Naik
"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. Considered one of the most important schools of thought in economics, it is also referred to as the Keynesian theory or Keynesianism. The Keynesian theory played a pivotal role during the resurrection of economy after the Great Depression, World War II, 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 theory of Keynesian economics was that of John Maynard Keynes, an eminent economist from England. The ideas put forth by Keynes back in the 20th century have a great influence on the macroeconomics we practice today. Owing to his contribution to the world of economics, Keynes is widely considered the father of modern macroeconomics and also, the most influential economist of the 20th century. Additionally, Keynes also worked as a civil servant, writer, director of the Bank of England, and private investor. His claim to fame though, was based on his ideas which provided a platform for the Keynesian school of thought and other related branches.

What is Keynesian Economics All About?

Keynesian economics is purely based on the ideas mentioned by John Maynard Keynes in his book 'The General Theory of Employment, Interest and Money', which was published in 1936. Private sector and public sector are the two components of an economy. Keynesianism stresses on the fact that in several cases, the decisions taken by the private sector result in poor macroeconomic outcomes in the economy. In order to resolve this problem, it suggests that the public sector should step in and respond through active policies, so as to stabilize the output in the business cycle. A move which is totally against Laissez-fair capitalism, which believes in exclusion of public sector from the market.

According to the Keynesian theory, the spending of one individual results in earning of another. Simply put, when an individual is spending his earnings, he is actually supporting the earnings of another individual. This continuous process 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 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 buying things from the market. Keynesian economics believes that the government's intervention is necessary for ensuring proper growth and stability. This is against the basics of classical economics, wherein it is believed that any irregularities in the market are corrected automatically.

More importantly, this school of thought warns that the practices such as too much saving or too much spending are not good for the economy, but it does support 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 as a whole. This theory also stresses on the fact that the trends at the macroeconomic level influence consumer behavior at the microeconomic level in a disproportionate manner.

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. More recently, a new school of economic thought―the post-Keynesian economics, which is greatly influenced by Keynes ideas, has emerged.