What is Keynesian Economics?
Keynesian economics is a school of macroeconomics that is named after the English economist John Maynard Keynes. The main idea of Keynesianism is that aggregate demand should be stimulated by the government during a time of recession. The government should do this through fiscal policy.
Keynes believed that the the aggregate supply curve was (at least during recessions) flat. Therefore, he argued, moving aggregate demand to the right (increasing it) would result solely in an increase in Real GDP without any significant increase in price levels.
This school of thought went against classical economics, which argues that the AS curve is vertical and that increasing AD leads only to inflation and not to any economic growth.
Keynesian economics refers to economic thoughts and theories developed by the British economist, John Maynard Keynes (1883-1946). These theories sharply deviated from the economic beliefs developed from the ideas of Adam Smith.
Keynes held that the capitalist system does not automatically lead an economy to full employment. Keynesian theories suggested that underemployment could be cured by fiscal or monetary policies to raise aggregate demand. Keynes suggested such measures to also control inflation.
As per Keynesian economics the level of economic activity depends on the total spending of consumers, business, and government. When business expectations are poor, spending on new investment will be cut. This will cause a series of reductions in total spending. This can result in the economy moving into a depression. Keynes argued increased government spending and easy money would encourage investment, increase employment, and enable consumers to spend more. According to Keynes, high levels of demand were essential for both full employment and economic growth.
Keynesian economics contrasts with classical economics, which was developed from the ideas of Adam Smith, propounded in his famous book Wealth of Nations, published in 1776. Subsequent to Smith many other prominent economists in the nineteenth and twentieth centuries added to the classical economic thoughts. All these thoughts followed the basic premise that price mechanism is the best regulator of economic health. Keynes was the first major economist to popularise the idea of need for government action to improve economic performance.
Keynesian economics refers to the theories of British economist and monetary expert John Maynard Keynes (1883–1946), who in 1935 published his landmark work The General Theory of Employment, Interest and Money. A macroeconomist (one who studies a nation's economy as a whole), Keynes departed from many of the concepts of the free-market philosophy—that is, the idea that the market must be permitted to operate without government intervention. In order to ensure growth and stability, he argued, government needs to be involved in certain aspects of a nation's economic life. He believed in state intervention in fiscal policies, and during recessionary times he favored deficit spending (creating a debt), the loosening of monetary policies, and government public works programs (such as those of President Franklin D. Roosevelt's New Deal) to promote employment. Keynes's theories are considered the most influential economic innovations of the twentieth century.
Keynes was a major participant at the Paris Peace Conference of 1919, where the Treaty of Versailles was drawn up, officially ending World War I (1914–18). He quit the proceedings in Paris, returned to private life in London, England, and in 1919 published The Economic Consequences of Peace, in which he argued against the excessive war reparations (payments as a form of punishment) that the treaty required of Germany. Keynes predicted that Germany's extreme punishment at the end of World War I would pave the way for future conflict in Europe. His prediction came true in 1939 when Germany invaded Poland, thus initiating World War II (1939–45).
Having played a central role in British war financing during World War II, Keynes participated in the Bretton Woods Conference of 1944, where he helped win support for the creation of the World Bank, which was established in 1945 within the United Nations (an international peace-keeping organization). The World Bank promotes economic development by guaranteeing loans to nations, providing easy credit terms to developing nations, and providing investment funds (called risk capital) for private enterprise in less-developed nations.
Further Information: "Keynes, John Maynard." Britannica.com [Online] Available http://wwwlj.eb.com: 180/cgi-bin/g?DocF=micro/319/2.html, October 30, 2000; "John Maynard Keynes." Encarta. [Online] Available http://encarta.msn.com/find/Concise.asp?ti=04818000, October 26, 2000.