Keynesian Economics
Candlefocus EditorKeynes is best known for his book The General Theory of Employment, Interest, and Money (1936). He argued that the classical theory of economics, which suggests that free markets and consumer demand will lead to full employment and economic stability, fails to account for the fact that consumer demand can fall short of the necessary level to drive economic growth. Without government intervention, he argued, widespread unemployment and extreme poverty can result.
Following the Great Depression, Keynesian economics emerged as the leading school of thought in macroeconomics. Using Keynesian economics, policy makers can apply Keynes’s theories to manage recessions and to foster economic growth. In particular, Keynesian economics advocates the use of stimulative fiscal and monetary policy to target aggregate demand.
Fiscal policy involves controlling government spending and tax levels to stimulate the economy. An expansionary fiscal policy involves increasing government spending, while a contractionary fiscal policy involves cutting government spending. Similarly, monetary policy involves managing interest rates and the availability of money through central bank actions. Expansionary monetary policy involves lowering interest rates to make it easier for businesses and individuals to borrow money and invest in the economy, while contractionary monetary policy involves raising interest rates to dampen consumer spending and economic activity.
Overall, the purpose of Keynesian economics is to promote a healthy and profitable economy by managing aggregate demand and encouraging economic growth. It is widely accepted today as the primary method of managing macroeconomic conditions. However, some economists have expressed critique towards Keynesian economics, particularly in regards to market inefficiencies and government interference. Despite this, it has remained an integral part of economic theory and policy making for the past eight decades.