Outline the essence of Keynesian economics thought and its impact on modern macroeconomic thought in the 20 century.
The fathers of economics are considered Adam Smith, the author of the famous work “Wealth of Nations”, David Ricardo, John Stuart Mill, Jean-Baptiste Say and other followers of the Classical school of economics. The main principles of all representatives of classical economics are common, while they are absolutely opposed to the views of another important group of economists known as the followers of Keynesian economic theory.
The founder of Keynesianism, John Maynard Keynes, is one of the most prominent figures in economics. Being the author of “A Treatise on Probability” (1921), “A Treatise on Money” (1930), “General Theory of Employment, Interest and Money” (1936) and other works, Keynes revolutionized the whole economic thought in the 20th century. He refuted the majority of arguments made by the Classical economists, emphasizing the importance of government regulation of state economy. Keynes especially underlined the role of government regulation of economy during such extreme situation as economic recession, which may lead to economic depression. According to Keynes, government can control economy by means of monetary policy (controlling the supply of money with the help of interest rate and interest rate) and fiscal policy (extraction of the part of GDP and formation of budget). In his works Keynes disproved classical statement that free and deregulated market will reach economic equilibrium automatically by reaching the level of full employment.
In contrast, he stated that economy can reach equilibrium (situation when supply and demand, or leakages and injections are balanced) even when unemployment is not at the highest point. Keynes and his followers argued the following: every economy aspire to equilibrium; in case when economy is not in equilibrium, producers change the level of production in order to reach equilibrium. For example, when firms produce more goods than it is necessary, supply exceeds demand, which means that producers do not sell all the goods they have produced. Thus, it is necessary to decrease supply in order to balance it with demand. Keynes viewed economy in a short run and criticized Classical economists, who viewed it in a long run. As it has been mentioned above, Keynes stood for government regulation of market when it is necessary. Thus, his ideas for policies were to preserve the free market, not to replace it. Keynes stood for further development of capitalism.
He was one of the few economists who were really revolutionizing economic theory. Another major characteristic feature of Keynes as an economist is that he did his best to concentrate on the problem of unemployment. Having found the interdependence of economic prosperity and savings, Keynes reckoned the latter among leakages, stating that savings “leak out” of the spending stream, thereby causing recession and unemployment. When classical economists sought the reasons of unemployment in supply of the goods, Keynes proved that unemployment was a result of imperfect demand for goods and services in the country, economy of which then suffered from unemployment. Thus, in order to control unemployment government should adjust its own spending in order to eliminate deficit in demand, and implement monetary and fiscal policies.
Keynesian thoughts have been criticized, however, they have significant impact on various policymakers in the 20th century. New Keynesian Macroeconomics school of economists appeared after the death of John Maynard Keynes and reviewed some of his ideas. Keynesian message was widely absorbed and most Western industrial countries achieved high level of employment after the World War II and changed the role of state in the economic life.
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