Keynesian economics are the various macroeconomic theories about how in the short run – and especially during recessions – economic output is strongly influenced by aggregate demand. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.
Keynesian economics in an economic theory that advocates the important role government can play in stimulating the economy. The economic theory was put forward during the 1930s by a British economist known as John Maynard Keynes (1883 – 1946).
Keynes is widely considered as one of the most influential economists of the 20th century. He believed that lower taxes and increased government expenditure can result in increased demand of goods that will have a beneficial effect on the economy. Subsequently, the word ‘Keynesian Economics’ was used to refer to theories that called for increased role of government in improving the economy.
Explanation of Keynesian Economics
Economists that support Keynesian economic theory believe that a country’s economic performance can increase and the slump can be prevented through intervention policies of the government. The theory focuses on short term changes in the economy brought about by increased government expenditure resulting in increased demand in a country.
Keynesian economists criticize the classical economic thinking that swings in economic output, employment, and other factors are self adjusting. The classical economic theory whose advocates include Adam Smith, Thomas Malthus, David Ricardo, Jean-Baptiste Say, and John Stuart Mill believed that governments should not intervene in the economy. The classical view purported that a decline in the aggregate demand and the subsequent employment levels, wages, and prices would encourage entrepreneurs to employ more people and increase the investments that would result in economic recovery. However, the laissez faire approach was criticized by several economists after the great depression of the 1930s. In fact, Keynes had put forward his theory after studying the causes of the great depression.
Keynes proposed his views in “General Theory of Employment, Interest and Money,” and other works. He says that structural rigidities and certain other factors in the financial market weaken the economic condition of a country. For instance, the notion that employers will not be encouraged to increased production due to fall in employment levels or wages. They will not produce goods if its demand is weak and cannot be sold. What is required to boost the economy is to improve general economic conditions in a country through increased capital expenditure. And this requires increased spending of the government.