Good Example Of Essay On Keynesian Economics

Type of paper: Essay

Topic: Economics, Economy, Demand, Money, Workplace, Theory, Customers, Consumer

Pages: 1

Words: 275

Published: 2020/12/26

Keynesianism – is an economic theory developed as a reaction to the Great Depression in the United States. Basic work of the theory was "The General Theory of Employment, Interest and Money" written by John Maynard Keynes and published in 1936.
In accordance with Keynes market economy is not in a balance that ensures full employment. The reason for it is the tendency to save some part of the income, which leads to the surplus of aggregate supply over aggregate demand. It is not possible to overcome this tendency. Therefore, the state should regulate the economy changing aggregate demand: increase money supply, lowering interest rates (stimulation of investment activities). Lack of demand is compensated for by budget financing.
Keynes was building the following chain: the overall fall in consumer demand causes a reduction in the production of goods and services. Reduced production leads to the ruin of small producers, to layoffs of employees by large enterprises and large-scale unemployment. Unemployment implies lower incomes, i.e. less number of buyers. And this, in turn, will boost further fall in consumer demand for goods and services. As a result a vicious circle emerges, that keeps the economy in a state of chronic depression.
Keynes proposed the following output: if the mass consumer is not able to revive aggregate demand across the national economy, it should be made by the state. If the state makes (and pays for) a large order to businesses, it leads to additional manpower from these firms. Receiving wages by previously unemployed means increase of their spending on consumer goods, and thus enhancing of the overall economic demand. This, in turn, will entail the growth of aggregate supply of goods and services and the overall economic recovery.
But this consequence is true only the one in the short term. When we speak about long term perspective then big order from the state (in other words – huge money input) means growth of inflation, and prices for resources which means shortening of production. That is why I think it is not very prudent to react for every growth of unemployment by inflowing of great sum of money into the economy.
However, in the times of crises state should intervene in the economy, as market on its own cannot solve each problem, it may be too subjected to panic. And nowadays after the financial crisis of 2009, many countries that used to be more devoted to monetary policy start using Keynesian tools to fix their economic problems.
Personally I think that in times of economic prosperity the state should use monetary theory in its economic policy which means almost no state interference in the economy. But in the years of severe crises it is better to use Keynesian methods of dealing with the economy.

Sources

Keynes, John Maynard. The General Theory of Employment, Interest And Money. London: Macmillan, 1936.
Sheehan, Brendan. Understanding Keynes' General Theory. London: Palgrave Macmillan, 2009.

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