a2 1720 Essay

Submitted By amhlophe
Words: 2580
Pages: 11

Key aspects of the Keynesian revolution, historical conditions, traditional economic doctrines it challenge, psychological role in Keynesian economics

John Keynes was one of the early economists who revolutionised the relationship between the state and business. His concern was the up and down movements of the markets and their inability to provide for human necessities at all times. In this paper I present the main aspects of his theories and how they relate to other economists’ ideas. I will also look at the conditions which Keynes was trying to address and where he was going with his theories. The classical economic theories were the dominant ideas when he was writing; therefore I will attempt to show how he diverted from these theories to create something which was never heard of before, something which characterizes the relationship of most governments and business connectedness today. I will examine the role of the government as mediator between capital and labour; and also explore the role which is played by psychology in the markets in the eyes on Keynes and how economic actors and agents (society) are influenced by the decisions which is made by others individuals.
Keynes’ economic theory, even though it wasn’t popular during the days it was proposed amongst some of the leading economist, it was a necessary prescription needed to heal the economy; capitalism in particular, which was bedridden gasping for its last breath. The unemployment numbers of 1933 left everyone mystified, unheard of before: “14 million unemployed sat, haunting the land--- it seemed as if the spirit of hope had been permanently crushed in America”, (Robert L. Heilbroner, The worldly Philosophers, page 252). Because there is no disposable income, “85 businesses failed, nine million savings accounts were lost, salaries dwindled 40%”, (Robert L. Heilbroner, The Worldly Philosophers, page 251). As if this was not enough, in the 1930s the world was faced with a devastating economic effect of them all, the great depression. A mind buckling reduction in the national income of “$39 billion in 1933, down from $87 billion just three years before”, (Robert L. Heilbroner, The Worldly Philosophers, page 251).
These were some of the historical issues which Keynes was trying to address in his economic theories. The hope was if effectively implemented, these negative conditions will be reversed and move the economy towards full employment whereby people will have money to spend on commodities, encourage businesses to invest again, and people to save (at least through the bank so that the money can continue to circulate through borrowings for investment). It was also directed at providing for the basic human needs in hard times like those experienced during the great depression and in times of high unemployment. His theories led to the creation of many social programs in most of the western world; programs like health care, employment insurance, welfare programs, etc. In fulfilling these basic human necessities, the economy will continue to operate with minimum interruptions thereby avoiding disasters like the great depression. The strategies for implementation were the fiscal and the monetary policies.
Classical economics which was made popular by Adam Smith are the foundation of Keynes ideological theories in the sense that they both agree in the fundamentals tenants of capitalism; the resource allocation is more effective when free-market is in operation. Another source of Keynes ideas was from Thomas Malthus on which he borrowed his concept of aggregate demand driving the markets rather than supply.
The traditional capitalist ideology was that the government was not to interfere with business economic activities. This idea of laissez faire argued that the economy was self-regulating and self-correcting; in the long run supply and demand tended to correct each other as the economy moved through various phases. One of the respected classical economists,