The term 'Keynesian Economics' is included in the Economics edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
Keynesian economics represents a system of economic ideas that the British economist John Maynard Keynes developed in the first half of the twentieth century. Keynes became best known for his easy to understand and straight forward arguments for the underlying causes of the Great Depression.
His theories of economics found their basis in the concept of the circular flows of money. As his ideas became more and more widely accepted, they led to a range of intervening economic policies towards the end of the Great Depression, particularly in the United States.
Keynes explained all flows of money in terms of their impact on other people and entities. He said that a single person’s spending contributes to the next individual’s paycheck. That person spending their pay would then supply the earnings of another. This virtuous circle goes on and on and assists in maintaining a healthy economy that is working properly.
As the Great Depression settled in, the natural inclination of people to save and hold their money increased. Keynes proposed that this cessation in the normally occurring circular money flow is what caused the economies of the world to grind to a screeching halt.
More than only explaining economic problems, Keynes offered solutions as well. He claimed that the best cure for this disease lay in priming the pump. With this expression, he intended for governments to intervene in order to boost their spending. They might do this by purchasing things on the open market or by growing the money supply itself.
At the time of the Great Depression, such an answer did not turn out to be well received at first. Even so, the actions of American President Franklin D. Roosevelt in spending enormously on defense for the Second World War are generally credited for beginning the United States’ economic revival.
Because Keynesian economics strongly makes the case for the government to jump in and help out the economy, it represented a serious break from the prior system of laissez-fair capitalism economics that predated it. This laissez-fair, or hands off, approach had endeavored to keep government out of the markets. The system argued that markets left undisturbed would find their own balance in time.
Keynes’ ideas represented a direct challenge to the many supporters of free market capitalism, such as the Austrian School of economics. Frederick von Hayek proved to be among its earliest founders who lived in England and represented a bitter public rival to Keynes. Their ideas on government influence in private citizen’s lives battled back and forth for years in public policy debate.
Keynesian economics discourages an excessive amount of savings, which it calls an insufficient amount of consumption and spending for the economy. The theory furthermore argues in favor of a great amount of redistributing wealth as necessary. Keynes thought that giving the poorest members of society money would lead to them probably spending it, which would support economic growth.
Keynesian economics has been a major force in international economic policy since World War II. Though its influence is less in the past three decades, it has not died out. Its tenets are again gaining ground in the light of the failures that led to the financial collapse and the Great Recession.