Keynesian Economics

06.06.2015 |

Episode #8 of the course “Brief History of Economic Thought”


Keynesian economics, named for its founder and principal theorist John Maynard Keynes, is a theory focused on the supply and demand of an economy during a time of contraction and economic recession. According to classical economics, the fluctuation of supply and demand would naturally reduce any surpluses of goods, as prices would adjust to make excess production consumable. However, Keynes theorized that because there was no guaranteed demand for any produced consumer good, the result could be unemployment for the workers who produce an excess of unconsumed goods. With this perspective and other new angles of thinking about economics, Keynes contributed an entire school of theory to an understanding of modern global economics.

At the height of the Great Depression in 1936, economist John Maynard Keynes published his opus entitled The General Theory of Employment, Interest, and Money. Instead of focusing on the aggregate supply of products in a capitalist economy, Keynes focused on the aggregate demand of products, goods, and services, concluding that because demand and supply would never exactly coincide, unemployment was a necessary and natural economic consequence.

He was also one of the first economists to promote government intervention in the case of the necessarily unemployed; he viewed the private sector as predominantly important, but believed that government did have a necessary role during times of economic crisis. He advocated that governments should maintain responsible savings habits and use that surplus savings to purchase excess goods that stagnate due to a demand lower than their production. Modern critics argue over whether or not there can be a “glut” in a Keynesian system, considering how he promoted government intervention, although that is not always a realistic solution to an economic crisis.


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