What is Keynesianism?

Keynesianism is a school of thought from economics, which goes back to the economist John Maynard Keynes (1883-1946). The theories of Keynesianism are essentially based on Keynes’ 1936 published book “General Theory of Employment, Interest and Money”. The school of thought itself emerged in the course of the criticism of the neoclassical and is often used synonymously for an interventionist way of acting, in which the focus is on securing full employment.

In this lesson we explain to you the emergence of Keynesianism, its most important statements and teachings and the economic program derived from it. At the end of the lesson, we give you the opportunity to test your newly acquired knowledge with the help of a few practice questions.

Macroeconomics: State intervention in the economy

Synonyms: Keynesian economics | Keynesian theory

Why is Keynesianism still important today?

According to biotionary, Keynesianism is one of the most important economic theories in macroeconomics. Keynes’ teachings, for example, formed the basis for models used today in economics, such as national accounts (VGR) and cycle analysis. In addition, Keynes provided with his “General Theory of Employment, Interest and Money” the approach of countercyclical action on the part of the state in order to be able to counter economic crises.

An overview of Keynesian economics

Keynesianism, along with neoclassical theory, which is also known as liberal economics, is one of the two major and authoritative theories in economics. In contrast to the first two theories mentioned, Keynesianism advocates a state influencing the economic cycle in order to counteract strong economic fluctuations or to avoid them as completely as possible. In this way, a state of full employment is to be established.

This is based on the assumption on the part of the followers of Keynesianism that the market is not capable of regulating itself. It is therefore the task of the state to pursue an active and anti-cyclical (see business cycle ) economic policy. According to this, expenditure is increased in weak economic phases ( downturn, depression ) and reduced accordingly in strong phases (upswing, boom ).

Keynesianism

The term Keynesianism

The term Keynesianism can refer to different schools of thought or theories:

  • The economic theory of John Maynard Keynes
  • Keynesian economic theory in various currents and forms
  • Economic policy measures affecting government spending and government revenue
  • A political philosophy of the 50s, 60s and 70s, the essential elements of which are the welfare state and the macroeconomic economy

Keynesian economic theory

John Maynard Keynes’ book “A General Theory of Employment, Interest and Money”, published in 1936, forms the basis of what is to be understood by Keynesian theory today. The accompanying paradigm shift in economics was even described by some economists as revolutionary.

Keyne’s scientific work can primarily be viewed as a critique of neoclassicalism, according to which the role of the state in an economy should be as small as possible. His theory of general equilibrium remains controversial to this day.

Keynes had completely changed the foundations on which macroeconomic variables such as consumption, investment, saving and income are based. This favored the development of current models such as the cycle analysis and the national accounts (VGR).

The subject of ongoing criticism, however, is still his considerations regarding the explanation of economic crises and the recommendations for action derived from them for overcoming or avoiding them. Because, contrary to the neoclassical demand for a minimal state, Keynes called for the state to play an active role in economic policy.

The role of the state and criticism of the classical theory

According to Keynes’ observations, the main task of the state is to expand the insufficient aggregate demand of an economy in order to counteract the state of underemployment. According to the theory, overcoming the Depression should be built primarily on a boost in investment.

Keynes, who witnessed the great economic crisis of the 20s of the last century, offended the economists with his explanatory approach. Regardless of the theories prevailing to date, he did not see unemployment as an accidental deviation from normal. The classics assumed that the market had enough “self-healing powers” ​​through which the desired situation of full employment would come about by itself and without government intervention.

Keynes criticized Say’s theorem, according to which general overproduction in an economy is impossible, since every supply would create a purchasing power to the same extent and factor income and profits always correspond to the value of the products created. In short: According to Say’s theorem, every production creates its own demand.

The set Keynes his concept of macroeconomic final demand counter, where he investment demand of companies called unsicherstes and unberechenbarstes element. Keynes took this as a justification for the fact that a market economy with pessimistic expectations and at the same time rigid wages can get into a state of high unemployment. Without government intervention, the economy can only emerge from this situation late or not at all.

This resulted in Keynes’ demand for an active state economic policy. The overcoming of the depression is to take place by a stimulation of the investment, whereby the macroeconomic final demand is to be increased. On the one hand, as described above, he attributes these investments to the greatest instability, but also admits that they have the greatest impact in terms of income and employment.

In order to achieve this goal, both an expansionary monetary policy with low interest rates and state fiscal policy come into focus, of which Keynes preferred the latter. Keynes hoped that faster inflation would boost employment through falling real wages.

Core teachings of the Keynesian schools

The teachings that can be combined under the term Keynesianism today can hardly be reduced to a common denominator. There are demarcations on a sociological, geographical and philosophical level.

By British economist Anthony Thirlwall the following list comes the “six key messages of Keynesian Vision” ( “six central messages of Keynes’ vision” ), which can be summed up the core teachings of Keynesian schools:

  • There is basically the possibility of involuntary unemployment.
  • An increase in savings does not necessarily lead to an increase in investments by the same amount. Investments are independent of whether savings are made beforehand or not.
  • Both production and employment are controlled through the goods market and not through the labor market.
  • The money economy is fundamentally different from the exchange economy.
  • The quantity theory of money is only valid in full employment.
  • Irrational investment decisions based on “instinctive behavior” are possible in a market economy.

 

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