Keynesian school is a school of economic thoughts, founded by the British
economist John Maynard Keynes (1883-1946), which grew out of the Great
Depression of the 1930’s, when the existing economic theory was unable to explain
the origins of this worldwide economic breakdown or to offer a decent public policy
solution.
Before Keynes, Society used to believe that free markets would automatically
provide full employment and that everyone who wanted a job would have one as long
as workers were flexible in their wage demands. But, the severity of The Great
Depression deeply tested this orthodox hypothesis. Indeed, the Keynesian theory
came as a revolutionary thought in the attempt to understand why the mechanisms of
free markets were unable to correct or restore balance in the economy as expected.
The main plank of the Demand-side Economics is the belief that aggregate
demand, which is defined as the total level of demand for desired goods and services
at any time by all households, businesses and the government, is the main force
affecting overall economic activity and causing short-term fluctuations in an economy.
Indeed, Keynes asserted in his book “General Theory of Employment, Interest and
Money” (1936) and other works that structural rigidities and certain characteristics of
market economies would intensify economic weakness and cause aggregate
demand to plunge more. He then further maintained that free markets have no self-
balancing mechanisms that lead to full employment.
Keynesian economists justify government intervention through public policies
that aim to achieve full employment and price stability.
They believe that the aggregate demand is often influenced by public and
private decisions. Public decisions represent government agencies and
municipalities.
Keynes argued that inadequate overall demand could lead to prolonged periods
of high unemployment. He supported that if the demand is weak, employers will not
add employees to produce goods that cannot be sold. Plus, poor business conditions
may cause companies to reduce capital investment, which would also have the effect
of reducing overall expenditures and employment. During economic recessions and
depressions, individuals and businesses do not usually have the resources for
creating immediate results through consumer spending or business investment.
According to his theory, the economic activity would be encouraged and the
unemployment reduced by a rise of the market’s aggregate demand.
An economy’s output of goods and services, being the sum of four components:
consumption, investment, government purchases and net exports, any increase in
demand has to come from one of these four components. But during a recession,
strong forces often make the demand goes down as spending goes down. Demand-
