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What is Keynesian Economics?

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John Maynard Keynes was a British economist who wrote extensively during the 1920s and 1930s. His work is still considered important today and has since become referred to as Keynesian economics. Up until the 1970s his ideas had a huge impact on government economic intervention in Europe. The economic collapse of 2008 saw Keynes’ ideas once again enter the spotlight, but there has also been a public backlash against the interventionist policies he favored.

Keynesian Economics

A lot of Keynes’ more well known ideas developed as an attempt to provide solutions for the Great Depression. He starts with the assumption that there is a circular flow of money. When one person spends money it becomes another person’s earnings; this person in turn spends the money they get and it becomes another person’s earnings and so on. This circular flow of money is the normal state of affairs and it benefits all the participants. Sometimes things can go wrong and this will stop this process; if the economic climate looks bad then this will likely mean a lot of people will be afraid to spend their money. If people are hoarding their money then this is going to mean that other people aren’t earning and the circular flow of money becomes difficult and this leads to the economy failing.

Keynes believed that it was possible to rectify these difficulties with the circular flow of money by what he called ‘priming the pump’. If people are afraid to spend then the government needs to step in and get things going again. One of the famous suggestions associated with Keynesian Economics is that even paying people to dig holes and fill them in again could be a way to stimulate the economy. Keynes believed that the best approach that a government should take would be either to buy things or increase the supply of money. The idea is that you can spend your way out of an economic depression because it once again fires up circular flow of money.

Criticisms of Keynesian Economics

Keynes was a firm believer in the idea that the government should interfere with the economy. In fact he claimed that the free market just wasn’t capable of functioning appropriately without intervention. These ideas are quite different from Laissez-fair capitalism which is the other hugely influential economic school of thought that has great influence in today’s world. According to supporters of Laissez-fair capitalism the government should keep away from the economy because the interference will always lead to negative outcomes – the idea is that the economy will sort itself out so long as it is left alone. In the United States there is a lot of support for this non-intervention approach as concerns about government bailouts increase.

Even those economists who don’t agree with John Maynard Keynes will agree that his ideas have had a huge impact on our modern world. He is credited for inspiring many of the social programs that blossomed in Europe and the US during the twentieth century.

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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.

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