Those who listen to the financial news may have heard the term ‘Keynesian economics’ floated around. There may be some confusion as to what this is actually referring to. Discussions about the validity of this theory can become heated among economists so it is worth having some idea as to what is behind it all. A basic explanation will be provided here.
Keynesian economics refers to a theory created by British economist John Maynard Keynes. He believed that the government needed to play an important role in any economy if it was to be successful. One of his most famous suggestions was that paying people to dig holes and just fill them again could be good for the economy. Keynes found all economic theory before his time to be lacking and he believed that the free market could never lead to full employment without attempts to influence it. He was a firm advocate of a mixed economy where there would be a public and private sector; the UK has been greatly influenced by his ideas.
Keynesian economics is viewed as offering a happy medium between Communism and Capitalism. It provides justifications as to why the government should be allowed to interfere with markets. For instance a Keynesian would argue that it would be possible for the Government to spend their way out of a recession by investing a lot of money in public projects. It is believed that investing money in this way can really get a stagnant economy moving again. An example of this would be paying people to build council houses; they will use their pay checks to buy other products and services and there will be a knock on effect that benefits the whole economy.
Those economists who believe fully in the power of the free-market would strongly object to the ideas within Keynesian economics. They would view any attempt of governments to interfere in the market as bad, and that left to its own devices the market will always right itself without any need to meddle. This is in opposition to Keynesian theory which claims that the free market is inherently flawed.
Although there is much debate as to the relevancy of Keynesian theory there is no doubting the impact that it has had on the world. It is almost certain to be debated for a long time to come, and it will continue to influence economic decisions that governments make.