John Maynard Keynes

John Maynard Keynes (1883-1946) was a British economist and one of the most influential figures of Macroeconomics. He introduced the concept of how aggregate demand can affect economic growth, and that fiscal and monetary policies were very vital in revitalizing the economy. His policies are still influential to economists and governments to this day.

“The difficulty lies not so much in developing new ideas as in escaping old ones”. John Maynard Keynes lived by these words as proven by his detracting demeanour towards classical economic thought. By realizing the weaknesses of the past, he has now become a highly influential figure in contemporary economics in which you may have heard of.

Concepts:

John Maynard Keynes was one of the many economists dealing with the Great Depression in 1929-1933, where most countries were suffering from an economic recession. The classical theory that was adopted by economists back then was that if aggregate demand fell, wages and inflation will decrease as a result. This will in turn, allow for lower costs of production, thus reducing unemployment and leading to economic growth. Keynes, however, did not agree with this theory due to how wages and inflation were slow to react. With this, he created his macroeconomic policies, known as Keynesian Economics, to discuss how the government should spend for the economy.

Keynes proposed that the government should utilize expansionary fiscal policy in cases of recession. This is where the government must increase its budget while lowering its taxation. Even if it leads to budget deficits due to lower tax revenue, the government should allow for lower costs of production to combat the decreasing investment and consumption.

With lower income tax, this is to allow people to have higher disposable income, which will drive them to increase their consumption and investment. The increase in those two will lead to higher GDP, thus stimulating economic growth. Keynes also believed that excessive saving can be detrimental, as it would mean more money being stagnant instead of being used to stimulate economic growth via investment. His theory suggests that consumers should spend more, rather than save more, thus calling for lower interest rates. One such policy that could discourage savings would be expansionary monetary policy, where interest rates will decrease while the money supply will rise. This will then lead to businesses and consumers wanting to borrow more money as a result. Thus, with more loans, there will be an increase in investment in the economy, which will further increase GDP.

Impact:

In 1936, he had written all his theories into his most famous work, The General Theory of Employment, Interest and Money. The Keynesian policies had been adopted by most countries around the world during the late 1930s.Even after the 1970s, where his policies had waned due to the stagflation of several main economies, it was after the 2008 financial crisis that it became popular again, adopted by President Barrack Obama of the US and Prime Minister Gordon Brown of the UK. In the present day, Keynesian economics is recognized as one of the most important concepts of finance and macroeconomics.