Essay on Keynesian Economics

Ever since its development in the 1930s, Keynesian economics has played a fundamental role in economic developments and the study of macroeconomics. Named after John Maynard Keynes, this economic model utilizes increased government spending and lower taxes to boost the economy.   Although many may claim that Keynes had little effect on the study of macroeconomics due to the wave of free market capitalism starting in the 1970s, through his theory of keynesian economics, John Maynard Keynes greatly influenced the study of macroeconomics as evidenced through his revolutization of the view of classical economic systems, impact on public policy, and the role of government in the economy.

Keynes began his economic journey after attending university and receiving a job as a junior clerk with Britain’s colonial India Office. After the start of World War I, he joined Britain’s Treasury ministry and helped aid the issue of Germany’s reparations following the war. Shortly after this, he resigned and went on to King’s College, taking charge of their financial department and writing his first work titled The Economic Consequences of Peace. This writing attacked the Paris Peace Conference and their choice to punish Germany so harshly following the war, with Keyens claiming it would lead to “a war of German revenge” (Martz). With these events building up his economic resume, Keynes began to form his own economic system with the start of the Great Depression in 1929.  Following America’s great depression, production of goods stayed low as poverty and the lower class grew. Though this had multiple causes, the main cause to blame for the monumental great depression lied in the stock market and the failure of monetary policy. Following the 1929 stock market crash, banks were forced to close as many people continued to take money out. The failure of the US federal reserve to properly address this crisis led to a domino effect which would eventually lead to a worldwide economic depression. As this trend continued to worsen, it was clear to many economists, including Keynes, that the laissez faire approach to the issue was not improving the global economy. After observing the failure of a purely capitalistic approach to the global collapse, Keynes feared this failure would lead others to communism and facism. This became his motivation to develop a new economic system that would later be coined keynesianism (Martz).    

Part of Keynes’ influence on the study of economics was the idea that his economic system took a new view on the free market’s ability to handle economic crises. Keynesianism revolutionized the way in which economists viewed classical economics as it was the first major rejection of laissez faire economics following the presidencies of free market capitalist presidents such as Hoover and Coolidge. Keynes saw the failures of capitalism during the Great Depression. He argued largely against the idea of letting the economy fix itself. In fact, “he argued in favor of a policy with a laser-like focus on the “short run,” or real time, when the suffering of the common citizen is most acute” (Quddus). After seeing the depression spread from America to the rest of the world, Keynes began to question the ability of classical economic models in a time of crisis.  He went on to make the point that “uncertainty caused individuals and businesses to stop spending and investing, and the government must step in and spend money to get the economy back on track” (Martz). Bringing up the idea of having the government be more involved in the economy was controversial for his time. Professor Munir Quddus comments on this development overtime, writing that Keynes’ argument of using government action to jumpstart the economy “is accepted wisdom today,[but] a hundred years ago, this view was heresy – very much a contrarian view. ”

Keynes’ influence on economics was further revolutionary as a result of his utilization of the government in the national economy. Following the failure of classical economics and the free market to solve the worldwide depression, Keynes’ recommended the government play a larger role within the economy in order to achieve high employment rates and stable prices. In an open letter to Franklin D. Roosevelt, Keynes’ outlines these recommendations, stating that “a large volume of loan-expenditures under government auspices” would be helpful to ending the depression. In relation to these government expenditures, Keynes’ also writes that “preference should be given to those which can be made to mature quickly on a large scale, as for example the rehabilitation of the physical condition of the railroads.” Keynes’ influence is materialized in the passing of the New Deal, in which FDR subsided many areas of work and construction while getting the government more involved within the economy in hopes of reviving it from the depression. Many of the organizations and bills created by this policy, such as the Bureau of Public Roads and Public Buildings Branch of the US Treasury, focused on the large-scale quickly growing projects Keynes referenced in his letter. Quddus elaborates on the importance of keynesianism during policy making in the United States at this time, writing “His [Keynes’] recommendations for an interventionist policy was revolutionary for the times. He argued that governments can and must borrow to finance emergency spending in order to employ millions of unemployed. His recommendations led to massive spending, including the New Deal in the U.S. and an early end to the Great Depression” (Quddus).