The Keynesian School of Economics: an Overview

Question- 01: What was the historical background of the school? Answer: The Keynesian school, proponents of the branch of economics now termed as Keynesian economics had come into existence towards the beginning of the twentieth century. This school was arguably the first viable alternative to the Classical school of thought. The school argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle. These theories were based on the ideas of 20th-century British economist John Maynard Keynes (1883- 1946). The premise forming the basis of Keynesian economics were first presented in ‘The General Theory of Employment, Interest and Money’ (1936). Roots of Keynes’s ideas can be traced back to before 1929 and he adopted a macroeconomic approach. World War I and the economic controls acted out requiring an overall view of the economy. The growth of large-scale industrial production and trade made the economy more susceptible to statistical measurement and control, making the inductive, aggregate approach more feasible than the past. In fact, this approach was increasingly necessary as the public became more eager for the government to deal actively with unemployment. He represented the British Treasury at the Treaty of Versailles—was appalled at the conditions of the peace treaty as he observed that nations had failed to look at the case from a macroeconomic point of view. The Great Depression of the 1930’s also had a profound effect in the development of Keynes’s ideas. In fact his ideas materialized when he was trying to analyze the problems of trade cycle (recessions and booms), one of the greatest problems of the classical economists. Furthermore the economic thinking of the period was concerned with the