The Keynesian School of Economics: an Overview

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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 problems of secular stagnation (globally declining growth rate) of the capitalist society. Some speculated that as the national income increased, consumption expenditures rose less rapidly than total income, and savings increased more rapidly. Wages were recognized as a source of demand for goods as well as a cost of production, and cutting wages was frequently opposed as providing no real remedy for unemployment; this was the macroeconomic thinking. The mature private-enterprise economies of the Western world were less vigorous after World War I. The population growth was declining; most of the world had already been colonized; there seemed no more room for geographic expansion; consumption appeared to outrun production as incomes and savings rose; less resources were allotted for the purpose of research and development as a result there were no new inventions like the steam engine, electricity, etc to stimulate vast capital investments. Also, the decline of vigorous price competition reduced the rate of replacement of old machinery with new and more efficient ones, and the economy was being dragged downward furthermore when the growing accumulated of depreciation funds from the past investments were not spent quickly enough.

Question- 02: What were the major tenets of the school?
Answer: The complete doctrine of the Keynesian economists was set as a better option than those provided by the classical economists. Keynes argued that the economy had moved towards The Great Depression only because of the flawed notion that the economy would adjust to the prevailing market conditions and move towards equilibrium. He proposed the government should take a more ‘hands on’ approach. Some of the major tenets include: 1) The school put forward the Keynesian Theory of Employment which began with the principle of effective demand. That is, total employment depends on total demand (aggregate effective demand) and unemployment rose due to a shortage of effective...
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