John Maynard Keynes Transformed Economics In The 20Th Century

1507 WordsApr 27, 20177 Pages
John Maynard Keynes transformed economics in the 20th century by challenging traditionalist thinking and the postulates that underpinned their theories. Keynes disagreed with the laissez faire attitude of the classical thinkers, and argued for greater government intervention due to his belief that the focus should be on demand side macroeconomics rather than supply side. This belief transpired because of the Wall Street Crash of 1929 and the subsequent depression that highlighted the shortcomings of the traditional theories, especially in regards to employment that remained excessively high for a prolonged period. The Keynesian school of thought became the mainstream economic guidance from the 1940’s to 1970’s, with Keynes heavily involved…show more content…
Hence, their solution to the Great Depression was for people to accept lower wages, thus bringing the market back into equilibrium. The events of the 1930’s, however, bankrupted this theory due to the size and the longevity of the unemployment that was not resolved naturally by the market; by 1932 one quarter of the American workforce was unemployed. Hence, Keynes argued in The General Theory of Employment, Interest and Money that full employment was a special case and that ‘the characteristics of the special case assumed by the classical theory happen not to be those of the economic society’ (Keynes 1936, p12). Keynes examined the postulates that underpinned this idea, and found that ‘The traditional theory maintains, in short, that the wage bargains between the entrepreneurs and the workers determine the real wage,’ (Keynes 1936, p16) and the real wage determines the volume of employment. Keynes perceived this to be erroneous and maintained that employment is dependent on effective demand, with the level of effective demand setting the real wages and output. He stated that unemployment was a consequence of the deficiency of effective demand because people only spend a proportion of their whole income. Therefore, the unemployment caused by the depression was not a result of the rejection by the workers to accept lower
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