Keynesian Theory

By Author: Sherry Roberts
Total Articles: 81
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Introduction
Economic theories provide well-substantiated explanations of the commercial activities that include production, consumption and the movement of goods. There are numerous economic theories that economists use to explain the economic status of different societies. The paper below shall review the Keynesian theory as an ideal theory that explains the current markets. The Keynesian theory best explains the current economies and thus suitable for the 21st century.
Overview: Keynesian economics
Keynesian economics operates under the ideology that the overall demand affects the economic output. Economists can determine the overall demand by reviewing other factors beyond the basics of productive capacity of the economy. Since the market cannot stabilize it influences the production, employment, and inflation. John Maynard Keynes is responsible for the development of the theories explaining the Keynesian economics. Keynes developed the theories of Keynesian economy during the great depression of 1930. Economists of the 1930s failed to explain the causes the global depression and subsequent worldwide collapse ...
... (Baumol, 2014). Without a clear understanding of the causes, the economists were unable to determine the best way to jump-start production and employment.
The problem of the great depression appeared to have no solution until Keynes introduced a new line of thought. Prior to Keynes, the economies had been operating on the ideology that the free market would provide full employment to the public. The markets assumed that anyone could get a job in the free market as long as the workers were flexible in their wages (Hiroki, 2014). In contrast, the Keynesian economy (curved from his name) believes that the aggregate demand is the most critical aspect of the economy. Keynesian economics believes that the total request of the economy is measurable as the sum of spending in sectors such as household, government, and enterprises. Keynes criticized the free market ideology arguing that the free market does not provide self-balancing mechanisms. The existence of self-balancing economies would enhance the accessibility of full-time employment for the public. The Keynesian economics argues that the ideal market must embrace government interventions for purposes of market regulation (Baumol, 2014). The government can also participate in the public policies that would regulate factors that affect employment and the stability of prices.
Ideas behind Keynesian Economics
According to Keynesian economics, inadequate demands can prolong the unemployment trends. A flourishing economy entails the existence of consumption, investment, government purchases and net exports. An increase in demand must arise from one of the four components. Unfortunately, during a recession the four forces reduce the demand due to reduced spending. In economic crunches, for instance, the uncertainty of the economy results in the erosion of consumer confidence. When a consumer’s trust in the economy erodes; he limits his spending to necessities. The diminished spending results to diminishing investment in the society. When the rate of investment diminishes, the money circulating the economy reduces. In such a scenario, the Keynesian economy argues for government intervention (in moderation) so as to enhance the output (Dos Santos Ferreira, 2014). The government must be a participant n the business cycle so as to regulate the company cycle.
Critics of the involvement of the government in the enterprise cycle argue that government involvement amounts to interference. The critics argue that the government may pass policies that affect the smooth operation of enterprises. The critical argument is; however, flimsy as Keynes emphasis on government intervention is so that the government can regulate and balance the operators of the economy.
Principles of Keynesian Economics
The Keynesians theory operates using the following three main principles. First, the Keynesian principle believes that the economic decisions influence aggregate demand. Economic decisions in the public and private arena affect the aggregate demand in the economy. The private sector, for instance, if left unregulated can have an adverse effect on the macroeconomic outcomes. Additionally, the government can regulate the market failures that arise due to occurrences such as a recession. Under the Keynesian economy, a society can enjoy a mixed economy, but the government must be a participant through regulations. The second principle of the Keynesian economy argues that there is slow response of prices to the effects of supply and demand (Dos Santos Ferreira, 2014). The slow response means that the economy can experience periodic shortages and excesses. The third principles of the Keynesian economy argue that changes in aggregate demand affect output and employment and not prices.
Relevance of the Keynesian Economy
The Keynesian economy has been helpful in understanding the changes in the economy. Prior to the introduction of the new form of economic thinking, economies operated using the classical economist point of view. The classical economist views were the first modern economist thought developed by such as Adam Smith and John Stuart Mill. The traditional economies operated on the theory that the markets must be free for sufficient growth to occur. According to Adam Smith there existed an “invisible hand” that ascertained there was market equilibrium. Unfortunately, the classical economy theories lost face with the emergence of the great depression. Keynes introduced a new economy that could fix the economy (Hiroki, 2014). Today, economists use the Keynesian economy to explain economic phenomena that influence the economy. The Keynesian economy has several advantages that demonstrates it importance in today’s world
Keynesian Economy and Job Creation
An application of the theories of the Keynesian economics has enabled nations to sustain the rates of employment. The leading Keynesian ideology is the involvement of the government. The government involvement can triggers job creations that would boost the economy of a nation. When the demand for employment surpasses the need, the government can play the role of the employer. The government can intervene in a struggling economy and hire individuals in the different sectors. The government control major sectors of the society are thus able to create jobs (Resnick, & Wolff, 2010). The government can provide white-collar as well as blue-collar jobs for skilled and unskilled workers. Employment and unemployment determine economic growth and or stagnation. Unemployment influences consumer behavior thus when unemployment rates are high, the level of consumer

Reference
Baumol, W. J. (2014). Stimulating growth amid recession: Entrepreneurship, innovation, and the Keynesian revolution. Journal of Policy Modeling, 36(4), 629-635.
Dos Santos Ferreira, R. (2014). Mr. Keynes, the Classics and the new Keynesians: A suggested formalization. European Journal Of The History Of Economic Thought, 21(5), 801-838.

Sherry Roberts is the author of this paper. A senior editor at Melda Research in online nursing papers. If you need a similar paper you can place your order for a custom research paper from legitimate research paper writing service services.