Keynesian Economics

Keynesian economics is an economical system made by John Keynes. It was his theory to explain what caused the Great Depression, which was a worldwide economic recession that happened 10 years before the World War II. It began in United States and spread throughout the whole globe. One of the reasons for the Great depression was the loss of many jobs in the USA, unemployment reached 1/3 of the workforce. Industrial production and constructions partly stopped in some countries, such as Poland or America. After farming suffered the most in those devastating times, everything started becoming more stable in 1939.

During those 10 years, all the main economists were expected to know the causes as well as the solutions for the Great Depression. John Keynes, however, was the most influential. He declined the theory of classical economy, which in Keynes views was the reason for unemployment that still rose, as well as taught that money is irrelevant but allows trade to occur. Keynes theory, however, was based on circular flow of money. He thought that in classical economy when you spend money, it becomes Someone Else’s earnings and when Someone Else spends their money it becomes his earnings, and that’s how it flows. However, when something goes wrong, for example, when Someone Else loses his job and has no more money, that’s when you stop earning too. And that’s what happened when the Great Depression hit the world. Keynes tried to find a better way of developing the economy, where you can avoid another Great Depression from happening.








Keynes came up with a theory that describes an increase of saving, consumption, investment and production. In that theory, the interaction of aggregate demand and aggregate supply establishes the level of output and employment in the economy. He tries to explain that instead of making x number of products from which you don’t know how many are going to be consumed, you need a further planning of production. The target is to find out the costumers needs (aggregate demand) and plan their products in months or even years in advance. This way it will be easier to make profit.

He also believed that fiscal policy should be activated. It is taxation and government spending. The classical approach was to regulate only the bond market and therefore the interest rates (the price of money itself). The fiscal policy then was to regulate the aggregate demand.

Keynes answer to unemployment is always to reduce the cost of:
1. Wages
2. Money itself

These are just my basics notes on the subject. There is a lot more to talk about in Keynesian economics, which I am sure we will be able to do in the seminar.

The sources I used to help me understand this theory:

Notes form the lecture, by Chris Horrie,
www. wikipedia.co.uk
www.wisegeek.com