Keynesian Revolution

The Keynesian Revolution was a big change in how people thought about economics, especially about what decides how many jobs there are in a country. It happened after a book called General Theory by John Maynard Keynes came out in 1936.

Before this, most economists believed that supply—how much stuff there is—decides employment. But Keynes said that demand, or how much people want to buy, is more important. He thought that sometimes, even if there are lots of workers and materials, not enough people want to buy things, leading to high unemployment.

Because of Keynes' ideas, many people began to think that governments should help during tough times to create jobs and encourage spending. Even though Keynes stopped being very active in debates after 1937, his ideas kept growing. They mixed with older economic ideas to create something called neo-Keynesian economics. This new mix kept some of Keynes' big-picture ideas while using older ideas for smaller, detailed parts of the economy. This combination is known as the neoclassical synthesis.

Historical context

The Keynesian Revolution was a big change in how people thought about economics. Before this, many believed that the government could not do much to help with unemployment. But after the tough times of the Great Depression and the ideas shared by John Maynard Keynes in his book in 1936, many started to think differently.

People began to believe that the government could help by spending money on projects or cutting taxes. These ideas became very important after World War II, especially in the United States. Even though some people disagreed at first, these new economic ideas became widely accepted and influenced many textbooks and policies.

Theory of employment

A big change during the Keynesian Revolution was how we think about jobs in the economy. Before this, many economists believed that markets would naturally find a balance where everyone who wanted a job could have one, without any help from the government. They thought this would happen because workers would agree to work for lower pay if needed.

John Maynard Keynes disagreed. He said that jobs depend more on how much people want to buy things, not just on how many workers are available. His ideas replaced the old way of thinking with a new focus on demand.

Other "revolutions" in economics

Prior to Keynes

Professor Harry Johnson wrote that modern economics began with the Smithian Revolution, which opposed mercantilism. Before the ideas of John Maynard Keynes, there were five big changes in economic thinking, including the Ricardian Revolution. Another important change was the marginalist revolution, which helped move economics from classical ideas to neoclassical economics in the 1870s. These changes formed the old economic ideas that Keynes later challenged.

In real-world actions, not just in theories, many countries in the 1800s acted in ways that were mercantilist or showed economic nationalism, like the American School in the United States during that time.

After Keynes

The rise of Monetarism in the 1970s, led by Milton Friedman, is seen as the next big shift in economic thinking. It is sometimes called the "monetarist revolution." The stagflation of the 1970s reduced the influence of classical Keynesian ideas. This led to new divisions in economic thinking, such as New Keynesian economics and New classical macroeconomics. These are sometimes called the saltwater school and freshwater school, named after the American universities linked to them. In development economics, this time is known as the Washington Consensus period. The strong economy from the 1980s to early 2000s is called The Great Moderation.

In academic circles, free market ideas peaked in the 1990s, with several free market economists winning the Nobel Prize. Events like the 1997 Asian financial crisis and the dot-com bubble caused more doubt about free market ideas. The 2008 financial crisis brought new attention to Keynesian economics, leading to the 2008–2009 Keynesian resurgence.

Background

When John Maynard Keynes published his book General Theory in 1936, free market ideas were already losing their strong hold on government decisions. Many countries were trying new ways to manage their economies. However, in universities, free market ideas were still very popular.

Before General Theory, Keynes wrote another book called A Treatise on Money in 1930. Some economists disagreed with his ideas. A group of economists, called "Circus," met to talk about Keynes' book. Though Keynes did not join them, he learned about their talks. In his General Theory, Keynes suggested that too much saving could hurt the whole economy. He believed that if people saved more than businesses could invest, companies would struggle to make money, leading to fewer jobs and higher unemployment.

The course of Keynesian Revolution

(Colander & Landreth 1996) say that the Keynesian Revolution had three parts: changes in policies, changes in ideas, and changes in teaching.

John Maynard Keynes shared his big new ideas about economics in a book called General Theory of Employment, Interest and Money in 1936. Before this, many economists thought that if people saved too much money, jobs would appear on their own. But Keynes said this was not true and that sometimes governments needed to help create jobs. His ideas were new and many people argued about them, but they became very important, especially after World War II.

Governments started using Keynes's ideas to help manage their economies, especially during hard times. His thoughts influenced leaders and banks around the world. Even after some other ideas became popular, Keynes's ways of thinking came back, especially after big money problems in 2008.

Keynesian Revolution questioned

Some economists believe that the ideas of John Maynard Keynes were not fully understood or followed after his book was published. They think that later versions of his ideas, called neo-Keynesian economics, mixed too much with older economic thoughts.

They suggest two reasons for this. First, a model called IS/LM, created by John Hicks, may have misunderstood Keynes' original ideas. Second, during a time of strict political rules, some books explaining Keynes' ideas were attacked and not used anymore. Keynes himself also didn’t take part much in debates about his ideas because of health problems and war work.

Significance

John Maynard Keynes wrote a very important book called General Theory in 1936. This book changed how people thought about economics. Before this, there wasn't a strong reason why governments should get involved in the economy. Keynes showed that sometimes governments need to help to keep things running smoothly. His ideas became very important again when the world faced a big money problem in 2008.