John Maynard Keynes developed Keynesian Economics in the 1930s. This economics is additionally known as demand-side economics. Keynes developed this theory to elucidate the world's understanding and recovery from the Great Depression. According to Keynesians, demand plays a crucial role in the economy. This theory relates to how aggregate demand impacts output and inflation. Keynes also explained various theoretical principles regarding this in his book The General Theory of Employment, Interest, and Money.
Meaning of Keynesian Economics
Keynesian economic theory is a macroeconomic theory that is related to total spending in the economy and its effects on output, employment, and inflation. This theory focuses on the changes within the economy over the short run. According to this theory, government intervention can strengthen the economy.
Features of Keynesian Theory
The basic features of Keynes’s theory are:
Effective demand is controlled by aggregate demand and supply.
Employment and income depend on effective demand.
As aggregate supply remains constant in the short run, Keynes focused on aggregate demand.
Aggregate demand in a two-sector economy is determined by: i) consumption expenditure and ii) investment expenditure.
Consumption expenditure is determined by the size of income and propensity to consume.
Propensity to consume is of two types - average propensity to consume and marginal propensity to consume.
Difference Between Keynesian Economics and Monetarist Economics
Keynesian economic theory states that the government should increase the demand to boost the economy.
On the other hand, monetarist economics states that the government can encourage economic stability by controlling the amount of money in an economy.
Keynesian Economics VS Monetarist Economics
Difference between Keynesian Economics and Monetarist Economics
Difference Between Classical and Keynesian Economics
Keynesian economics believes that government spending is the most important economic activity. On the other hand, classical economics believes that a self-regulating economy is efficient and there is no need for government intervention.
Classical Economics VS Keynesian Economics
Difference between Classical Economics and Keynesian Economics
Keynes VS Hayek
John Maynard Keynes and Freidrich August Hayek were the two economists of the early twentieth century. Both of them have different opinions regarding the same matter. According to Keynes, the government must play an important role in controlling unemployment. Deficit spending was considered the only way to bring an economy out of the depression.
But Hayek criticised Keynes’s belief in monetary policy that low-interest rates through increased money supply. According to him, this will increase inflation, leading to malinvestment as interest rates are quite low.
Differentiate Between Classical and Keynesian Theory of Employment
In conclusion, we may conclude that Keynesian economics is based on the fact that the government should manage demand in an economy. This theory supported higher employment levels in the economy. When the government invests in various public projects, this increases employment directly. But the major drawback of this theory is that overdoing it can result in inflation.