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The Originator of Macroeconomics

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Last updated date: 22nd May 2024
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Who is Considered the Father of Macroeconomics?

John Maynard Keynes (1883–1966) was a British economist active in the early 20th century. He is best known as the creator of Keynesian economics and the father of contemporary macroeconomics, studying how economies—markets and other large-scale systems—behave. The General Theory of Employment, Interest, and Money (1935–1936) and other publications proposed a theoretical foundation for full-employment government policy. Until the 1970s, it was the preeminent macroeconomics school and exemplified how most Western governments approached economic policy.


While some economists contend that if wages are allowed to decline to lower levels, full employment may be restored, Keynesians contend that firms won't hire people to make items that won't be sold. Keynesianism is regarded as a "demand-side" theory that concentrates on short-run economic fluctuations because they think that unemployment is caused by a lack of demand for products and services.


Early Life and Education

Keynes' father, John Neville Keynes, a lecturer in economics at Cambridge University, had a significant role in stoking the young man's interest in economics. His mother was involved in philanthropic work for the poor and was one of the first women to graduate from Cambridge.


He was raised in a middle-class family and won scholarships to two of England's most prestigious universities, Eton College and Cambridge University, where he graduated with a bachelor's degree in mathematics in 1904. Keynes worked on probability theory early in his career and taught economics as a Fellow of King's College at Cambridge University. He held posts in the British Treasury and the British Civil Service and assignments to royal committees on money and finance. In 1919, he also served as the Treasury's financial representative at the Versailles peace conference, which concluded World War I.


Keynes' father supported laissez-faire economics, a free-market capitalist theory that rejects government interference. Keynes was a traditional proponent of the free market throughout his time at Cambridge (as well as a frequent stock market investor).


However, after the 1929 stock market crash that precipitated the Great Depression, Keynes began to feel that unrestrained free-market capitalism was fundamentally defective and needed to be recast to perform better than other systems like communism and in its own right.


Proponents of Government Economic Intervention

  • Keynes' father supported laissez-faire economics, a free-market capitalist theory that rejects government interference. Keynes was a traditional proponent of the free market throughout his time at Cambridge (as well as a frequent stock market investor).

  • However, after the 1929 stock market crash that precipitated the Great Depression, Keynes began to feel that unrestrained free-market capitalism was fundamentally defective and needed to be recast to perform better than other systems like communism and in its own right.

  • As a result, he started to promote government action to end unemployment and the current economic downturn. Along with government job programmes, he said that higher government expenditure was required to lower unemployment—even if it resulted in a budget deficit.


What Exactly is Keynesian Economics?

The core principle of John Maynard Keynes' theories, or Keynesian economics, is that governments should actively participate in the economy of their nations rather than merely allowing the free market to operate unchecked. To reduce economic cycle downturns, Keynes specifically favoured more federal expenditure.


Demand, not supply, is what drives an economy, according to the most fundamental tenet of Keynesian economics. The mainstream economic thinking of the day held the contrary belief that supply drives demand. All economic outcomes, from the production of commodities to the employment rate, are determined by total expenditure because aggregate demand, or the sum of the private sector and government spending on and consumption of goods and services, drives supply.


According to another key tenet of Keynes economics, the government increasing demand by injecting money into the market is the greatest approach to getting an economy out of a recession. Spending and consumption, in other words, are the two main drivers of economic growth.


According to Keynes, demand is so crucial that the government should spend even if it means going into debt to do so. His opinion is based on these two principles. Keynes argued that by stimulating consumer demand, which stimulates production and secures full employment, the government will be able to increase the economy.


Arguments against Keynesian Economics

Keynesian economics has received a lot of criticism since the 1930s, even though it was extensively accepted after World War II.


The idea of large government—the growth of federal programmes that must take place for the government to participate effectively in the economy—is subject to significant criticism. According to rival economists like the Chicago School of Economics, economic recessions and booms are a normal feature of business cycles. Direct government intervention simply makes the recovery process worse, and federal expenditure deters private investment.


Milton Friedman, an American economist most known for supporting free-market capitalism, is Keynesian economics' most illustrious opponent. Friedman, who is regarded as the most significant economist of the second half of the 20th century (as opposed to Keynes, who was most significant in the first half) favored monetarism, which challenged significant elements of Keynesian economics.


Friedman and his fellow monetarists held that governments could promote economic stability by focusing on the rate of growth of the money supply, in contrast to Keynes' view that monetary policy—control of the overall supply of money available to banks, consumers, and businesses—is more important than fiscal policy in influencing economic conditions. Keynesian economists favour government spending, whereas Friedman and monetarist economists favour controlling the flow of money through the economy.


For example, Friedman criticised deficit spending and argued for a return to the free market, including smaller government and deregulation in most areas of the economy—supplemented by a steady increase in the money supply. Keynes believed that an interventionist government could moderate recessions by using fiscal policy to prop up aggregate demand, encourage consumption, and reduce unemployment.


Modern Keynesian Theory

The critics of the Keynesian theory in the 1970s were known as rational expectations theorists. They claimed that taxpayers would anticipate the debt brought on by deficit spending. People would start saving today to pay off the debt in the future. Savings would be encouraged via deficit spending rather than demand or economic growth.


The New Keynesians were motivated by the rational expectations theory. According to them, monetary policy has greater influence than fiscal policy. Expansive monetary policy, if implemented properly, would eliminate the need for deficit expenditure. Politicians are not necessary for central banks to govern the economy. They merely would change the money supply.


Keynesian Economics Examples

  • The start of the Great Depression in the 1930s had a big impact on Keynes' economic ideas, and numerous of his policies were widely adopted as a result.

The Keynesian notion that even a free-enterprise capitalist system needs some governmental monitoring was explicitly represented in the New Deal, a set of government measures that President Franklin Roosevelt implemented to alleviate the crisis in the United States.With the New Deal, the American government took extraordinary steps to boost the economy, including establishing several new organisations tasked with helping jobless Americans find work and regulating the cost of consumer products. To increase demand, Roosevelt also accepted Keynes' idea of increased deficit spending, which included initiatives for public housing, slum eradication, railroad building, and other significant public works.

  • President Barack Obama made several actions in response to the Great Recession of 2007–2009 that were consistent with Keynesian economic theory. Several industries had federal government bailouts of indebted businesses. Fannie Mae and Freddie Mac, the two main market makers and guaranteeing agencies for mortgages and home loans, were also placed under conservatorship.

To preserve current employment and generate new ones, President Obama signed the $831 billion American Recovery and Reinvestment Act in 2009. It also featured family unemployment benefits, tax breaks, and spending allocations for infrastructure, education, and healthcare.


Conclusion

Keynesian economics, pioneered by John Maynard Keynes in the 1930s, had a significant influence on post-World War II economies in the middle of the 20th century. His beliefs have been criticised since the 1970s, resurfacing in the 2000s, and are still being discussed.


A core element of Keynesian economics is that the best method to bring an economy out of a recession is for the government to boost demand by injecting capital into the economy. Consumption (or spending), in other words, is the key to the economy's revival.


One lasting contribution made by Keynes is the idea that governments must contribute to the economic prosperity of people and enterprises. What has to be determined is the size of the government's role and the best way to carry it out.

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FAQs on The Originator of Macroeconomics

1. What role does inflation have in Keynesian economics?

When the economy is weak, Keynesian economists would encourage deficit spending on labour-intensive infrastructure projects to boost employment and stabilise wages. When there is strong demand-side growth, the government would boost taxes to restrain the economy and avoid inflation. For instance, Keynesian economists would encourage deficit spending on infrastructure initiatives that need a lot of work in order to boost employment and maintain wages during recessions. When there is strong demand-side growth, the government would boost taxes to restrain the economy and avoid inflation.

2. What distinguishes Keynesian economics from conventional economics?

According to Keynes, traditional economic theory claimed that fluctuations in employment and economic production provide profit possibilities that people and businesses are enticed to seek, thereby resolving economic imbalances. Keynes claimed that, in contrast, corporate pessimism and specific traits of market economies would worsen economic weakness and lead aggregate demand to decrease much more during recessions. According to Keynesian economics, governments should engage in deficit spending during tough economic times to make up for the drop in investment and increase consumer spending to stabilise aggregate demand.

3. Why is Keynesian theory beneficial?

Keynesian philosophy argues for government restraint in a rapidly expanding economy even while it permits higher government spending during recessionary periods. This stops the rise in demand that leads to inflation. Additionally, it compels the government to reduce deficits and make savings in preparation for the next economic downturn. The contrast between the robust governmental response to the 2008–2009 financial crisis and the complacent approach to the Great Depression of 1929–1932 illustrates the widespread acceptance of this viewpoint. I believe everyone is a Keynesian in a foxhole, as the Nobel winner and Keynes critic Robert Lucas acknowledged in 2008.