John Maynard Keynes is a British economist considered to be the pioneers of modernmacroeconomic theory and among the three most prominent economists ever known. Hisideas shook the key frameworks of the classical economists and have continuously affectedthe fiscal and economic policies of western nations for decades (Blinder, 2017). His ideasalso marked a key paradigm shift among the economists that believed in minimumintervention by the government. One of the most important principles theorized by Keyneswas that investment and savings should be established independent of one another with therate of saving being ascertained by the propensity to consume by the society as investmentis determined by the expected rate of return in relation to interest rate (Briggs, 2017). Furtherhe asserted that the income of the nation is a sum of its investment and consumption.Therefore at a time of a downturn, the situation is likely to develop a spiral that is continuousas consumers spend less, jobs are lost, business invest less and businesses lack anincentive to invest (US History, 2017). As such Keynes opines that incase of reducedproduction and unemployment the best solution would be an increase in the amount thatpeople put into investments as well as consumption.
Keynes argue that this is the pointwhere the government features because it is their duty to step in and utilize the tools at theirdisposal to encourage consumption and investment (University of Texas, 2017). In essencethe theorist argue that during hard times to stimulate activity in the economy, the governmenthas to do deficit spending. This is likely to translate into policies like spending ininfrastructure, public works project and long term interest rate drop.How the theory was influenced by historyBefore the 1930s business cycle was the mechanism of regulation however, during the greatfinancial crash of 1929 as the economy experienced a crisis the cycle dropped and failed torise on its own again and instead stayed down marking its death. The financial crash turnedinto a general economic downturn as recession turned into depression but growth was notrestored (Blinder, 2017). Economists like Lionel Robbins persistently called for a reduction inwages to raise employment. However the market mechanisms that such classicaleconomists emphasized were working no more.
The wages dropped alongside theemployment and rather than creating recovery and adjustment the crisis became worse. Thesituation applied not only to United States domestic economies but also applied in therelationship between economies (Briggs, 2017). Instead of solving the problem, the goldstandard served as an avenue for fast circulation of the crisis from one nation to another.Further, trade deficit augmented the plunge in money supply and placed a downwardpressure on the prices a situation that stirred a decrease in employment and output. Thegreat depression further lead to emergence of anti-free trade views with economies callingfor tariffs as well as protection of their local employment and production (US History, 2017).The capitalists in every nation sought to protect their markets from external competition bycreating barriers against imports and the workers of these nations believed thatprotectionism would provide them with job security.
The end result was a rapid fall in globaltrade, export market dry up and further depression in employment and output. Internationaltrade breakdown turned great depression into a global and serious phenomenon. Thesignificant drop in the level of unemployment and wages however failed to stimulate freshinvestment (University of Texas, 2017). The same Keynes attributed to presence of unionsand resistance from workers. The resistance resulted into a situation where despite highunemployment levels wages could not be lowered enough to bring back profitability. As suchthe prior economic strategies of recession were no longer reliable as a solution to businessproblems.This marked a point in history where the systems future was put to question.
The solutionsthat were in place failed to work and there were needs for new solutions to economicproblems. This situation turned attention to and gave rise to the prominence of Keynes viewthat intervention of the government was key in eliminating the significant boom and the bustcycle associated with the great depression (Briggs, 2017). It countered the consensus thatthe economy naturally restore to full employment following a downturn and lower wagesraises profits and instead proposed a growth in public expenditure. Keynes proposed thatnational government should trigger a growth in output and productivity via high wage policythat would compel industry restructuring around corporations with high levels of productivity(Blinder, 2017).
Keynes also proposed that by expanding their expenditure, the governmentis likely to provoke growing investment, output and employment that will eventually allow forwages that are higher. His idea gained relevance in this era evidenced by his proposal’simpact on the American government Roosevelt New Deal policies to be specific. Rooseveltresponded to proposals by Keynes by supporting increasing wages and unions vialegislations that encouraged businesses to respond to a rise in wages progressively (USHistory, 2017). Keynes economic theory was further influenced by the stagflation and oilshock of the 1970s. Instead of contributing positively to the economy the increasedgovernment spending subject to Vietnam War and rising oil prices contributed towardssevere stagflation in the US (University of Texas, 2017).
Additionally, Keynes economictheory resurged during the 2008 financial crisis evidenced by the heavy spending bygovernment and stimulus packages in China, Europe and U.S to put an end to the crisis.How it influenced historyKeynes influence on history is depicted in its role in the emergence of IMF, World Bank andBretton Wood agreement. Following the end of the Second World War Keynes wasinstrumental in the negotiation for the Bretton Wood agreement in 1944.
Accompanied withother economists, Keynes pursued the establishment of a body for currency regulation andglobal central bank. Keynes was also key in the process of forming of bodies that laterevolved into International Monetary Fund and World Bank (Blinder, 2017). Also part of hiscontribution towards history is his proposal for the world reserve currency. In his proposal,he suggested the use of Bancor as a global reserve currency. He proposed that the Bancorbe fixed to thirty different commodities and that the same would stimulate commodity pricesstabilization as well contribute towards trade balance via current accounts taxation (Briggs,2017). Even though this idea has never been adopted, to date it’s still under discussion.Keynes through his General Theory also revolutionized the way economists think abouteconomy related issues.
He did this by opposing the earlier policies that asserted that themarket established full employment on its own as long as the government did not interferewith how it is run. He encouraged governments to be active members in the market for themto ensure that there is a reduction in unemployment (US History, 2017). The theoryintroduced the concept of aggregate demand as a sum of consumption, investment and alltypes of government spending. According to Keynes there exists no reason why thegovernment cannot help by hiring those who are unemployed as well as investing in thepublic works. The idea though faced resistance initially, it was embraced by governmentssuch as U.S who used multiple projects in the public works docket to put individuals back towork. Further as 1933 came to an end, Keynes attempted to persuade President Rooseveltto use deficit spending to save America from economic tailspin (University of Texas, 2017).
However, when the economy recovered at the end of his first term, the president reducedspending despite unemployment being very high. In the year 1938 the budget minimizedexpenditure a situation that eliminated deficit virtually. As predicted in the theory of Keynes,the decline in the stimulus of the budget reversed the recovery in the economy and as USentered the Second World War Roosevelt abandoned balanced budget for deficit spendingto stimulate the economy.