Keynesian economics is a branch of economics that was named after British economist John Maynard Keynes, who became recognized from his explanation of the cause of the Great Depression. Keynes’ ideas centered on the idea that when an economy increases spending, earnings will increase, leading to more spending and earnings. This is known as the circular flow of money. Keynesian economics advocates for a mixed economy and with the rise of Keynesianism, laissez-faire economics came to an end¹.
In Keynes’ theory, an individual’s spending goes towards another individual’s earnings, and that person’s spending goes towards another person’s earnings. This cycle is how an economy is supposed to operate. When the Great Depression came about, people started to store their money, causing the circular flow of money to freeze. Keynes’ solution was that the government should increase the money supply to increase spending¹.
Keynesian economics sees an increase in saving and a decrease in consumption as being harmful to the economy. This branch of economics also asserts that the redistribution of wealth is beneficial to the economy because when the lower classes of the economy receive wealth, they are more likely to spend it, increasing economic growth. Another Keynesian idea is that macroeconomic trends can influence consumer behaviour disproportionately on the microeconomic scale¹.
A difference between Keynesian economics and classical economics is that Keynesian economics emphasizes the importance of aggregate demand for goods as being the driving factor for the economy². Classical economics, on the other hand, emphasized the importance of making improvements for potential output as being the driving factor of the economy.
1. What is Keynsian Economics? Retrieved from www.wisegeek.org/what-is-keynesian-economics.htm
2. Frost, Martin. Keynsian Economics. Retrieved from www.martinfrost.ws/htmlfiles/keynesian_economics.html