Oct 3, 2018 in Economics

John Keynes, a British economist, developed several concepts that have had a considerable influence on economics. His concept concerning investment and saving depicts two scenarios. In the first instance, if the investment exceeds savings, inflation will occur. The other case is the occurrence of recession due to savings exceeding investments, as people would spend less and cause a decrease in aggregate demand. In this regard, firms would minimize their investments due to the declining demand. His concepts opposed the view that investment primarily depended on the interest rate, and instead advocated for investors and lending institutions to undertake investment for profitability purposes (Eatwell & Milgate, 2011). Keynes perception was that uncertainty, and not risks determine investment. In his liquidity preference theory of interest, Keynes considers that the prevailing demand for money and its supply in the market determines the interest rate. The intersection of the supply and the demand for money provides the interest rate. Keynes postulates that there exists a correlation between the level of income and the demand for money. An increase in income levels results in the rise in the demand for money. In addition, Keynes established the relationship between the rate of interest and the demand for money as inverse.

The other concept pertained to the laws of demand and supply. Keynes stipulated that the level of demand determined the level of supply in a market and not the vice versa. If demand rose, firms would embark on more production and employment activities. The reverse situation would lead to reduced output and hence unemployment. Keynes argued that corrective government policies would ensure the mitigation of unemployment and depression (Eatwell & Milgate, 2011). Government spending fills the essentially existing gap in the free economy between savings and investments, which the unemployed people and unsold goods would otherwise fill. The government facilitates continuous consumption through its stimulation undertakings.

Keynes’ other concept concerns employment. According to Keynes, low wages do not directly translate to full employment. Furthermore, workers would be unwilling to take wage cuts, and thus this aspect of market regulation would be ineffective. Unemployment results from reduced spending which cause reduced demand and job losses in a cyclical manner (Wood, 1986). Increased demand and thus employment, will lead to increased spending. This process is a chain reaction that depends on the income spent. Keynes strongly believed in the active government participation in the economy for its success. He proposed that governments should borrow and input more money into the economy to boost demand. His concept provided an alternative to the previously held view that indicated that the only solution to unemployment was wage rate drops (Wood, 1986). Keynes concept considered that supply could exceed demand so that goods remain unsold. In this regard, production and employment would decline. He considered that full employment was impossible in a free market devoid of any influence. He disregarded the long-term classical views stating that with the appropriate policies, the government could realize economic equilibrium of income at any level.

Keynesian concepts considerably contributed in the evolution of economics in several ways. He refuted other economist’s ideas such as smith, whose idea stipulated that commerce and trade should be devoid of any form of interference such as tariffs, and that the market should solely regulate itself. Furthermore, he altered Say’s concept regarding demand and supply. Keynes economic concepts created a model that proved crucial in various economic aspects. Other several economists have developed their concepts based on Keynes work. The Keynesian concept that aggregate demand is subject to various economic factors is a key concept in modern economics. Moreover, Keynes’s principles of effective demand significantly explain unemployment and market mechanism. Finally, the influence of Keynes concepts in policymaking is immense.

Related essays