Keynesian economists - Essay Example

The paper also considers the negative impact of government interference in business as per the suggestions of Keynesian economists. Keynesian economics is based on aggregate demand and government intervention. The theory was created by John Maynard Keyes to explain the Great Depression in the 1930s (Samuelson & Nordhaus, 2010). At the time, the classical economics theories assumed that the free market would automatically self-regulate by providing employment and sustain the economy. Goods and services’ total demand in the economy at a specified time is aggregate demand.

Prior to Keynesian economics, the assumption was that a decrease in aggregate demand in the economy would result in fewer goods and job opportunities. This would translate to reduced wages and inflation, which would enable employers to invest and create more jobs. However, the great depression disapproved the theory. Many factors influence aggregate demand. During a recession, the decisions made by the private sector may reduce consumer spending (Higgins, 2013). Similarly, prices and wages gradually respond to the fluctuations of demand and supply causing shortages or surpluses in employment opportunities.

Keynesian economists hold that government intervention plays a key role in solving the problem of insufficient aggregate demand. Aggregate demand represents the spending of the government, public and private sector. Insufficiency in aggregate demand comes about when the spending of all these sectors reduces. The government is in a position to solve the problem of insufficient aggregate demand through active policies like fiscal stimulus package and job creation, which increases spending and restores aggregate demand.

Many theories against government interference with business find unbalanced government budgets disturbing for the economy (Higgins, 2013). Nonetheless, Keynesian economists find that government intervention