The Keynesian School of Economics - Essay Example

Keynes brought out theories that form a base to understand the great depression. With the help of these theories, Keynes attempted to explain how a thing as great depression could occur and suggested actions that could help in overcoming the same. The theory also suggested a set of measures that could further avoid any such happening and could maintain a healthy equilibrium of the overall economy that could support good amount of employment along with an appropriate demand and supply. This would in turn promise that enough amount of money circulated in the market that could be used for business investments and productions to meet the demand.

Individuals such as Robert Lucas, Thomas J. Sargent, and Robert Barro carried the theory forward but at the same time questioned many of its percepts. This resulted into small large modifications in the original theory and came to be know as 'The Keynesian Revolution' in which new adjustments were proposed to the original Keynesian tenets. In many aspects, the Keynesian theory departed with the classical economics that was much prevalent in those days. Keynes debated that as proposed by the classical theory, the markets would not by itself achieve a state of full employment equilibrium, but at any given point and amount of unemployment, an economy can come to a standstill and stopping any further progress.

He also found the classical theory to be inadequate in providing equal financial opportunities and being unable to solve the problem of unemployment. "The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes" [Keynes, 1936].The classical theory advocated a policy of non-intervention by the state government in the economic affairs and suggested that the economy is entirely self regulating that does not require any external manipulation for it to achieve a state of balance.

Whereas the Keynesian theory suggested that the economy would require appropriate manipulations to direct its growth in a desired manner and this is to be achieved by active involvement of the government by continuously managing the amount of aggregate demand. Demand is the key by which the government could exercise control over the market and the total amount of employment. " Aggregate demand shocks can cause significant changes in output and employment if agents adjust prices and wages in ways that are 'insignificantly' suboptimal from their individual standpoints" [Page 43, N. Gregory]. On this account the policies that are framed on the basis of Keynesian theories are called 'Demand Management Policies'.

The Keynesian theory also does not distinguish between short-run and long-run principles as the classical theory does. Keynes suggested that the economy could stabilize at any equilibrium level of income and that it was the role of the government to verify that the given equilibrium is appropriate for the state economy. If the equilibrium does not promise total employment, the government needs to interfere by using appropriate policies to achieve the desired equilibrium. In that case the government would either have to implement reflationary policy that can boost the aggregate demand or deflationary policy that can decrease the aggregate demand in the market.

The chief theories put forward by Keynes were: The Labor