ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

What is Keynesian Economics?

Updated on October 1, 2012
John Maynard Keynes
John Maynard Keynes

In Part I of his magnum opus published in 1936,The General Theory of Employment, Interest, and Money, John Maynard Keynes explained that his economic theory was based on the refutation of Say's Law; the doctrine that income is automatically spent. Applying Say's Law would mean that all the observable indicators, used by economists to understand the behaviour of an economy, would be irrelevant. Say's Law implies that all resources in an economy will be used, because all cash is used for consumption and capital investment to satisfy the consumption.

Keynes however, was able to demonstrate that there is a strong motivation by individuals and companies to accumulate cash as an objective; rather than to then use it to maximize consumption and investment. The tendency to accumulate cash occurs during good times and recessions. During recessions however, this tendency becomes extreme; so that aggregate demand for goods and services in an economy falls to a level at which the economy ceases to operate normally. Capital investment also stops, so that there is no consumption related to the purchase of capital goods; or from the wages paid to those involved in the manufacture and use of these capital goods. According to Keynes's analysis, economies have an inbuilt tendency to instability; because of this motivation to accumulate cash.

A year after publication of his General Theory, Keynes expanded his thesis to a scenario in which there is extreme economic uncertainty. Uncertainty brings risk aversion, so that the tendency to accumulate, rather than to spend or invest cash becomes dominant. Extreme uncertainty therefore also produces the same fall in aggregate demand and investment.

According to Keynes, when these extreme situations of uncertainty and recession occur, the Government should create aggregate demand in the absence of that created by the private sector. There are several ways to create aggregate demand. Keynesian Economics is the application of an economic theory; that seeks to correct the inherent instability in economies, through the creation of aggregate demand during times of uncertainty and recession.

Governments can use the taxation system to redistribute income, to leave different sections of the population with more disposable income; however this is still no guarantee that aggregate demand will be created. Beneficiaries of the redistribution of income will still have the tendency to save cash rather than to consume or invest.

It is therefore necessary for Government itself to create the aggregate demand; by the expenditure of revenues. These revenues can be spent on projects,that the Government believes will have the maximum effect in creating aggregate demand once they are executed. In times of recession, tax revenues will be small or non-existent; therefore Government expenditure will incur budget deficits. The economic growth and aggregate demand created by this deficit financed Government expenditure will then be recovered from future tax revenues.

working

This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://corp.maven.io/privacy-policy

Show Details
Necessary
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
Features
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Marketing
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Statistics
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
ClickscoThis is a data management platform studying reader behavior (Privacy Policy)