Term Paper: Keynesian Revolution: Analysis and Criticism

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[. . .] In order to keep people employed, the government should run deficits when the economy is slowing, because private sector representatives will not bother to invest in people during a slow economy.

Private companies are also less likely to invest as markets become saturated due to the flailing economy, and this can create a cycle of less investments, fewer jobs, less consumption etc. (Reich).

Governments, according to Keynes, can avoid this downward spiral of the economy from the beginning by simply intervening where private organizations do not. Keynes further commented in his work, "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist" (Keynes, 1963).

According to the Keynesian model, changes in output and income levels can also result in equilibrium of savings and investment, which in turn cause equilibrium of total national income as well as output. Keynes stated that in such a situation a reduction in wages would certainly not eliminate unemployment. Keynes ideas were similar to those of 19th century British economist Thomas Robert Malthus.


The Keynesian Revolution suggested that, "the goods market could be at an underemployment equilibrium, in that it did not ensure equilibrium in the labor market" (Keynes).

Keynes emphasis on demand as the major factor determining output was phenomenal. Economists did start looking at how consumer demand related to income levels and how interest rates might change due to resulting changes or shifts in equilibrium.

Prior to the Keynesian Revolution, the major though process related to the economy was considered "classical." It argued that the interest rate led to a balance between savings and investment, which would in turn result in a balance in the goods market. Keynes however, differed in his opinion and argued that the interest rate's primary purpose was to act as a balance between the supply and demand for money and not savings and investment. His view correlated to why savings did not always correlate with investment or the interest rate.

Keynes basically asserts in his revolutionary theory that "quantities (and not prices) that adjust to eliminate excess demands or supplies." Keynes published a book entitled "Theory of Employment, Interest and Money." On page 63, he notes the following regarding his revolutionary economic theory:

Equation 1: Income = value of output = consumption investment

Equation 2: Saving = income - consumption

Equation 3 (therefore): Saving = investment"

Keynes is referring to national income, and comparing it to the output, which he considers equal to the "price recoverable" in regards to all goods and services provided by any industry at any point in time or given period. According to this equation, Keynes defines savings as "income that is not consumed" (Cooney).

One important point to consider proposed by Keynes is the idea that the "preservation" of equilibrium, or maintenance of a system of checks and balances is dependent on a regular market for goods (Cooney). If the market or "demand" for goods, a central idea and philosophy in Keynesian economics, is not met, then obviously the equilibrium of production and sales will be disturbed, resulting in fluctuations of all economic variables. This includes inflation rates, unemployment and wage issues.


The Keynesian Revolution was very significant in that it set the stage for macroeconomic thinking in a microeconomic economy, and world of political thinkers. John Maynard Keynes attempted to develop a model of global economic theory which can be best described as "aggregate economics."

John Maynard Keynes emphatically supported the concept that full-employment was possible in a system that was in balance or equilibrium, if under-utilized resources were fully mobilized and government policy makers became involved in fiscal and monetary policy changes.

Keynes wrote the following in his Essays on Persuasion (1930): "Full employment, government expenditure for social economic stimulation, productive investments, need for low interest rates, economic policies and the general equilibrium framework based on these conditions, are essential elements of ethic-economics."


The Keynesian Revolution actually proposes a very simple process. It suggests that price systems do not work when evaluating wages, and basically everything economic affects everything else economic.

For example, take the following reference. If consumers are spending at a rate that is less than the income that they are receiving, then essentially income is considered above it's "equilibrium level" (Keynes). If however, consumers are actually spending more than the income they are receiving, then income is actually below its equilibrium level. What all this basically translates into is the idea that in order to maintain an adequate system of checks and balances, people should only be spending as much as their income affords, but also should be spending at minimal at that level.

When consumer habits vary from this "norm" proposed by Keynes, then this sets the stage for economic downturns such as recession and depression. It makes perfect sense that in times of low income, consumers are more likely to hold onto their cash than spend it. Individual entities and organizations in turn lower prices and offer discounted merchandise in an effort to attract buyers to their stores and gain income. If consumers don't however, decide to spend their income and settle on saving, then merchandisers lose out on income.

This in and of itself creates an imbalance in the system. Classical theorists would presume that the solution to economic downturns is lowering of wages in response to poor production and sales.

The Keynesian Revolution however, represents the complete opposite of this idea. John Maynard Keynes proposed that the actually culprit in all economic ventures was "aggregate demand." He proposed that production and income levels "wax and wane" according to the demand of consumers.

John Maynard Keynes was Revolutionary in his approach to economics. He was not necessarily looking out for the little corporation or individual entities, but rather looking out for the good of the "whole" or complex organization. He asked politicians and governments to consider the economy on a national and global level.

John Keynes was criticized for many of his ideas. In the late 19th century most people as demonstrated above believed that simply altering or lowering the wages of employees could manipulate the economy. This certainly would prove beneficial to individual entities and corporations seeking to maximize their profits.

John Keynes ideas were controversial because he asked the governing bodies of countries to step in. He suggested that they create a deficit where necessary to control the system of "checks and balances" and create a greater degree of equilibrium. He argued that by creating such a deficit, the needs of employees and organizations would balance out and create a very productive economy.

The Keynesian Revolution presented the idea that recessions and depression were wholly unnecessary. If the government of any nation were to institute policy changes and monetary and fiscal reviews, the needs of producers and purchasers could be balanced out. In theory his ideas and methods seem perfectly sound. Many people however, still oppose government intervention in the economics and policies of a market economy.

It is easy to see why many governments seeking to increase their wealth would oppose the ideas of the Keynesian Revolution. It is much easier to manipulate the wages of employees and workers than to manipulate the general monetary and fiscal policies of a nation. What is most interesting about Keynes Revolution however, is that for the first time someone challenged political theorists and economists to look at the economy from a global perspective.

Most notably, the Keynesian Revolution brought about the idea of macroeconomics, which is still a crucial factor and consideration in governmental politics and global structuring today. Keynes was very correct in assuming a circular diagram of economics. Expenditures by one party certainly can result in income for another party.

Additionally, ultimately success lies in the ability of any economy to maintain a system of checks and balances. Keynes challenged governments to consider interactions from a global perspective. In modern times, consumers and government officials would likely both benefit by analyzing the impact of their actions on the nation as a whole.

Unfortunately, with the passage of time so too does the passage of theory occurs. Following John Keynes revolutionary ideas, the idea of "Monetarism" became a powerful new mainstream philosophy in the world of economics. Many Monetarists are considered anti-Keynesian in their ideas and premises.

Keynes simplified economic theory by presuming that demand for production and services depend on income. He did not take into consideration however, the changes technology would bring over time. In modern times, consumers may just as easily increased expenditures by using "credit" authorized by banks and corporations. Credit purchases may not take into consideration the actual income of the consumer.

Rather, one might more accurately conclude that credit purchases cause a deficit in income, by allowing consumers to exceed their current incomes and purchase more than they have… [END OF PREVIEW]

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