Keynes And The Great Depression Essay

John Maynard Keynes came to prominence during the early to mid 30’s when he like so many other economists were trying to understand the Great Depression. During the recession many economists could not agree on the causes of the decline or provide a solution for it. The main theory behind classic economics is that supply creates demand, (aka Say’s Law) the economy is self-regulating and government intervention should be limited. Therefore it was felt that recessions would cure themselves and not be prolonged if the economy was left to self-regulate without any interference from the government. During the recession wages and prices were cut as it was felt that this would help cure the recession. Because wages were cut spending fell, which meant people were spending less. Aggregate demand fell further which resulted in further job

He also argued that using monetary policies such as cutting interest rates in a severe recession would also have no effect, as people were more likely to save their money rather than spend it. In Keynes opinion, the government should intervene and boost the economy through the use of expansionary fiscal policies otherwise the economy would remain in a recession. He argued that increasing aggregate demand would help bring the economy out of recession. By the government injecting capital into the economy this would set off a chain reaction. For example if a government invested a large amount of capital into the economy via infrastructure, people working on the infrastructure would spend a proportion of that income (e.g 0.8 of every €1) on consumer goods and services. Expenditure is another person’s income in the form of wages, rent, interest and profit and so they in turn would spend a proportion (0.8) of this extra income on more goods and services. This chain reaction is called the ‘multiplier