Keynesian+Theory+of+Unemployment

With his book //**The Theory of Employment, Interest and Money (1936)**//, Economist John Maynard Keynes (1883-1946) changed the way the world's perception of the workings of the economy. First, Keynes introduced the theory that the equilibrium is determined by aggregate demand. Aggregate Demand is the amount of goods and services all buyers demand at various prices (Sayer and Morris 170). According to Keynes, when there is increase demand in the economy, this will encourage companies to make more goods or provide more services. As this book was published, his home country of Britain was going through the great depression. The inflation was through the roof and a lot of people were unemployed. As stated by Sayer, Classical Theorists saw the economy in terms of reduced prices and wages while Keynes saw it in terms of fall in production. Classical Theorists lived by the principle of “Lassez Faire”; for the government to allow the economy to resolve itself since it goes through a business cycle. As Hubert Humphrey would say, “Prosperity is just around the corner”. After two years of living in their cars and not being able to afford a decent meal, the people began to see holes in this theory. Keynes objected to lassez faire, saying that it will take too long for the economy to resolve itself and “In the long run, we are all dead.” The people can not wait for the economy to solve itself. Something had to be done now. Classicalists believed that the way to maintain full employment was to cut wages and reduce taxes. Keynes spoke out against this, stating that “The best way to destroy the capitalist system was to debauch the currency.”(Skidelsky 40). Because the economy was determined by demand, the cut in wages would reduce employee income, decreasing consumer spending. This reduces demand for products, leading to a reduction in production, forcing companies to not only cut wages, but lay off employees. Now the employees (and former employees) are now even more unable to spend, decreasing both consumer spending and demand. If it goes on like this, the recovery will be unforeseeable. Reducing taxes wasn't an option for the government when their budget was out of control due to the reduction of tax revenues. The way to recovery is to encourage spending. By encouraging consumers and firms alike to increase spending, demand will increase. This will increase quantity produced, leaving companies to need to hire more employees, increasing employee income, making them able to spend more. Put this all together and you get an increase in aggregate demand. This encourages production and helps the economy out of recession/depression. Although a believer in free trade (John Maynard Keynes), Keynes believed that Government interference is beneficial to an economy. Through Fiscal and Monetary policies, the government use spending of goods or services to reduce the business cycle. Government spending reduces the price for goods and services, making it more affordable. This increase demand and consumer spending. With the increase in demand, companies need to produce more. So, they will have to hire more employees. The newly hired employees will have more income, leaving them more able to spend. This increases demand and consumer spending. The perfect example is Franklin D. Roosevelt's New Deal, which created agricultural jobs for unemployed farmers. It gave farmers the opportunities taken away from them by the dust bowl. This gave them a wage, which they could use for consumer spending. This of course increased aggregate demand. __** Works Cited **__ “John Maynard Keynes.” // The Concise Encyclopedia of Economics. // The Library of Economics and Liberty. N.d. Web. February 2, 2011 “John Maynard Keynes.” // Economy Professor. // The Economist, n.d. Web. February 2, 2011 “Keynesian Economics in a Nutshell.” // Maynardkeynes.org //. John Maynard Keynes, n.d. Web. February 2, 2011. Sayre, John E and Alan J. Morris. // Principles of Macroeconomics: Edition 6 //. Toronto: McGraw-Hill Ryerson, 2009. Skidelsky, Robert. // John Maynard Keynes: Volume 2: Hopes Betrayed 1883-1920 //. New York: Vikings, 1986. Skidelsky, Robert. // John Maynard Keynes: The Economist as Savior 1920-1937 //. London: MacMillan London Ltd, 1992.
 * Keynesian Theory of Unemployment**