ABSTRACT
Keynesian economic theory, or Keynesianism, is based on the ideas of John
Maynard Keynes. In his famous work The General Theory of Employment,
Interests and Money, published in 1936, Keynes provided a response to the
Great Depression of the 1930s. Until then, conventional liberal wisdom had
believed in the power of market forces to bring the economy back into
equilibrium (see Liberalism and Neo-liberalism). A certain level of unem-
ployment was seen as a normal condition and so were periodical cycles of
boom and bust. In the long run, the economy was expected to bounce back
into equilibrium between demand and supply. Long-term economic growth
and enhanced international trade were thought to reduce unemployment
levels. Keynes, however, was extremely sceptical of the liberal orthodoxy.
Arguing that markets are not self-correcting, he expressed his doubts in the
famous statement: ‘In the long run we are all dead.’ Keynes demonstrated
the consequences of market failure on unemployment. In order to be prof-
itable, businesses are forced to keep wages down and to cut costs by devel-
oping technology. In the longer term, labour would be replaced by new
technologies. Thus, profits would go hand in hand with a certain degree of
unemployment. But Keynes went even further by outlining the longer-term
consequences for aggregate demand: lower wages and high rates of unem-
ployment would ultimately reduce the number of consumers in an economy.
As demand falls, production would decrease too and unemployment would
rise even further, creating a treadmill with terrible social consequences. This
represents a reversal of Say’s Law. Keynes argued in essence that demand
creates its own supply. Keynes further showed why there was a need for
global collective action, because the actions of one country spilled over to
others. By putting pressure on countries to maintain their economies at full
employment, and by providing liquidity for countries facing downturns, an
institution like the International Monetary Fund (IMF) could help sustain
global aggregate demand.