John Maynard Keynes and Economic Theory

The 19th and 20th-century economist John Maynard Keynes revolutionized the study - and practice - of economics, most especially through his writings on the causes of long-term high levels of unemployment, such as were seen during the Great Depression. His best-known and still - almost four generations after it was published - work (The General Theory of Employment, Interest and Money argued that the most effective means of bringing up and maintaining levels of employment was a government-sponsored policy of fiscal oversight.

The article under review here suggests one of the ways in which full employment can be achieved is through the manipulation (by the government) of fiscal policy, a manipulation that necessarily will have an effect on the Gross Domestic Product. An expansionary monetary supply tends to lead to increases in the Gross Domestic Product, with the converse also being true. Keynes argued that such an expansionary monetary supply (which is under the control of the federal government) will also increase the rate of employment. Thus there is a link (although it is correlative rather than causative) between high rates of employment and rises in the GDP. (Both of which result from an expansionaty monetary policy.)

To understand why this is, we must understand an underlying principle, which is the idea of aggregate demand-aggregate supply. While to some extent this concept is independent, it is also of course part of larger contemporary economic theory.

Related Essays

Keynes General Theory of Employment In 1936, John Maynard Keynes published a book entitled The General Theory of Employment, Interest, and Money. In economic and political circles, the book was .... (2292 9 )

Keynesian Theory and the New Deal .... For a generation after the New Deal, the fiscalist economic theory of John Maynard Keynes was dominant enough to amount to a new orthodoxy. .... (2237 9 )

Alfred Marshall and Keynes .... The economics of John Maynard Keynes did not challenge neoclassical economic theory so much as it challenged classical economic theory. .... (2664 11 )

Marshall's Labor and Wage Theory .... His influence on John Maynard Keynes, who was one of his students, and others resulted in the building of new, or extended, economic theory on Marshall's .... (2617 10 )

The Lexus and the Olive Tree "The Lexus and the Olive Tree": An .... of his work to elevate economic THEORY above real .... gave rise to British economist John Maynard Keynes' philosophy of government economic regulation, which is .... (1545 6 )

of the Solow growth model. Goddard, Romilly and Tavakoli (1995) use a spreadsheet to solve the Mundell-Flemming (IS-LM-BP) model. While they do not specify how the spreadsheet solves the model, it is assumed that they employ this iteration function. A good alternative method for solving simultaneous equations is using matrix algebra commands. Judge (1990b) develops an IS-LM model using Lotus 1-2-3 and solves it by using matrix algebra commands. A more recent example of this model and technique may be found in the spreadsheet chapter of Judge (2000). This paper explores how aspects of neoclassical economic theory can be integrated into a dynamic new Keynesian (aggregate demand-price adjustment) macroeconomic model.(note 2) For clarity we define neoclassical models as models in which prices are perfectly flexible and expectations are rational, so markets are in equilibrium as long as all information is known. New Keynesian models may have sticky prices or non-rational expectations, so markets do not immediately return to the long-run equilibrium. The basic new Keynesian aggregate demand-price adjustment model used in this paper was developed as Supplement 3 to our Cahill and Kosicki (2000) paper. The supplement is available at htt

Category: Economics - J