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.



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