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John Maynard Keynes: Capitalism’s Savior?

Hala Saab

The theories of John Maynard Keynes revised modern economic models and had a direct role
in transforming Western society during the dark days of the Great Depression. The policy
making which he suggested in the 1930s to overcome recessionary periods was based on the
following concepts:

- There is no “automatic safety mechanism” in the economy that will result in a savings
and investment equilibrium and cause an economic rebound.
- The economy could hit bottom and stay there. In a depression, the economy might not
cure itself and could remain stagnant for a long time.
- So, the government should intervene in order to increase employment, and so increase
income and consumption in the market.

Explanation of Main Beliefs and Policies that Saved Capitalism:

1. The Economy During Depression: According to Keynes, when an economy is in a

depression, conventional economic rules regarding savings and investment do not
function as they might in a normal economic cycle. When people are unemployed, not
only do they not save, they sell assets and spend the money they saved earlier.

2. The Solution of Government Intervention: Keynes suggested solutions to save

capitalism by calling for government intervention to increase employment, thereby
increasing income and consumption. Keynes pointed out that if business cannot do so,
then the government must intervene. So, Keynes advocated increased government
expenditures and lower taxes to stimulate demand and pull the global economy out of
the depression. Optimal economic performance could be achieved, and economic
slumps prevented, by influencing aggregate demand through activist stabilization and
economic intervention policies by the government. Keynesian economics is
considered a "demand-side" theory that focuses on changes in the economy over the
short run.

3. The Concept of Aggregate Demand: Keynes also introduced the concept of

aggregate demand: the theory that an economy’s output and growth are largely
determined by total demand, both private and public. He believed that there are times
when private investment is inadequate, requiring government intervention to stabilize
it. The government should then borrow money (run budget deficits) in order to fund
public investments such as new roads, bridges and other public works. But, Keynes
also said that the government should stop its borrowing and reduce public spending
when consumer and business confidence are restored. In other words, deficit spending
is to be a short-term measure to bring the economy back to a natural equilibrium. He
never advocated it as a long-term policy.

4. A countercyclical fiscal policy: Keynes rejected the idea that the economy would
return to a natural state of equilibrium. Instead, he considered economies as being
constantly in flux, both contracting and expanding. This natural cycle is referred to as
boom and bust. In response to this, Keynes advocated a countercyclical fiscal policy
in which, during the boom periods, the government should increase taxes or cut
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spending, and during periods of economic troubles, the government should undertake
deficit spending.

5. The multiplier effect: This is one of the main components of Keynesian economic
models. According to Keynes' theory of fiscal stimulus, an injection of government
spending eventually leads to added business activity and even more spending. This
theory proposes that spending boosts aggregate output and generates more income. If
workers are willing to spend their extra income, the resulting growth in gross
domestic product (GDP) could be even greater than the initial stimulus amount.

6. An example from the great depression: For example, during the great depression,
the government cut welfare spending and raised taxes to balance the national books.
Keynes said this would not encourage people to spend their money, thereby leaving
the economy unstimulated and unable to recover and return to a successful state.
Instead, he proposed that the government spend more money, which would increase
consumer demand in the economy. This would in turn lead to an increase in overall
economic activity, the natural result of which would be deflation and a reduction in
unemployment. Its concept is simple: Spending from one consumer becomes income
for another worker. That worker's income can then be spent and the cycle continues.
Keynes and his followers believed individuals should save less and spend more,
raising their marginal propensity to consume, to effect full employment and economic
growth.

7. Interest Rates: Keynesian economics focuses on demand-side solutions to

recessionary periods. Lowering interest rates is one way governments can
meaningfully intervene in economic systems, thereby generating active economic
demand. He argued that economies do not stabilize themselves very quickly and
require active intervention that boosts short-term demand in the economy. Wages and
employment are slower to respond to the needs of the market and require
governmental intervention to stay on track. This was a solution to depression and
saved capitalism because the new economic activity proposed by Keynes feeds a
circular, cyclical growth that maintains continued growth and employment. Without
intervention this cycle is disrupted and market growth becomes more unstable and
prone to excessive fluctuation. Keeping interest rates low is an attempt to stimulate
the economic cycle by encouraging businesses and individuals to borrow more
money. When borrowing is encouraged, businesses and individuals often increase
their spending. This new spending stimulates the economy.

Conclusion:

At the end, very few economists can claim to have had such a great effect on the development
of economics in the 20th century or to have been directly responsible for returning the world
economy to prosperity from the depths of depression. Keynes performed his role on the
international stage at a crucial time in world history, which can safely make him the
pragmatic savior of capitalism.
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References
Keynesian Economics
https://www.investopedia.com/terms/k/keynesianeconomics.asp#ixzz53uitJhvs
Robert Skidelsky, John Maynard Keynes, 1883–1946: Economist, Philosopher, Statesman
(2003).
Robert L. Heilbroner, The Worldly Philosophers: The Lives, Times and Ideas of the Great
Economic Thinkers (1953, 1999).