Keynes published "The General Theory" in 1936, formally proposing the concept of macroeconomics. Keynes advocated that the government should use fiscal policy and monetary policy to offset the negative impact of the short-term economic cycle on people's employment and income.

Keynes’s theory was proposed in the 1930s. During the Great Depression, there were not only long-term and large-scale unemployment problems, but also deflation problems. Therefore, monetary policy could no longer stimulate economic recovery. Keynes therefore believed that it was necessary to Fiscal policy to expand government spending to address the Great Recession. However, Keynes's policies also caused government budget deficits, and therefore became the focus of doubt and controversy.

Keynes believes that in order to reduce serious unemployment problems, fiscal deficits can be tolerated. When the economy recovers, production, employment and income will naturally increase, and government tax revenue will also increase. By then, the fiscal deficit problem will disappear. It will be solved easily. Keynes disagreed with the laissez-faire attitude of classical economics.

Keynes believed that people would suffer due to economic depression and unemployment. Keynes said a famous saying: "In the long run, we are all dead."

Keynes believed that the level of production and employment is determined by the level of aggregate demand. Aggregate demand is the total demand for goods and services in the entire economic system. In individual economic theory, automatic adjustments in prices, wages, and interest rates automatically move aggregate demand toward the level of full employment.

Keynes pointed out the reality of the rapid deterioration of production and employment conditions at that time, and pointed out that no matter how good the theory was, in fact the automatic adjustment mechanism did not work. The key to the problem is whether "insufficient demand" exists. According to classical economic theory - a common refrain in pre-General Theory practice - insufficient demand was a symptom rather than a cause of recessions and economic dislocations, and thus would not occur in a normally functioning market.

Classical economic theory believes that the key to achieving full employment in an economic system is two points: First, the interaction between supply and demand determines the price of goods, and the continuous changes in price in turn lead to changes in supply and demand. Balance; second, the new wealth created by this system may be saved for future consumption or used to invest in future production. There is also a supply and demand mechanism that determines this choice.

The interest rate on deposits follows the same mechanism as price, that is, it is the price of money.

Even during the worst years of the Great Depression, this theory still explained the collapse of the economy as a result of a lack of powerful mechanisms to stimulate production. Therefore, the appropriate approach is to lower the wage price of labor to a subsistence level, causing the price of labor to fall and purchasing power (employment rate) to rise.

Funds not paid as wages will be converted into investment, perhaps in other new industries. Closing factories and laying off workers are also necessary measures. The other key policy measure is balancing the state budget, either by increasing tax rates or by cutting spending.

Extended information:

Examples

1. Roosevelt’s New Deal (1933-1938, United States)

2. Ten major construction projects (1970s, Republic of China)

3. Four trillion investment plan (2008, China)

Generation background

Keynesianism Or Keynesian theory emerged in the 1930s.

1. Scientific theories in the context of the Great Depression of the 1930s

From 1929 to 1933, an unprecedentedly severe economic crisis broke out in the world. This great crisis has swept all countries around the world. After experiencing a four-year-long crisis, the entire world has fallen into a long-term special depression. Western countries called this great crisis and the ensuing special depression the "Great Depression of the 1930s."

2. Scientific theories compatible with state interventionism

Before World War I, state interventionism began to appear. During the war, this kind of state intervention developed rapidly and took on the military character of an emergency. New economics opposes laissez-faire and advocates state interventionism; it points out the important role of the "visible hand" government in ensuring the smooth operation of the economy, and does not simply emphasize the role of the "invisible hand" market mechanism.

3. The academic background of its emergence

Before the emergence and spread of Keynesian economics, the dominant economics tradition was represented by Marshall, A.C. Pigou and others. economics. Veblen first used the term "neoclassical" to describe Marshallian economics in 1900.

Later, economics generally accepted terms with fixed meanings such as "neoclassical school" and "neoclassical economics" to refer to Marshall, Pigou and others and their economics. Neoclassical economics dominates mainstream academia, both theoretically and policy-wise. Keynes himself also grew up under the influence of neoclassical economics.

Keynesian economics criticized the employment theory in neoclassical economics and inherited the mercantilist state interventionism, Malthusian theory of insufficient effective demand, Mendeville's theory of high consumption promoting prosperity and Horton's theory of economics. Busson's theory that excessive saving leads to unemployment and economic depression.

Reference: Baidu Encyclopedia-Keynesian Economics