The Keynesian Approach
The Keynesian Approach
Before John Maynard Keynes, studies in economics were based on Adam Smith's idea of free market economies. Adam Smith proposed that government should not interfere in the free market in his An Inquiry into the Nature and Causes of the Wealth of Nations, which he published in 1776. He believed that the invisible hand of an open market economy would maintain the equilibrium balance between goods supplied and demanded. Each individual trying to maximize his own benefits would produce the best outcome for the community.
Keynes believed that the government should strive to help control inflation and unemployment through monetary policies aimed at stabilizing the economy during booms, recessions, and depressions. He helped to invent what we know today as Macroeconomics by encouraging economics to view Macroeconomic policies differently at their aggregate level than their Microeconomic counterparts.
Time Magazine says that Keynes' influence on modern economics mostly stems from his General Theory of Employment, Interest and Money, which he published in 1936 during the Great Depression. Although it was, "convoluted, badly organized and in places nearly incomprehensible" it changed economists attitudes about laissez-faire style management of the economy. Keynes argued that business investments will decrease as markets become saturated due to a slowing economy. Private investors will not be encouraged to invest at such a time, which will decrease GDP, leading to higher unemployment levels. According to Keynes, if nothing is done, although a free market economy will adjust itself, it will do so through increasing unemployment and "social misery."
