Question

How keynesian revolution begin?

Answer 1

Alfred Marshall 's body of neo-classical theory seemed to have little to say that was relevant to the real-world problems afflicting developed industrial economies in the 1930s. In particular, neo-classical theory was unable to account for the persistence of surplus labor on labor markets and the apparent inefficiency of product market price reductions in order to restore consumer spending to levels that would justify further expansion of production.

Changing economic conditions in the interwar era coupled with increasing discontent over the validity of orthodox theory created an atmosphere through which to bring about a radical shift in economic thought. The person responsible was John Maynard Keynes (1883-1946), a brilliant and well connected member of the British establishment.

The basic position of Keynes was that economists were mistaken in assuming they could understand the functioning of the economy as a whole by explaining the workings of its component parts. If the economy were seen as a system, Keynes argued, it would become apparent that the root cause of the depression was a total demand insufficiency. According to Keynes, the level of aggregate income / output, and thus the level of employment in a capitalist, free enterprise economy, was determined primarily by people's willingness to spend. If the total amount people wanted to spend was less than the amount which would induce producers to employ all available resources, the level of income/output would fall

Keynes 's analysis in the general theory became the foundation of modern macroeconomics and a powerful influence on public policy in the years following the Second World War. While Keynes himself saw his work as a defense for a capitalist, largely free-enterprise type of economic system, supporters of the British social-democratic welfare state movement found intellectual support for the economic system in it.

Keynesian thought 's influence spread swiftly across the English-speaking world. In the 1940s, a generation of young economists trained in Britain took Keynesianism home with them, to the universities and departments of government that employed them. There were also established academic economists in Keynes who found an answer to questions that they had been troubled with for a long time, but could find no acceptable theory framework within which to address them.

The microeconomic analysis studied earlier showed how it was easy to find the price / quantity combination that would satisfy both suppliers and demanders once the relationship between price and quantity demanded and the relationship between price and quantity supplied had been established, resulting in a market equilibrium in which there would be no surpluses or shortages.

Thus, the reconciliation of Keynesian macroeconomics and conventional microeconomics, the "neo-classical synthesis," became the theoretical basis on which by the late 1960s a broad political or public-policy consensus appeared to emerge in most industrialized nations. This is now often referred to as the "Keynesian Consensus," a somewhat nostalgic.