Question

"History of Economic Thought" short answer question

Why is John Maynard Keynes considered to be such an important figure in the development of economic thinking, and what are the major strengths and weaknesses of his contributions? Discuss.

Answer 1

JM Keynes is regarded as most prominent figure in economics. He fundamentally changed the role of government in economic activities. He supported active role of government in economic activities when private sector is not ready to deliver maximum.

Keynes believed that economic recession can not be addressed by the free market system. Only government can make intervention in economic system to restore equilibrium. Unemployment and recession are caused by the fall in aggregate effective demand. Government can address the issue of deficient demand by increasing its expenditure. Expenditure must be increased where private sector is not ready to participate. Government must supplement efforts of private sector and not compete with it.

Criticism:

• Keynes did not address the supply side economics, so keynesian theory could not explain stagflation situation.
• Keynesian also neglected crowding out effect. Pigou does not agree with Keynes.
• Keynes believed that there would not any rise in price until economy reach full employments. But this is not true, there would be rise in price even before economy reaches full employment.