What is Keynesianism?

Keynesianism, or Keynesian school, is a political-economic doctrine that defends the state as an active agent against recession and high unemployment.

The ideas of Keynesianism emerged with the economist John Maynard Keynes, mainly after the publication of his book “The General Theory of Employment, Interest, and Money” in 1936.

Because it requires a larger government as a decision maker in a country’s economy, Keynesianism generated opposition to liberalism, an idea that advocates as small a state as possible.

How Keynesian Theory Works

Before the rise of Keynesian theory, there was a lot of discussion about what to do during a recession.

At the beginning of the 20th century, the dominant thinking was still that of classical economics, where the economy had to recover on its own in times of crisis, known by the principle of Laissez-faire.

During that same time, British economist John Keynes tried to understand why the country’s workers lost their jobs during a crisis, even if they agreed to receive less in exchange for keeping them.

With the collapse of the New York Stock Exchange in 1929, the whole world is in a serious crisis, where Keynes is one of the first economists to realize that the free market could not solve that problem.

In general, the prices of products and services fall with the crisis, but wages do not, which increases unemployment. The solution, for Keynes, would be to expand the economy again through new government spending, which would allow job creation.

With this, the State would take an active role, reaching the so-called  Full Employment  , a scenario in which there is only a certain natural unemployment and outside the state of crisis.

The ideas of Keynesian theory emerged at the same time that the United States government was making the New Deal plan, increasing public spending for recovery after the 1929 crisis.

Keynesian model

Based on his theory, Keynes formulated his model that would explain how an increase in public spending would decrease the risks of recession.

For this, it is necessary to observe how an economy is measured through GDP, that if it is in equilibrium, the Aggregate Supply (Y) is equal to the Aggregate Demand (PA), or Aggregate Expenditure, where:

Y = C + I + G + (X – Q)

The components of Aggregate Demand (AP) are:
C – Population consumption;
I – Search for investment credits;
G – Government spending;
X – Exports;
Q – Imports.

The beginning of a crisis occurs when the supply of products and services in the economy is greater than the demand, that is, when Y is greater than PA in the previous formula. When this happens, companies can sell less and accumulate shares.

According to Keynes’s model, the government should increase its expenditures, using the “G” formula, being an active agent in the economy, while the others are reducing.

Thereafter, Keynes tried to explain the  multiplier effect  , saying that with additional government spending, new jobs and other companies would be created with investment around these government projects. This would again generate an increase in aggregate demand.

This theory revolutionized the way of thinking within the economy in an aggregate way, with the so-called Macroeconomics.

Differences between Keynesianism and liberalism

One of the characteristics of Keynesianism was state intervention in the economy, which ended up creating opposition to liberal economists.

The ideas of Keynes and his followers advanced mainly after World War II, in which several countries began to adopt political systems with more intervention, creation of state companies and public jobs, in an attempt not to suffer the consequences of a next great crisis. .

However, with the return of the great crises in the 1970s and 1980s, Keynesianism began to be questioned a lot, creating an opening for liberalism.

Neoliberalism and Monetarism

With the resurgence of liberal ideas, countries such as the United States, the United Kingdom, and Chile began to privatize their state-owned companies and reduce public employment, in a dynamic that became known as neoliberalism.

One of the major criticisms of Keynesianism was the increase in the public debt of countries due to the financing of their works, using tax money.

In addition to public debt, government intervention in an attempt to reduce unemployment causes prices to rise, that is, there is an increase in inflation and a reduction in the purchasing power of workers.

From scenarios of unemployment and high prices, to stagflation, some countries abandoned Keynesian policies to focus on controlling the currency, known as monetarism.

Even so, to this day, Keynesian ideas are active and have great importance for the development that it provided for studies in economics.