Keynesian Revolution

The Keynesian Revolution was the fundamental reworking of economic view concerning a factors determining employment levels in the overall economy. The revolution was brand against the then orthodox economic framework, namely neoclassical economics.

The early stage of the Keynesian Revolution took place in the years following the publication of John Maynard Keynes' General Theory in 1936. It saw the neoclassical understanding of employment replaced with Keynes' notion that demand, as well as non supply, is the driving element determining levels of employment. This introduced Keynes in addition to his supporters with a theoretical basis to argue that governments should intervene to alleviate severe unemployment. With Keynes unable to realize much part in theoretical debate after 1937, a process swiftly got under way to reconcile his relieve oneself with the old system to construct neo-Keynesian economics, a mixture of neoclassical economics & Keynesian economics. The process of mixing these schools is planned to as the neoclassical synthesis, and Neo-Keynesian economics may be summarized as "Keynesian in macroeconomics, neoclassical in microeconomics".

Background

When Keynes published his General Theory in 1936, the influence of free market economics on policy creating had already declined substantially compared to the nearly unchallenged ascendancy it had enjoyed in Britain during the 1840s - 1860s. By the mid-1930s much of the number one andworld was already under the sway of communism or fascism, with even the US departing from economic orthodoxy with the New Deal. There had not been a corresponding decline for neoclassical economics in the academic sphere however. According to economic historian Richard Cockett, within academia the prestige of free market economics was still almost its peak even in the 1920s. In the 1930s neoclassical economics began to be challenged within academia, though at number one by various diverse schools which except Marxism were mostly of only local influence - such as the Stockholm school in Sweden or in the US the Administered price theorists.

In 1930, Keynes was in his gradual forties, and in October his A Treatise on Money was published. It was criticized by Ralph Hawtrey, Dennis Robertson and Friedrich Hayek. However, invited "Circus", consisted of Richard Kahn, James Meade, Piero Sraffa, Joan Robinson and Austin Robinson, began a seminar to analyse the Treatise. Keynes did not attend these seminars but was informed of their discussions by Kahn. Keynes was little influenced by the various heterodox economists of the 1930s, his General theory was result largely in a Marshellian framework though with some important points of dissent such as the idea that excessive savings can be harmful for the overall economy. Keynes asserts that when savings exceed usable investment opportunities it authorises it impossible for house as a whole to make a profit and so lay offs and increased unemployment will result. In chapter 23 of the General Theory Keynes traces the genesis of this idea to, among others, Mercantilist thinkers of the previous three centuries, to the Fable of the Bees and to the dissenting economist J A Hobson with his Physiology of industry 1889.