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In Keynes's theory, general ( macro-level) trends can overwhelm the micro-level behavior of individuals. Instead of the economic process being based on continuous "supply side" improvements in potential output, as most classical economics had focused on from the late 1700s, Keynes asserted the importance of the aggregate demand for goods as the driving factor, especially in downturns. From this he argued that government policies could be used to promote demand at a "macro" level, to fight high unemployment of the sort seen during the 1930s.
A central conclusion of Keynesian economics is that there is no strong automatic tendency for output and employment to move toward full employment levels. This conflicts with the assumptions of supply side economics, Austrian economics and much of neoclassical economicsNeoclassical economics is grouping of a number of schools of thought in economics. There is not complete agreement on what is meant by neoclassical economics—in particular, vision, problem domains, and particular concerns vary among neoclassical economist, that price adjustment will achieve this goal. More broadly, Keynes saw his as a general theory, in which resource utilization could be high or low, whereas previous economics focused on the special case of full utilization.
John Maynard Keynes was one of a wave of thinkers who perceived increasing cracks in the assumptions and theories which held sway at that time. As physics questioned the necessity of absolute time, writers the structured narrative, and composers the need for tonal harmony -- Keynes questioned two of the pillars of economic theory dominant: the need for a solid basis for money, generally a gold standardThis article is on the monetary principle. For gold standard in diagnostic testing see gold standard (test The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. When several nations are on a fixed, and the theory, expressed as Say's LawSay's law is an economic principle, formulated by Jean-Baptiste Say, that asserts that there can be no demand without supply. In the economic sense, demand refers to a desire materially expressed in an exchange. Say's Law states that there can be no excha which stated that decreases in demand would only cause price declines, rather than affecting real outputIn economics, the gross domestic product GDP is a measure of the amount of the economic production of a particular territory in financial capital terms during a specific time period. Definition GDP is defined as the total value of all goods and services p and employment. In his political views, Keynes was no revolutionary. He was pro-business and pro-entrepreneur, but was very critical of rentierA rentier is a person who lives on the income from property and is not personally involved in its operation.s and speculatorsSpeculation is the buying, holding, and selling of stocks, commodities, currencies, collectibles, real estate, or any valuable thing to profit from fluctuations in its price as opposed to buying it for use or for income dividends, rent etc. Speculation is, from a somewhat Fabian perspective. He was a " new" or modern liberal.
It was his experience with the Treaty of Versailles which pushed him to make a break with previous theory. His "The Economic Consequences of the Peace" (1920) not only recounted the general economics, as he saw them, of the Treaty, but the individuals involved in making it. The book established him as an economist who had the practical political skills to influence policy. In the 1920s, Keynes published a series of books and articles which focused on the effects of state power and large economic trends, developing the idea of monetary policy as something separate from merely maintaining currency against a fixed peg. He increasingly believed that economic systems would not automatically right themselves to attain "the optimal level of production." This is expressed in his famous quote, "In the long run, we are all dead", implying that it doesn't matter that optimal production levels are attained in the long run, because it'd be a very long run indeed. However, he neither had proof, nor a formalism to express these ideas.
In the late 1920s, the world economic system began to break down, after the shaky recovery that followed World War I. With the global drop in production which eventually became "the Great Depression," critics of the gold standard, market self-correction, and production-driven paradigms of economics moved to the fore. Dozens of different schools contended for influence. Further, some pointed to the Soviet Union as a successful planned economy which had avoided the disasters of the capitalist world and argued for a move toward socialism. Others pointed to the alleged success of fascism in Mussolini's Italy.
Into this void stepped Keynes, promising not to institute revolution but to save capitalism. He circulated a simple thesis: there were more factories and transportation networks than could be used at the current ability of individuals to pay and that the problem was on the demand side.
But many economists still insisted that business confidence, not lack of demand, was the root of the problem, and that the correct course was to slash government expenditures and to cut wages to raise business confidence and willingness to hire unemployed workers. Yet others simply argued that "nature would take its course," solving the Depression automatically by "shaking out" unneeded productive capacity.
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