He initiated the "Keynesian Revolution" which split economics into two divergent paths; one away from a traditional laissez faire economic system and toward an economic theory that saw the government as an essential player in maintaining growth within a capitalist economy. The following paper will review the economic policies of Keynes. Firstly, a review of his contribution to the USA recovery form the Great Depression shall be given. Secondly, a discussion of Keynes contribution to the global economic recovery following World War II will be presented. Thirdly, the use of Keynesian theory during the Conservative Era in the USA will be outlined. A conclusion will summarize the main points of the paper.
The Great Depression was a global event of economic downturn that was initiated in 1929 and spanned across a decade until 1939. As such it is the longest and most harrowing depression that the industrialized world had known. Beginning in the USA, the Depression resulted in significant reductions in output, widespread unemployment and poverty, and acute deflation worldwide (Romer 3). At the time, the gold standard provided almost a global network of fixed currency exchange rates, and it has been stated that this was a core reason that the economic downturn in the USA swept through other national economies. In the USA, the Depression has been described as the second worst socio-cultural event since the Civil War. The actual causes of the Depression are still contentious issues today among economist and academia. Although it is generally agreed upon that there was a multitude of contributing factors; declines in consumer demand; financial panics; and misguided government policies (Calomoris 5; Romer 4).
The recovery from the Great Depression was enabled by fundamental changes to national economic approaches, macroeconomic policy and the theory of economics itself. Keynes played a key role in the recovery with his advocating of interventionist government policies, which required the government to draw on fiscal and monetary sources to buffer the detrimental effects of the present Depression, as well as future potential recessions and booms. Keynes stressed the need for the government to intercede occasionally and exert force on the market economy (Romer 3; Skidelsky 5). Previous to this time, economists had simply believed that an economy would continue to grow and develop; it was thought that a market failure would be a temporary situation that could fix itself if given time. This laissez-faire approach was developed by the economist Adam Smith. It was argued by Smith that if the market was left alone it ("the invisible hand") would run itself (Skidelsky 15).
In fact, many approached an economic crisis as a state that would stimulate new opportunities to make a profit. Keynes, though presented a theory wherein the economy could become stagnant, and remain so, regardless of the amount of unused resources. He postulated that capitalism had no intrinsic ability to maintain growth regardless of external circumstances (Romer 7). Such a dramatic shift from the present approach to economics was revolutionary; that during times of severe depression the government was the only hope for an economic recovery. In this way, Keynes became known as the father of