OPPapers.com

The Keynesian Theory

Keynesian Theory

The Great Depression can be greatly understood by the Keynesian Theory. It is actually crucial to understanding the Great Depression.
To begin, when the Great Depression hit worldwide, it fell on economists to explain it and devise a cure. Most economists were convinced that something as large and intractable as the Great Depression must have complicated causes. Keynes came up with an explanation of economic slumps that was surprisingly simple. In fact, when he shared his theory and proposed solution with Franklin Roosevelt, the President is said to have dismissed them with the words: "Too easy."
Keynes explanations of slumps ran something like this: in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a circular flow of money in the economy, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But suppose something happens to shake consumer confidence in the economy.
For example, if someone has a low pay roll salary, they will not have any confidence to want to spend their money. What they will do is put their money in a saving account. Therefore, the buyer will lose money. By putting money into the worried consumer, the consumer will spend money. By the consumer spending money, the buyer receives money thus completing the circular flow of money. By not having the circular flow of money, their was a great depression (this is only one explanation). Competing this circular flow of money was one solution of The Great Depression.
By putting money into people's hands, Keynesian's Theory creates a budget deficit. For example, people who are given ‘free' money, don't create a budget of their spending. On the other hand, it creates profit for the buyers. Although, this hurts the consumer, they may be getting money but they spend it like there is no tomorrow. Hence the reason for naming the theory "to easy."...