The Legacy of Keynes Essay Example | Topics and Well Written Essays - 2750 words

The Legacy of Keynes - Essay Example The influence of J.M. Keynes work is immense in the field of economics as he revolutionised economics with his classic book written in 1936, The General Theory of Employment, Interest and Money and changed the way we perceive the role of economy and governments in social life. With the introduction of the theory of income expenditure multiplier in 1931 by Richard Kahn, Keynes worked on the basis of his work which was to bring about revolutionary ideas to the field of economy giving rise to a new branch of economics known as the 'macroeconomics' (Keynes, 1936/1974). In a two volume Treatise on Money published in 1930 Keynes established the Wicksellian theory of the credit cycle in which the initial ideas of the liquidity preference theory of interest are suggested. This has been considered as one of the most important of Keynes contributions along with his ideas on marginal efficiency of investment. The impact of his 1936 book The General Theory of Employment, Interest and Money has been unprecedented not only because of the timing of its publications but also due to its unique approach that brought in a new brand of Keynesian economics (Coddington 1976; 1260; Trevithick 1992). This book was released during the period of the Great Depression and had major political, social and economic impact. Within the general theory, Keynes sought to develop a theory that can explain the formation of aggregate output and employment considering aggregate demand as the determining factor. He introduced certain revolutionary concepts in economics such as the co ncept of demand-determined equilibrium. He also suggested that price flexibility is generally ineffective as a cure to unemployment. Keynes also gave a unique theory of money based on "liquidity preference", and highlighted the role of radical expectations (Trevitihick 1992; Keynes 1936/1974). He worked on the marginal efficiency of investment schedule and taking a detour from Say's Law reversed the savings-investment causation relationship, and also suggested the possibility of government fiscal and monetary policy that can be used to counter the problems of recessions and control economic booms for a balanced and predictable economy.The Keynesian ideas were controversial as they were revolutionary and although Keynes had support of progressive economists he faced severe opposition from traditional ones. The "IS-LM" representation of Keynes's theory initiated the "Neoclassical-Keynesian Synthesis" and became the most popular and dominant form of macroeconomics by the 1960s (Chrysta l et al, 1994; Snowdown et al.1994). The Keynesian synthesis however went through changes in the Post Keynesian era although Keynes' theories were retained in the original forms. Keynes influence was pronounced due to the combined factors of the Depression, post war economy and Keynes revolutionary ideas that changed the way economists perceived or interpreted the role of government and concepts of economic theories (Snowdown et al, 1994). The inflationary gap of the post war era as identified by Keynes led to his emphasis on compulsory savings and setting up of an international commodity reserve. In a later