KEYNESIANISM.

John Maynard Keynes. 1883-1946.

John Maynard Keynes. A Cambridge academic. The chief advisor to the government during the war. His belief was that economic depressions like those that Britain suffered in the 30’s could be avoided. The key to his beliefs was DEMAND.

How it worked. Fall in demand for manufactured goods caused economies to drift in to recession. Unemployment would follow. It followed that to stop this demand must be maintained. The only body strong enough to do this was the GOVERNMENT.

Government increases spending to stimulate demand. Eg. provide finance for a new road building project Increases demand as new workers spend their money on consumer goods eg. new cars. Car industry is stimulated as the demand for cars rises. More car workers taken on so more people with money to spend.

Government action. Use money and taxes to reinvest in the economy to get it going. This artificial boost to the economy would stimulate real growth. Firms would have lots of orders and would need to take on extra workers. With their wages workers will buy goods and services so demand is stimulated.

Governments must be prepared to stop trying to balance the budget. Need to be willing to run deficit budgets even if they have to borrow money to do so. The government would pay off their debts by taxing the companies and workers who have had increased profits and wages as the economy has improved.

During the war the government had directed the war effort During the war the government had directed the war effort. People had got used to the fact the government interfered in their lives. It was now accepted that government action and direction was an essential part of economic planning.