John Maynard Keynes’s ‘The General Theory of Employment, Interest, and Money (1936) started a revolution in economic thought when it challenged the classical view of markets as self-correcting. Keynesian theory requires governments to stimulate demand and maintain full employment during periods of recession (Kahn, 2022). It was developed in the 1930s at a time of global economic collapse. This strategy to promote more government spending and economic planning was a big contrast from previous theories of the economy. It has dramatically influenced twentieth-century economic policies and continues to guide the responses to financial crises and the fiscal strategies of world governments, including Canada’s stance on handling economic management and stimulus.
Historical Context and Importance
The Keynesian theory became a revolutionary paradigm of economics during the Great Depression between 1929 and 1939, accompanied by genuinely disastrous unemployment levels and economic instability. This phase revealed the weaknesses of classical economic theories, which argued that markets were self-regulated and would spontaneously be able to achieve full employment (Sümer, 2023). Keynes sought to challenge this idea, asserting that during periods of recession, private sector demand could be much lower than would have been sufficient for full employment. He stated that government intervention by increasing spending and economic planning was necessary in such circumstances to stimulate demand and revive the economy.
Keynes’ concepts were a paradigm change, for it was proposed that the government purposely had to increase spending and demand to prevent an economic recession. He became well-known for pushing government-funded employment projects, even basic ones, such as paying to dig and fill holes to stimulate the economy. This principle underscored the essence of Keynesian stimulus: The role of these governmental initiatives in boosting the economy whenever it falls into recession.
Keynesian economics was the new beginning of radical changes from orthodox economic thought. It established a new system of dealing with business cycles but at the same time reducing all adverse impacts that were related to low economic levels. Keynes’ advocacy of positive governmental intervention led to the development of modern economic policy, which is evident in how every country responds by creating beneficial conditions after each financial crisis. His theory not only provided solutions to the short-term problems of the 1930s but also laid a long-span foundation for economic stability and development.
Relevance Today
Although Keynesian economics has been criticized as a theory, it is one of the most important theories related to modern economic policy when discussing government responses during crises such as the 2008 financial meltdown and COVID-19. In compliance with Keynesian principles, governments worldwide have embarked on fiscal stimulus programs that create demand through mass government spending to reverse periods of economic downturn (Larch et al., 2021). These initiatives have provided economic stability where the private sector investment and consumption declined. Keynesian theory and context remain applicable, meaning they have a significant impact. It describes modern economic behavior and gives evidence of the effectiveness of this theory as a source for proactive government interventions that address emerging challenges.
Canadian Policies and Keynesianism
Regarding changes by the Canadian government, when the economy loses momentum, policy shifts are mostly Keynesian. This framework is evident in the active fiscal policies during recessions whereby the government attempts to increase demand and eliminate unemployment, as recommended by Keynes. Canada has used Keynesian policies after the financial crisis through infrastructural development and tax cuts. Keynesian reasoning led to such measures following the slumps, and this helped Canada withstand more effective recessions than many competitors. A Keynesian approach encourages resilience and growth due to the government’s use of fiscal stimuli during an economic slowdown.
In the current fight against COVID-19 worldwide, Keynesian economics has begun gaining more traction in people’s and companies’ financial aid received from governments. This method is a situational form of Keynesian policy on government spending directly, one instrument to address economic activity growth and employment problems during a crisis (Jaeger et al., 2019). The Keynesian approach to Canadian governance during the 2008 financial crisis and its economic effects from the Coronavirus allows for a robust fiscal policy. It confirms that the core of Keynes’s legacy is still relevant in addressing today’s and tomorrow’s crises for Canada globally.
The long-term investment in Canada’s social infrastructure, including education and health by the nation, has been done for over a decade to increase its reproductive productive capacity. Such investments were also motivated by appreciating a resource endowment with an element of social protection to provide economic vigor as another pre-requisite in Keynesian theory. Canada adopts counter-cyclic fiscal policies as they adjust taxes and public spending. These policies are implemented according to changes during economic cycles. This proactive approach seeks to keep the unemployed under control and maintain a developing price level that can sustain steady growth. This concept of Canada’s economic policies is over a decade old.
Higher Government Spending and Economic Planning
The theory generally supports an active government role in the economy, which involves increased public investment with deliberate economic management to counteract boom and bust market cycles. Keynes argues that in slow periods when the private demand does not meet expectations, government spending is necessary to aid recovery. This approach is often described in the ‘priming pump’ principle, which asserts that government spending on public works, infrastructure, and the private sector should be directed appropriately to prime demand for goods and services. Priming pumps eventually lead to greater employment levels while stimulating aggregate output. However, Keynes’s argument that markets are not self-correcting and the focus on government to restore stability with full employment fundamentally undermined this notion of classical economics.
The pragmatism of Keynesian thought is therefore evident in many international events that take place following the interventions by governments to close gaps left behind by private demands. As a result of the enhanced budgetary allocations, the government will be able to improve insulation against recessionary effects and unemployment and stabilize the economy. This approach to managing an economy is Keynesian because it assumes the importance and effectiveness of a calculated government intervention to follow a direction favoring growth. It emphasizes the utility of government spending as a short-term solution to return immediate health in the economy, and it also works out an insurance scheme that is designed against deeper downturns, which would involve recovery.
Conclusion
Keynesian theory, therefore, is a foundational principle in twentieth-century economic policymaking adopted by various governments to solve their problems. The key approach espoused by Keynes was that of government intervention through increased expenditure and smart economic management. The continued use of Keynesian-type policies during crises by the Canadian Government underlines the crucial place and importance brought to modern economic strategy. State involvement in the process of leveling and stimulating economic growth plays a crucial role in this theory.
References
Jaeger, J., Westphal, M. I., & Park, C. (2020). Lessons learned on green stimulus: Case studies from the global financial crisis. World Resources Institute.
Kahn, R. F. (2022). Some aspects of the development of Keynes’s thought. In Richard F. Kahn: Collected Economic Essays (pp. 97-118). Cham: Springer International Publishing.
Larch, M., Orseau, E., & Van Der Wielen, W. (2021). Do EU fiscal rules support or hinder counter-cyclical fiscal policy?. Journal of International Money and Finance, 112, 102328.
Sümer, L. (2023). Financial Crises: From 1929 Great Depression to 2020 Great Lockdown. In The World Economy and Financial System: A Paradigm Change Offering a Sustainable Approach (pp. 29-52). Cham: Springer International Publishing.
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