The founder of Keynesianism is John Maynard Keynes, who fundamentally changed economics in 1936 with his work “General Theory of Employment, Interest and Money”.
Definition / explanation
In Keynesianism, the highly unstable aggregate demand is considered to be decisive for the extent of employment and production. Fluctuating private investments lead - via a multiplier - to fluctuating production and influence unemployment.
Keynes described countercyclical countermeasures by the state as a suitable measure to keep these fluctuations low. Overall economic demand is to be controlled by state demand policy.
The aim is full employment in the economy, which in turn has a positive effect on demand and production. A stable overall demand thus enables the utilization of capacities and leads to a stable economy.
The most important, also currently valid, points of Keynesianism are the control of employment and production through the goods market and the possibility of unemployment on an involuntary basis. Keynes also pointed out that an increase in the savings rate does not lead to an increase in the investment rate to the same extent.
With his statements, Keynes also contributed to the explanation of consumption in a simple macroeconomic partial model of the goods market.
There are different types of consumption in Keynesianism.
The non-income part is also known as autonomous consumption. It describes the fact that people consume even if there is no national income. The income-related part of consumption is the sum of national income and the marginal consumption rate. This marginal consumption rate indicates which part of an additionally earned monetary unit is invested in consumption or, alternatively, saved.
The fundamental psychological law according to Keynes stipulates that the marginal consumption quota moves between zero and one, since a higher income will in any case lead to increased consumption and savings.
The goods-money market model of Keynesianism originally goes back to Hicks and is considered the best-known interpretation of Keynesianism. This model records the demand side of an economy in the interest-income diagram (Hicks diagram).
The IS-LM model represents the equilibrium of the goods market with the IS curve and the equilibrium of the money market with the LM straight line. At the same time, the equilibrium between the interest rate and national income is determined by the intersection of the curves.
The aim is to consider the short-term effects of control measures. For this purpose, a flexible adjustment of the quantities to changes in demand is assumed.
Although only the demand side of a closed economy is considered in the IS-LM model, analogies can be drawn for open economies or supply sides.