Posted on 29-03-2022

The economic theory encourages state intervention through economic policy.

What is Keynesianism?

Keynesianism is the economic theory that encourages state intervention through economic policy, to stimulate demand and encourage consumption.

Keynesianism emerged in the West at the end of the 19th century, with the aim of stimulating demand to get out of the crisis. This theory posits that to overcome an economic crisis it is necessary to address the problems of demand through state intervention.

The theory was proposed by John Maynard Keynes in his work  General Theory of Employment, Interest, and Money, published in 1936, following the Great Depression, and in it he studied all the factors of production that make up the economy of a country, such as investment, consumption, demand,  saving and government spending.

John Maynard Keynes was a promoter of the Keynesian theory.

Keynes's theory

Keynes's theory is based mainly on the excess of resources, and not on the lack of them, to find a solution to the economic crisis.

This theory explains that the decrease in wages stagnates the economy by decreasing demand. Unemployment is the main cause of the crisis, and this does not occur due to a lack of financial resources but due to the lack of global demand. By not consuming enough, not enough goods and services are produced to create jobs for everyone.

Keynes's theory proposes that in order to raise global demand, the following variants must be applied:

  • Lower taxes: thus boosting the consumption of individuals.
  • Lower interest rates: encouraging loans.
  • Increase public spending: creating jobs by the state by increasing public spending, but in turn lowering unemployment levels.

According to Keynes, the government must intervene to increase public spending, and this state investment would then be recovered, since increasing consumption would increase demand, thus benefiting companies that in turn pay higher taxes to the government. In this way, Keynesianism proposes a solution to one of the negative factors of capitalism: business cycles.

Keynes's theory states that the state must intervene to increase aggregate demand, regardless of whether the money comes from the country's  Gross Domestic Product (GDP) or from the issuance of foreign debt. This model is applicable to countries with economic crises, although its effects are in the short term since in the long term they would generate more crises than solutions.

Characteristics of Keynesianism

The main characteristics of Keynesianism are the following:

  • He argues that economic policy is the main tool to get a country out of a crisis.
  • He proposes that governments take charge of stimulating demand and that the State is in charge of investing resources in companies.
  • The use of fiscal policy as a regulator of the economy.
  • He considers that the main danger for the economy is 
  • It is opposed to liberal economics and is based on state intervention as an economic agent.


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