The greatest development in economic research and policy in the past century were majorly attributed to John Maynard Keynes. He came up with the Keynes economic theory in an attempt to solve the great depression in the nineteen thirties (Mankiw, et al., 1993). It relates on total spending in the economy and its consequences on inflation and output. The theory largely encouraged an increase in government spending and a subsequent decrease in taxes so as to increase business and subsequent improvement of the prevailing economy from depression. This concept was of the idea that optimum economic performance could be attained and shortfalls prevented by stimulating aggregate demand through government policies interventions. The following are the strengths of john Keynes economic theory:

Strengths of john Keynes theory

Increased employment levels– in that during recession unemployment levels increase while the employment levels drastically decline as this is caused by downsizing by companies. This leads to a drop in consumer demand for goods and services at a very fast rate. Government interventions through various monetary policies like increasing its spending returns the economy back to the initial level.
Banking industry stabilization– during recession banks and other financial institutions start increasing their lending rates and tightening their lending policies. This in turn halts the growth of small and medium sized businesses. The government intervention through open market operations and decreased interest rates helps in returning the economy back to equilibrium.

Control on government spending– even though the theory advocates for an increase in spending by the government it also calls for rationing during a rapidly economic growth. Thus preventing the rising demand that pushes inflation. This pushes the government to reduce deficits and save for the future and allocate the funds to a different sector.
Provides tools for a country to better monitor its economic output– among the objectives of Keynes theory is to monitor the total output of the economy of a given country. Thus, the development of the gross national product precursor by Keynes that measured the health of the economy by comparing its production and capacity. The measuring of these indicators and understanding their interpretations puts a state at a better position to predict inflationary and depression cycles, hence the ability to intervene early to avert the negative situations.
Interest rates moderation– in increased performance economic period, the loan demands outweigh their supply by lenders. This causes an increase in interest rates thus fuelling inflation. By wisely applying the financial theory tools, leads to enactment of a corrective measure to counter these effects and adjusting back the economy.

Weakness of Keynes theory

The Keynesian model is usually less applicable in cases of underdeveloped countries as in;

The model was developed taking into account the prevailing economic conditions in developing countries. This conditions in terms of money markets, credit development and creation and condition of goods of developing countries are quite different from those in underdeveloped countries.

In underdeveloped countries, an increase in aggregate demand will not be able to stimulate a production in the same ratio. Therefore unemployment in underdeveloped countriescannot be solved by increasing both aggregate demand and production (Keynes, et al., 1936). This is because the problem is not necessarily with the total demand but the institutional and structural problems facing the under developed countries. In that, in undeveloped countries there is a worrying shortage of raw materials, semi-finished goods, underdeveloped capital markets and poor skill and managerial qualities. They are also characterized by poor means of transport and communication. There is an increasing demand for foreign currency than supply. Taking all the above mentioned structural and institutional challenges in the context makes even more difficult to implement monetary theory to enhance supply. Therefore, an increase in total demand will rarely solve the unemployment issues in such cases.

The average supply curve becomes inelastic due to the above mentioned structural hindrances. Therefore, an increase in aggregate demand through deficit financing will increase inflation. A fall in average supply would lead to further increase in inflation and prices while the unemployment problem remains unsolved (Keynes, et al., 1936). Keynes opinion was that inflation starts after full employment thus making it clear that Keynes definition of inflation is different from that of underdeveloped countries.

Keynes was of the opinion that removing unemployment need is enhancing aggregate demand. Therefore by providing loans to the modern manufacturing sector, the underdeveloped countries will increase aggregate demand. Reduction of taxes, debt financing and provision of subsidies will trigger rural, urban migration due to the more attractive wages in urban areas compared to the rural ones and also partly because of the better standards of living(Blinder, et al., 1986). The expansion of the urban industrial sector will lead to an increased influx of rural, urban migration hence growing urban unemployment. This will also bring about urbanization problems like congestion, poor sanitation and straining of public facilities.

Keynesian theory relevance to economics

Keynesian economists believe that the total demand is affected by various economic decisions ranging from private or individual consumption to the public expenditure. Public expenditure majorly relates to fiscal policies, that is government expenditure and its policy on taxes and monetary policy tools to solve inflation.

A change in total demand whether anticipated or not, usually has a short run effect on employment and real output and but not price. This can be clearly demonstrated in the Philip’s curve as it shows a slow increase in inflation as unemployment is falling (Keynes, et al., 1936).
Keynesian economists also believe that prices usually respond to demand and supply changes slowly, therefore, causing shortages and surpluses of labor periodically. The typical unemployment level is never ideal to Keynesian economists since unemployment is subject aggregate demand caprice and these prices increase gradually. Keynes was also so concerned more about solving the unemployment problem more than combating inflation. This is because he believed that low inflation costs are small. He also believed in governments taking aggressive actions to stabilize the economy on the basis of value judgments and the capability to improve free markets

In conclusion, Keynes theory suggests that no automatic mechanism no matter how strong can move employment and output towards full employment level. Although this is in conflict with economic approaches assuming strong tendency towards equilibrium. Keynes policies need to be internationally coordinated and this can only be achieved by the need of international economic institutions(Mankiw, et al., 1993).

Works cited

Blinder, Alan S. “Keynes after Lucas.” Eastern Economic Journal 12, no. 3 (1986): 209–216.

Keynes, John Maynard. The General Theory of Employment, Interest, and Money. London: Macmillan, 1936.

Mankiw, N. Gregory, and others. “A Symposium on Keynesian Economics Today.” Journal of Economic Perspectives 7 (Winter 1993): 3–82.