Keynesian Prescriptions for Economic Growth

Abstract

Between 1945 and the mid-1970s, the ideas of John Maynard Keynes represented the prevailing orthodoxy in economic theory. Keynes argued that, at a macroeconomic level, the operation of the ‘invisible hand’ alone was unlikely to result in the economy reaching and settling at ‘full employment’. Price and wage stickiness, informational asymmetries and the absence of futures markets would all tend to prevent free markets from working smoothly. The implications of this theory for economic growth was that the free market would fail to generate the economic conditions, and the subsequent rates of investment in R&D and capital, necessary to achieve a socially desirable rate of economic growth. This chapter examines the basic mechanics of the Keynesian model and shows how it implies that direct state intervention, both to avoid prolonged slumps and correct market failure on the supply side, is necessary if the economy is to fulfil its growth potential.KeywordsFree MarketGovernment SpendingAggregate DemandNatural RatePositive ExternalityThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.