What is the Keynesian model? Origin and characteristics of Keynes’s theory

The Keynesian model is an economic and political theory born in the twentieth century, based on the studies by the British economist John Maynard Keynes (1883-1946). Its main characteristic is the interventionism of the State to face the crisis of a country, contrary to the theory of liberalism.

Keynes focused his studies on elements such as cycles and economic aggregates, which are: consumption, unemployment, employment, savings, production, investment and the relationship between all of them, which have a role and rules in the economic movement of a country, and a behavior determined by the individuals themselves.

Origin of Keynesian theory

This theory has its origin in the 20th century, when Keynes exposed it in his work “General theory of employment, interest and money”, General theory of employment, interest and money, in 1936, just when the liberal and capitalist system were experiencing a decline. Some countries that aspired to improve their economies, after World War II, adapted it as an economic model.

Keynes made this theory on the behavior of the economy of a country in the short term, and analyzed the measures to be taken to improve the situation.

John Maynard Keynes (1883-1946)

Main characteristics of Keynesianism

Global demand is the basis of the Keynesian model, variable that he considered fundamental for keep a country’s economy active and that is determined by

  • Goods and forms of consumption Social.
  • The investment by of the companies, as part of their demands.
  • The activation and response of the public sector in the face of social demands.
  • The exports as the basis for the behavior of international markets.

Formula with which he proposed to be able to combat inflation and unemployment, two main problems of a country’s economy.

According to Keynes, unemployment is the phenomenon that occurs from a lack of global consumption, and therefore it must be increased by stimulating demand, which in turn requires a reduction in taxes and therefore families have more money to consume.

Another way to fighting unemployment is lowering interest, in such a way that entrepreneurs make more investments, or through the increase in public spending, through public administration and general state budgets, so that more hospitals, schools, roads, etc. are built, while promoting international commercial exchange with the exchange rate decrease.

While for fight inflation, which is due to excessive demand, Keynes considers the need for articulate measures to control global consumption and reduce it, for which it must lower demand by increasing taxes, raising interest rates, reducing public spending and promoting a rise in the exchange rate.

The Keynesian formula is: GDP: C + I + G + XM

The Keynesian model worked between 1945 and 1973 when the oil crisis occurred, and when for the first time in the modern economic history started to unemployment and inflation coexist, which the Cambridge economist had not foreseen: the inflation that emerged in 1973 it was not a product of high demand, but produced by the increase in energy and oil prices, which led to an increase in product prices, Well, even with the economic recession and low demand, prices continued to rise.

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