Keynesian economics refers to a theory, which is named after the British economist John Maynard Keynes. This economist is most popular for his simple explanation about what caused the Great Depression. The economic theory of Keynes focuses on the circular flow of money, which states that when the amount of spending increases, the earnings increase as well, which then results in more spending and earning.
In the theory of Keynes, when a person spends his money, it will go towards the earnings of another person. When that particular person spends the money that he earned, he is somehow supporting the earnings of another person. This cycle will just go on and on, and will support a fully-functioning economy. When the Great Depression occurred, the initial reaction of the people was to hoard and save money. However, according to the economic theory proposed by Keynes, this action impeded the circular flow of money and interfered with the normal functioning of the economy.
The solution proposed by Keynes to address this economic state involves the government proactively increasing the spending. This can be done by increasing the supply of money or by purchasing goods itself. Keynesian economics also encourages the public sector to be active in assisting the economyâ€”an idea that is completely in contrast with the concept of laissez-faire capitalism which preceded it.
According to the concept of Keynesian economics, the practice of saving too much and spending or consuming too little is disadvantageous for the economy. Additionally, this economic theory also supports the act of massively redistributing wealth when it is deemed necessary. Keynesian economics asserts that the considerable redistribution of wealth is practical because when the poorer sectors of the society are given money, it is more likely that they will spend it, instead of saving it. This spending will then promote economic growth.