How Relevant Are Keynes’ Ideas for Understanding the Contemporary World?

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How Relevant are Keynes’ Ideas for Understanding the Contemporary World? The ideas of John Maynard Keynes have influenced economics for nearly a century. Keynes’ ideas have relevance for understanding the contemporary world. Keynes’ ideas were shaped by the world of the later 19th and early 20th centuries. During this period, many economies moved away from use of the gold standard and adopted monetary systems that required a new economic theory to guide policy makers in dealing with economic activities within an expanding and more complex economic environment. Keynes developed and published his economic theories during the Great Depression. In his paper The General Theory of Employment, Interest, and Money (1936), Keynes argued that aggregate demand was innately unstable because people made investment decisions based on the unpredictable “animal spirits” of business expectations. Keynes proposed that if people developed pessimistic expectations about the economic environment, they would pull back on investment activities which in turn would result in a reduction of aggregate demand, output, and employment. When Keynes spoke of investment he was not referring to investments such as those in the stock market, but to investment in the production of goods and services. Between 1929 and 1933 in the United States, investment fell 80%. The overall premise of Keynes’ General Theory is that business people produce what they expect to sell. However, it is incorrect to deduce that the aggregate of these production decisions is consistent with full employment level output in the short and long-term even in conditions of a stable economic environment, fulfillment of expectation, perfect competition, and flexible wages (Wray, 2008). The focus of Keynes theory rests on expectation and entrepreneurial decision-making in any economic environment. The decision made on level of
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