The Rise and Fall of Keynesianism

• Author: Erbi Ago
• Position: Tirana Business University
• Pages: 177-181

177

ISSN 2410-759X

Acces online at www.iipccl.org

Balkan Journal of Interdisciplinary Research

IIPCCL Publishing, Tirana-Albania Vol. 1 No. 2

September 2015

The Rise and Fall of Keynesianism

Erbi Ago, GDL, LPC

Tirana Business University

Abstract

This analysis will focus on suggesting the reasons for the rise of Keynesian economics in

the 1930s and will continue by explaining the factors that led to its fall in the 1970s. The

article starts by providing an analysis of the problems that classical economists faced

during the Great Depression and how Keynesianism was basically a theory formed as a

solution to these issues. The economic turmoil and unemployment of the 1930s led to a

need for a new theory that was developed based on the hindsight of how socialist and

fascist governments had no problem with unemployment and were developing due to

state intervention. Therefore, Keynesianism rose as a defense to capitalism by

implementing partial socialist measures in order to save it. This would rather be

considered as state intervention to counter unemployment. Ironically, Keynesianism

failed to predict the issues that rose in the 1970s, inflation, stagnation, and unemployment

as it did not consider it impossible for them to happen at the same time.

Keywords: Socialism, Economy, Unemployment, Keynes, Capitalism.

Introduction

“Keynes’ General Theory can rightly be said to stand as one of the three key books in

the development of economics, together with Adam’s Smith’s Wealth of Nations and

Marx’s Capital (Fusfeld, 1999, 127). Keynesian economics represent the third

significant step in the development of the understanding of political economic matters.

Keynesianism, as a theory, rose to prominence in the earlier part of the 20th century.

Several scholars have studied its rise and fall and the reasons to both these aspects.

When something is not working, the need for a replacement is obvious. Therefore,

replacing economic theories implies there are certain crucial differences between

them.

On this point, this paper will make two claims; first, that Keynesianism rose as a

solution to the problem of unemployment that “classical economics” failed to deal

with which led to the Great Depression’s stagnation and economic turmoil pointed

out carefully by scholars such as Stillwell and Watts. To achieve an understanding

of Keynesian differences from its predecessors, classical economists; a comparison of

the differences between the former and supporters of the latter school such as Jean-

Baptiste Say and Pigou will be provided. This will allow pointing out the problems

that classical economists could not deal with, leading to the Great Depression; and

why Keynesianism rose as a result. The second claim is for the aspects and problems

that led to the fall of Keynesianism were due to aspects of economy that its proponents

ignored and how this theory was considered as impossible and incomplete by

scholars such as Friedman and Lucas. Simply put, drawing from these two groups

of thinkers, Keynesianism rose in order to stabilise economy after the failure of the