Which Factors (Intellectually and Economically) Contributed to the Demise of Keynesianism?

Which factors (intellectually and economically) contributed to the demise of Keynesianism?

The intention of this paper is to analyse the factors that led to the demise of Keynesianism through critically examining both intellectual and economic contributions which may have piloted such a fate. However, before this can be done, one must understand Keynes’ critique of the liberal market and the ideas that allowed him to form such a critique.

Keynes’ work was not only a product of World War Two, but also that of the crisis in economic theory produced by the great depression. He argued that a reduction in demand in the economy caused by deficient money in the hands of the consumer resulted in a collapse of the world economy. The solution according to Keynes was to take a demand side approach in neutralising the economy should imperfections occur. He believed reducing unemployment to a position of full employment to be the main priority of the state and proposed policies of work in housing, transport and road building as a method of creating employment.

Keynes’ main issue with the liberal market encapsulated a theory whereby an economy in recession would have private investment cut which intern leads to increased unemployment as firms cut jobs. However, this has a further knock on effect of reducing real wages and thus further deducing demand. His conclusion was that unemployment was not only costly to the state but to society as well.

The idea of effective demand is shown to operate through the mechanism of international trade as well, and thus it is not confined to the domestic market. Keynes said that “deficient effective demand cannot be readily solved through adjustments in the market where the excess supply will manifest itself”. Thus Keynes created his basis for state intervention.

Unemployment being one of Keynes major concerns let to the incorporation of the Philips curve in the theory as it provided an explanation of price determination and...