The Legacy of Keynes

A crisis is always associated to a fall of the paradigm into force. And the current crisis isn't an exception.

Today we see many economists bringing back the theories and models of Keynes. Despite the wrong idea some people have about theories, the world is seeing now that the contribution of Keynes for the economics theory is broader that what many though was.
When Keynes in 1930 argued that the USA weren't in a simple recession and the markets couldn't solve the solution by themselves, as the people belive then, the world was shocked.
In 1936 Keynes published his most famous  work: "General Theory of Employment, Interest and Money", despite his fame and contribution to the european economy and politics were already considerable.
With many publications and an important role in the negotiations of the Treaty of Versailles, with his General Theory,  Keynes showed the weaknesses and failures of the economic theory to explain the problems that were hauting the Western Economies.
The Great Depression of 1929 with its consequences - exponential growth of the unemployment, banks and companies failures, and decrease in the industrial production, money suplly and international trade flows - changed the way as the people were seeing the world and the economy. The economists trained in the current theory weren't able to explain how the world come to that situation: the faith in the mechanisms of self-recovery of the markets were put aside as the crisis was becoming worse.
This was the perfect time for Keynes, to struggle against the current theories.
At that time the economic theory already defined the economic cycles theory. According to it, the economic growth of the capitalist economies evolved according to 4 phases:

• ascendent phase (propserity or expansion);
• inflection from the ascending to descending;
• descending phase (depression or contraction);
• inflection from the descending to ascending;

Keynes concentrated his Theory in the last phase, in order to help to recover from the crisis the Western World was suffering. Keynes created a Theoretical model to explain the insufficiency of aggregate demand, the decrease in the capacity of investment and consumption and the decrease in the confidence of the economic agents.
The Western Economies survived to the 1929 Great Depression acording to Keynes predictions. One of the ways founded to solve the Depression was the restoration of the confidence in the markets, thanks to the public intervention in the macroeconomic field, by the decrease in the interest rates and the increase in the budget deficits.
Using the explanation of the existence of equilibrium solutions below the full employment and some possible recipes for the economy becomes to prosperity, the contribution of Keynes was benefited by the New Deal policies of Roosevelt in the USA, the cycle inversion in many Western European Countries (thanks to expansionary monetary and fiscal policies) and of course the abandonment of the global standard system.
Keynes showed a new short-run macroeconomic approach, based on the management of the aggregate demand through public incentives to increase the investment and consumption.
However his theories were sometimes misunderstood. When he annouced the end of the laissez faire, he wasn't trying to predict the end of the private innitiative: the capitalism wasn't a model to shoot down, but to improve.
Many economists though that the solution was to become a planning and central management economy. For Keynes the capitalism should remain because it wasn't a wrong system: it was only imperfect in the way it was beeing applied in the real economies that time. For Keynes the markets should work with public incentives to stimulate the investment and consumption and fight the unemployment, leaving intact the private property.
Since then, according to the cycle theory, the crisis couldn't be avoided, the solution according to keynes was be already prepared to struggle and recover from this situation.
After the Western World recover from the Great Depression, the economists though that a solution for all the depressions was founded. In fact, in the next recesions suffered by the USA (1975, 1982 and 1991), the Federal Reserve used the policies proposed by Keynes: decrease in the interest rate in order to stimulate the economy, accompanied sometimes by the decrease in taxes and increase in the public expenditure. However in the Asiatic Great Crash of 1997, the affected economies didn't follow the Keyne's recipe: the policies applied were the budget austerity and the increase in the interest rate. The governments of these countries knew perfectly the Keynes policies. But they realized that untill 1997 they were following the policies issued by the International Monetary Fund and the U.S. Treasury. So, the governments selected another way to solve the crash.

After Keynes, our world faced big crisis and is now facing the biggest crisis after the Great Depression in the Keynes' time. And the current big crisis showed that it's  necessary a new approach and understand of the Keynes' theories, for a better implementation of those theories.