Keynes was a British economist whose ideas have affected the theory and practice of modern macroeconomics, and informed the economic policies of governments. He built on and greatly refined earlier work on the causes of business cycles, and is widely considered to be one of the founders of modern macroeconomics and the most influential economist of the 20th century.

In the 1930s, Keynes spearheaded a revolution in economic thinking, overturning the older ideas of neoclassical economics that held that free markets would, in the short to medium term, automatically provide full employment, as long as workers were flexible in their wage demands. Keynes instead argued that aggregate demand determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment. He advocated the use of fiscal and monetary measures to mitigate the adverse effects of economic recessions and depressions. Following the outbreak of the Second World War, Keynes's ideas concerning economic policy were adopted by leading Western economies. In 1942, Keynes was awarded a hereditary peerage as Baron Keynes of Tilton in the County of Sussex. During the 1950s and 1960s, the success of Keynesian economics resulted in almost all capitalist governments adopting its policy recommendations.

In 1999, Time magazine included Keynes in their list of the 100 most important and influential people of the 20th century, commenting that: "His radical idea that governments should spend money they don't have may have saved capitalism."In addition to being an economist, Keynes was also a civil servant, a director of the British Eugenics Society, a director of the Bank of England, a patron of the arts and an art collector, a part of the Bloomsbury Group of intellectuals, an advisor to several charitable trusts, a writer, a philosopher, a private investor, and a farmer.

The fundamental principle of the classical theory is that the economy is self-regulating. Classical economists maintain

that the economy is always capable of achieving the natural

level of real GDP or output, which is the level of real GDP that

is obtained when the economy's resources are fully

employed.

According to Say's Law, when an economy produces a

certain level of real GDP, it also generates the income

needed to purchase that level of real GDP. In other words,

the economy is always capable of demanding all of the output that its workers and firms choose to produce. Hence,

the economy is always capable of achieving the natural

level of real GDP.

Consider what happens when the funds from aggregate saving exceed the needs of all borrowers in the economy. In

this situation, real GDP will fall below its natural level because

investment expenditures will be less than the level of

aggregate saving.

Aggregate saving, represented by the curve S, is an upward-

sloping function of the interest rate; as the interest rate rises,

the economy tends to save more. Aggregate investment,

represented by the curve I, is a downward-sloping function of

the interest rate; as the interest rate rises, the cost of borrowing increases and investment expenditures decline.

Initially, aggregate saving and investment are equivalent at

the interest rate, i. If aggregate saving were to increase,

causing the S curve to shift to the right to S′, then at the same

interest rate i, a gap emerges between investment and

savings. Aggregate investment will be lower than aggregate

saving, implying that equilibrium real GDP will be below its natural level.

Unemployment

Says Law of Market

Equality between Saving and Investment

Money and Prices

Demand for Money

Role of State in Achieving High Level of Income

and Employment

General versus Special Theory