The idea from keynesianism derives from the thought of John Maynard Keynes, an English economist born in 1883 and died in 1946. The concept alludes to the principles that this specialist embodied in “General theory of employment, interest and money”, a book that he presented in 1936.
Keynes published his most important work as a proposal to overcome the Great Depression from 1929. That is why Keynesianism revolves around the stimulation of the economy in a context of crisis.
For Keynes, national states and international institutions should have the tools to exercise control over the economy in times of recession. In this framework he focused on the state spending as a vehicle to stimulate activity.
Keynesianism, therefore, considers that the fiscal policy It is essential to achieve a multiplier effect in the economy, since through it it is possible increase aggregate demand (that is, the sum of the expenses on services and goods that the State, companies and individuals are willing to carry out with a certain price level).
While the classical theory of economics holds that the market tends automatically to the full use of the means of production, Keynesianism postulates that there is no such tendency “natural”, but various factors affect it. In this way, it proposes to promote production from the State since, with greater production, there are more goods to exchange and more exchanges take place.
Keynesianism, in short, promotes state intervention in the market – unlike liberalism– to overcome economic depressions by stimulating aggregate demand, which generates greater production, investment and employment.
To formalize the theory of Keynesianism it is possible to adopt an approach that considers the purchasing power of a given country and find out what it constitutes at a given point in time. This concept is also known as purchasing power, and is determined by goods and services that can be purchased with a specific amount of money, taking prices into account.
The purchasing power is directly proportional to the amount of goods and services that we can buy with the same sum of money. In the case of a country, this power is equal to the sum of the income of all its inhabitants, and this is represented in the formula with the variable AND.
As the total income must be distributed in savings and investment but also in consumption, any increase in income entails one in either of these two factors. In other words, the higher the income, the higher the consumption and savings.
Changes are represented in the formula by the sign Δ (delta), which in mathematics, physics and computer programming is often used to indicate the variation of a magnitude between two given moments. With regard to savings, we must use the letter A, while for consumption, the C. Let us not forget that in this case we are talking about an entire country, by which we refer to the savings and consumption of all inhabitants.
Using all of this, we can express the fractional change in two different ways. The Marginal propensity to save It is understood as the saving for each extra unit of income and can be expressed by the following equation: 0. On the other hand we have the Marginal propensity to consume, 0, according to which the focus is on the additional consumption for the extra units.
If we represent the marginal propensity to save with the variable pma and the marginal propensity to consume as pmc, then we can establish the following equality: pma = 1 – pmc.