John Keynes has been hailed as both the saviour and destroyer of the capitalist system. Why?

John Maynard Keynes is well known as a British Economist whose ideas and thoughts helped to shape the economic policies of the British Government from 1939 to 1979. Keynes’ ideas influenced the economy and helped to change the economic recessions and depressions. His thoughts are named as the Keynesian economics and follows the idea that when some micro-economic-level actions are taken collectively by a large proportion of individuals it will lead to insufficient performances in the economy. In other words, the economy operates below its potential output and growth rate. This is often referred to as general glut. Keynes was inspired by the work of Adam Smith (1723-1790) and elaborated on Smith’s theories and ideas on Economics.

Adam Smith was the founder of economics, as we know it today. His thoughts have ultimately helped to shape contemporary ideas relating to the market economy and the role of the state in relation to it. Smith also founded an intellectual framework that explained the free market and laissez-faire. Both of these are connected with the underlying theme of economic growth. Smith's analysis is not confined to showing the interrelation between the different elements of a continually maintained system. It also explains how the system can generate the continual accumulation of wealth. And since, according to Smith, this process is most successful when left to the play of natural forces, his analysis leads him to urge governments to let well alone. There is also the idea of using ‘supply and demand’, which always has to be equal as both are the two sides of the same set of transactions, while discussions of "imbalances" are a muddled and indirect way of referring to price. However, in an unmeasurable qualitative sense, demand for an item such as goods refers to the market pressure from people trying to buy it. They will "bid" money for the item, while in return sellers offer the item for money. When the bid matches the offer, a transaction can easily occur. In reality, most shops and markets do not resemble the stock market, and there are significant costs and barriers to "shopping around”.

Smith is also well known for his expression of ‘The Invisible Hand’, which he used to demonstrate how self-interest guides are the most efficient use of showing the resources in a nation's economy, with public welfare coming as a by-product. He states that it simply encourages businesses to provide what consumers want and at the same time it discourages government involvement. He believed that the only responsibilities of the government should be to define property rights, set up honest courts, impose minor taxes and subsides to compensate for well defined and narrowly specified “market failures”.

Smith also believes that you can not achieve a stable economy all the time, this is due to inflation in the market. The market will constantly go up and down, depending on the amount of money people continue to put into the system. In every society an average rate both of wages and profit in employment of labour and stock is naturally regulated.

Keynes argued that it was the demand that created the supply. If total demand rose, firms would respond to the extra demand by producing more and employing more people. However a fall in demand would lead to less output and rising unemployment. His central point was that an unregulated market economy could not ensure sufficient demand. Keynes states that this makes it harder for the economy to work because when people are low on money then they start to budget, which means that less money is being circulated into the economy. This will consequently have a gradual effect on businesses losing money and ultimately take a negative financial toll on the economy as a whole.

The way to combat this problem is in what Keynes calls “the multiplier effect.” This is the idea that an initial amount of spending (usually by the government) leads to increased consumption spending and so results in an increase in national income greater than the initial amount of spending. In other words, an initial change in total demand causes a change in total output for the economy that is a multiple of the initial change. This than means that people will spend money and then by doing so will give others money to help the economy keep afloat.

However, Marx argues that in order to maintain profit, you do need to pay people less than what they produce. This is why Marx rejects the idea of the multiplier effect. Marx states that if the worker makes widgets for £1 and then sells them for £2 straight away there is a problem. The worker can not buy the widget, which means that sales cut widget production, which then leaves the worker unemployed.

Keynes cited a solution to the problem when he suggested that more money be printed and circulated. This may seem like a good idea, as it will stop any chance of people struggling with money problems and having to budget. Keynes argued that increases in the money supply would not inevitably lead to increases in inflation. Increasing the amount of money in circulation may instead lead to a decrease in the velocity of circulation of that money. In other words the average speed of circulation of money would fall because there was more of it about.

Alternatively, the increase in the amount of money in circulation may lead to an increase in the number of transactions taking place, because as we have seen Keynes disputes the assumption that the economy will find its own equilibrium. It may be in that position there is insufficient demand for full-employment equilibrium. In that case increasing the money supply will fund extra demand and move the economy closer to full employment.