Keynesian Revolution - Background

Background

When Keynes published his General Theory in 1936, the influence of free market economics on policy making had already declined substantially compared to the almost unchallenged ascendancy it had enjoyed in Britain during the 1840s - 1860s. By the mid-1930s much of the first and second world was already under the sway of communism or fascism, with even the US departing from economic orthodoxy with the New Deal. There had not been a corresponding decline for neoclassical economics in the academic sphere however. According to economic historian Richard Cockett, within academia the prestige of free market economics was still near its peak even in the 1920s. In the 1930s neoclassical economics began to be challenged within academia, though at first by various diverse schools which apart from Marxism were mostly of only local influence - such as the Stockholm school in Sweden or in the US the Administered price theorists Keynes was little influenced by the various heterodox economists of the 1930s, his General theory was written largely in a Marshellian framework though with some important points of dissent such as the idea that excessive savings can be harmful for the overall economy. Keynes asserts that when savings exceed available investment opportunities it makes it impossible for business as a whole to make a profit and so lay offs and increased unemployment will result. In chapter 23 of the General Theory Keynes traces the genesis of this idea to, among others, Mercantilist thinkers of the previous three centuries, to the Fable of the Bees and to the dissenting economist J A Hobson with his Physiology of industry (1889).