Keynes and the 20th century: when should the state intervene in the economy?

If the market falls, will it get up on its own, or does it need a helping hand? 20th-century economists argued fiercely over this question, and their answers shaped today's government policy.

How did Keynes differ from the classical economists?

During the Great Depression that began in 1929, unemployment rose sharply in many countries. According to the classical view, a competitive market should return to full employment on its own over time. But the return was delayed.

The British economist John Maynard Keynes published "The General Theory of Employment, Interest and Money" in 1936. His main idea: the level of employment is determined first and foremost by aggregate demand, that is, total spending in society. If demand falls, the market can remain "stuck" with unemployment for a long time. At such a time government spending can support demand.

Let us look at the logic in a simple chain (prepared by the author, hypothetical). The city administration spent 100 million soum on road repairs. The contractor "Yo'lsoz" paid wages to its workers. The workers spent part of this money in teahouses and shops, and the teahouse owner hired a new cook. The first spending "awakens" other spending along the chain. In Keynesian economics this effect plays a central role.

How was the post-war world organised?

In July 1944, in the small town of Bretton Woods in the US state of New Hampshire, representatives of 44 countries gathered, according to the World Bank archives (the IMF writes 45 countries on its own page). The conference laid the foundations of the International Monetary Fund (IMF) and the World Bank. Keynes was one of the most active participants in these negotiations.

Economics also achieved official recognition. The prize in economic sciences established by Sweden's central bank (Sveriges Riksbank) was awarded for the first time in 1969: it was shared by the Norwegian Ragnar Frisch and the Dutchman Jan Tinbergen for dynamic models of economic processes.

Then and now: where are the 20th-century ideas?

Issue	Approach in the mid-20th century	Today's practice
The state's role in a crisis	Keynes: supporting demand through government spending	Stimulus programmes are widely used in crises
International finance	New institutions were created at Bretton Woods	The IMF and the World Bank continue their work
The method of economics	Mathematical and dynamic models grew stronger	Computer models and big data
The main question	How to reduce unemployment	Balancing unemployment, inflation and sustainable growth

Keynes and his critics had one thing in common: they assumed that people make rational decisions. By the end of the century, psychologists had cast doubt on this assumption too.