About a century ago, the new economic theory about the power of the aggregate demand and governmental intervention destabilized the conventional belief free markets would automatically make an economy healthy. Back in the 1930s, existing economic theories could neither explain nor provide the solution to the Great Depression. It suddenly appeared that free market cannot provide total employment. To address this problem, British economist John Keynes concluded that the aggregate demand was uneven which destabilized the economy and hindered full employment. He underlined the importance of government intervention that is essential to regulate the economy with public policies.
Though Keynesian economists provided a comprehensive explanation of how to make the economy work, their theories dominated in the economy for about 25 years after World War II. Many economies entered the stage of slow growth combined with inflation which had no explanation under the Keynesian theory. In the mid-1970s the new classical economic school arose and pushed out Keynesian ideas. The theory was resurrected during the financial crisis of 2007-2008. Many governments used the Keynes’ ideas to respond the recession. It is very likely that Keynes’ understanding of financial crisis and depression match the current economies. Nevertheless, the Keynesian theory is not comprehensive enough to resolve all economic problems.
The good economy is the system that leaves no sound theory behind. There is no universal school of thought in economics that is capable to give explanations and cures to every recession we face. Though Keynesian thoughts worked out in times of Great Depression, they do not provide all answers we need.