Keynesianism Pt. 4

According to Keynesian theory, some individually-rational microeconomic-level actions — if taken collectively by a large proportion of individuals and firms — can lead to inefficient aggregatemacroeconomic outcomes, wherein the economy operates below its potential output and growth rate. Such a situation had previously been referred to by classical economists as a general glut. There was disagreement among classical economists on whether a general glut was possible. Keynes contended that a general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn. Losses of potential output due to unnecessarily high unemployment is the result. Producers then react defensively (or reactive) making decisions that damage macroeconomics.
Most Keynesians advocate an active stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems. Government policies can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation. For example, when the unemployment rate is very high, a government can use a dose of expansionary monetary policy.
Keynes argued that the solution to the Great Depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: 1: A reduction in interest rates, and 2: government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy. This in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.
A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a strong general tendency towards equilibrium. In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium allow for price adjustment to eventually achieve this goal. More broadly, Keynes saw his theory as ageneral theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.
The new classical macroeconomics movement, which began in the late 1960s and early 1970s, criticized Keynesian theories, whileNew Keynesian economics has sought to base Keynes' ideas on more rigorous theoretical foundations.
Some interpretations of Keynes have emphasized his stress on the international coordination of Keynesian policies, the need for international economic institutions, and the ways in which economic forces could lead to war or could promote peace.

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