In what sense did Keynes “stand classical economics on its head”?
The correct answer and explanation is :
John Maynard Keynes famously “stood classical economics on its head” in his landmark work, The General Theory of Employment, Interest, and Money (1936), challenging the long-established tenets of classical economics. Classical economics, which dominated economic thought until the early 20th century, assumed that markets, including labor and goods markets, are self-correcting. In classical theory, full employment is the natural state of the economy, and if unemployment arises, the market will automatically restore equilibrium through wage adjustments.
Keynes, however, rejected this notion, arguing that economies could experience prolonged periods of unemployment and underutilization of resources, especially during times of economic downturns. He argued that the economy does not always self-correct in the way classical economists believed. According to Keynes, aggregate demand—total spending in the economy—was the key determinant of employment and output levels. If aggregate demand was insufficient, the economy could remain stuck in a state of high unemployment, as wages and prices might not adjust downward quickly enough to restore full employment.
Keynes also critiqued the classical assumption that saving automatically leads to investment. In classical economics, it was assumed that individuals’ savings would be matched by businesses’ investments, maintaining equilibrium. However, Keynes introduced the concept of the “paradox of thrift,” suggesting that if everyone tries to save more during a downturn, it could lead to a fall in aggregate demand, reducing output and employment. Thus, saving in a recession could worsen economic conditions, rather than improving them.
In summary, Keynes overturned classical economics by asserting that government intervention—through fiscal policies such as increased public spending—was essential to stimulate demand and ensure full employment, especially during economic slumps. He argued that the economy was not inherently self-correcting, and active policy measures were needed to address unemployment and stabilize the economy.