How the Macroeconomic Theories of Keynes influenced the Development of Government Economic Finance Policy after the Great Depression of the 1930’s: Using Australia as the Εxample

How the macroeconomic theories of Keynes influenced the development of Government Economic Policy after the Great Depression of the 1930’s: Using Australia as the example. Keynes’ economic work, The General Theory of Employment, Interest and Money, was first published in 1936. The General Theory was written as a response to the human tragedy caused by Great Depression. Keynes’ General Theory was written with a view to challenging the economic orthodoxy of the times and not written with a view to practical application. The prevailing economic orthodoxy was the classical theory of economics in the Ricardian tradition. Keynes’ theory became, for a time, the new orthodoxy and profoundly affected economic policy especially in the post-World War 2 period, in the Western World. Keynes prescribed a number of measures that governments should undertake to provide economic stability that could not be left to the unfettered operation of the market. For example, he explicitly proposed that taxes could be used to redistribute wealth and thus increase the propensity to consume and that taxes could be used as a form of forced corporate savings, to reduce national debt, and so, reduce the propensity to consume. In other words, taxation policy, in a package of policy measures, could be used to stimulate or slow down an economy as required. Prior to Keynes, taxation policy was more about raising funds for essential government expenditures. Keynes also propounded that interest rates in an economy be kept low so that investment in productive assets, as opposed to non-productive investment, be encouraged. This paper starts by examining Keynes’ General Theory of Employment and will then illustrate how Keynesian economic theory influenced Australian government economic policy development from 1930, the pre-Keynesian era, to 1949 the height of the Keynesian era.