Classical economic theory assumed that a ‘free-market’ economy is a ‘self-regulating’ system that continually tends toward a full-employment equilibrium, with optimum economic benefits for everyone. Therefore, the best government economic policy is to ‘excuse itself’ and give utmost freedom to individual enterprise. A key element of the ‘Keynesian revolution’ was its demonstration that these basic assumptions are false, both in theory and practice, and its assertion that, therefore, the most appropriate government macro-economic policy is to view the whole economy as if it were a single huge business enterprise which needs to be managed as one. In any individual business enterprise, a basic tool of management is the accounting system, which enables management to analyze its operation and performance. Keynes rejected the view, (Adam Smith) that if left alone the ‘invisible hand’ will work on it’s own accord. Instead he argued that “in a barter economy, in a monetary economy, decisions to demand and decisions to supply were made by different persons-they are unlinked,” (Walker). Thus they might not be the same. There is a need for management of the decisions, and there might be a management failure that could result in excess supply. Keynes saw the possibility of this arising from circular cycle such as this, where demand depends upon income. But income in turn depends upon expenditure. Thus, income is expenditure: in our market economy, every dollar of income comes from somebody's spending. But expenditure in turn depends on demand. Thus he imposed that this might tentatively account for depressions whereas: “low income produces low demand produces low expenditure produces low income.” This sounds like circular interpretation, but Keynes argued that it is the causation that is circular. Keynes plan was to explain unemployment in terms of circula...
