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Until the great depression of 1930, monetary policy had been the main instrument of economic stabilization. The great depression saw the failure of free enterprise economy.
During this period, under monetary policy economies failed completely. The prices went down men and machines were thrown out of work. Demand contracted and workers had no purchasing power to buy goods and services. Investment failed to peak up even a 1% rate of interest failed to attract the demand for investment. Capital and the capitalist system collapsed suggesting monetary policy could no longer click. It was against this background of universal despair that Keynes in his general theory (1936) gave an insight into the determinants of national income and the role of government in making capitalist economies to work.
Keynes key assumptions are:
a) A mature economy does not necessary attain equilibrium at a level of full employment.
b) A reduction in wage rate is no cure to depression. It will only further depress the demand for goods and services.
c) The state must accept responsibility through public expenditure on autonomous investment, a public work program to maintain a high stable level of effective demand.
Keynes emphasized the role of government in the economy. According to him capitalism could work only with government help, government guidance and government control. This is the origin of fiscal i.e. collecting revenue, spending money and managing its debt as an instrument of economic stabilization.
Wilfykil answered the question on March 8, 2019 at 13:15
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