Keynesian Economics

Keynesian economics ( /ˈkeɪnziən/ KAYN-zee-ən; also called Keynesianism and Keynesian theory) are the group of macroeconomic schools of thought based on the ideas of 20th-century economist John Maynard Keynes. Keynesian economists believe that in the short run, productive activity is influenced by aggregate demand (total spending in the economy) and that aggregate demand does not necessarily equal aggregate supply (the total productive capacity of the economy). Instead it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment and inflation.

Advocates of Keynesian economics argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, particularly monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle. The theories forming the basis of Keynesian economics were first presented by Keynes in his book, The General Theory of Employment, Interest and Money, published in 1936. Keynes contrasted his approach to the 'classical' (more commonly 'neoclassical') economics that preceded his book. The interpretations of Keynes that followed are contentious and several schools of thought claim his legacy.

Keynesian economics advocates a mixed economy – predominantly private sector, but with a role for government intervention during recessions – and in the US served as the standard economic model during the later part of the Great Depression, World War II, and the post-war economic expansion (1945–1973), though it lost some influence following the stagflation of the 1970s. The advent of the global financial crisis in 2008 has caused a resurgence in Keynesian thought.