Keynesian Economics
AdvancedKeynesian economics is a school of economic thought, based on the work of John Maynard Keynes, which holds that total demand is the main driver of output and employment in the short run, and that governments should act to stabilise the economy during downturns.
Keynes developed his ideas during the Great Depression of the 1930s, most famously in his 1936 book The General Theory of Employment, Interest and Money. He challenged the view that markets always correct themselves quickly.
Keynes argued that economies can remain stuck with high unemployment for long periods if demand is too weak. Because wages and prices adjust slowly, falling demand leads to lower output and job losses rather than quickly falling prices. In such situations, he argued, governments should increase spending or cut taxes to boost demand, even if this means running budget deficits.
For example, Keynesian thinking supports government stimulus programmes during recessions, such as infrastructure spending or payments to households, to replace lost private demand.
Keynesian economics dominated policy in many countries from the 1940s to the 1970s. It lost influence after the stagflation of the 1970s, but Keynesian ideas, combined with other approaches, still shape how governments and central banks respond to recessions.
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