Keynesian economics
Keynesian economics also called Keynesianism, or Keynesian Theory, is an economic theory based on the ideas of the 20th-century British economist John Maynard Keynes. Keynesian economics promotes a mixed economy, in which both the state and the private sector are considered to play an important role. Keynesian economics markedly differs from, and sought to provide solutions to what some economists believed to be the failure of laissez-faire economic liberalism (which advocates that markets and the private sector operate best without state intervention).
In Keynes's theory, macroeconomic trends can overwhelm the micro-level behavior of individuals. Instead of the economic process being based on continuous improvement in potential output, as most classical economists had believed from the late 1700s on, Keynes asserted the importance of aggregate demand for goods as the driving factor of the economy, especially in periods of downturn. From this he argued that government policies could be used to promote demand at a macro level, to fight high unemployment and deflation of the sort seen during the 1930s. This is in contrast to supply-side economics. Keynes believed that the government was responsible for helping to pull a country out of a depression. If the government increases its spending, then the citizens are encouraged to spend more because more money is in circulation. People will start to invest more, and the economy will climb back up to normal.
A central conclusion of Keynesian economics is that there is no strong automatic tendency for output and employment to move toward full employment levels. This conclusion conflicts with the tenets of classical economics, and those schools, such as supply-side economics or the Austrian School, which assume a general tendency towards a welcome equilibrium in a restrained money-creating economy. In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of General equilibrium allow for price adjustment to achieve this goal.
More broadly, Keynes saw his as a general theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.
In Keynes's theory, macroeconomic trends can overwhelm the micro-level behavior of individuals. Instead of the economic process being based on continuous improvement in potential output, as most classical economists had believed from the late 1700s on, Keynes asserted the importance of aggregate demand for goods as the driving factor of the economy, especially in periods of downturn. From this he argued that government policies could be used to promote demand at a macro level, to fight high unemployment and deflation of the sort seen during the 1930s. This is in contrast to supply-side economics. Keynes believed that the government was responsible for helping to pull a country out of a depression. If the government increases its spending, then the citizens are encouraged to spend more because more money is in circulation. People will start to invest more, and the economy will climb back up to normal.
A central conclusion of Keynesian economics is that there is no strong automatic tendency for output and employment to move toward full employment levels. This conclusion conflicts with the tenets of classical economics, and those schools, such as supply-side economics or the Austrian School, which assume a general tendency towards a welcome equilibrium in a restrained money-creating economy. In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of General equilibrium allow for price adjustment to achieve this goal.
More broadly, Keynes saw his as a general theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.