Keynesianism, or Keynesian economics, is a macroeconomic theory that focuses on total spending in the economy and its effects on output and inflation. It was established by British economist John Maynard Keynes in his book, The General Theory of Employment, Interest and Money, in 1936. Keynesian economists believe that since private sector decisions sometimes lead to inefficient macroeconomic outcomes, or market failure, it requires an active policy response by government. Therefore, Keynesian economics supports a mixed economy guided mainly by the private sector but partly controlled by government.
Keynes sought to establish a theory different from “classical economics,” which was based on the theories of such economists as David Ricardo, John Stuart Mill, and Arthur Cecil Pigou. Observing what he called classical economics' failure during the 1930s, Keynes concluded that the classical theory of markets as self-regulating was wrong. Instead, he argued, recession and high unemployment are mainly the result of insufficient spending in the private sector. Therefore, to achieve full employment and sustained economic growth, the government needs to actively intervene to increase spending, if necessary through deficit financing.
Critics of Keynes point out that his approach leads to inflation and ultimately to less long-term growth because government cannot know how resources should be distributed for most efficient use. Austrian economist Friedrich Hayek called Keynesian economic policies a “fundamentally collectivist approach" for its advocacy of centralized planning. Keynes's idea that full employment could be achieved through inflation, which was thought to be proven by the so-called "Phillips Curve," was also discredited after the experience of stagflation during the 1970s--high unemployment accompanied by high inflation.
Nevertheless, Keynes’s economic ideas played an important role in public policy during the Great Depression, World War II, and the post-war economic expansion from the 1950s and 1970s. Recently, the global financial crisis from 2007-2009 caused many politicians to adopt a Keynesian model of stimulating the economy with the hope of alleviating the shock of the crisis. British Prime Minister Gordon Brown and United States Presidents George W. Bush and Barack Obama are among many politicians who have tried implementing Keynesian methods in their economies.
This page provides an overview of Keynesian economic theory, its history, and examples of how it gets adopted by governments.