Keynesian economics is a theory of economics developed by John Maynard Keynes during the 1930s, especially in response to the Great Depression. It emphasizes the role of government spending and demand in influencing economic activity.
Core Ideas of Keynesian Economics:
Demand Drives the Economy:
Economic output is primarily determined by aggregate demand (the total spending in the economy).
If demand falls, businesses produce less, hire fewer workers, and the economy contracts.
Government Should Intervene:
In a recession, private demand may not be enough to keep the economy at full employment.
Government spending (fiscal policy) can help make up for this shortfall and boost demand.
This could include building infrastructure, giving out stimulus checks, or increasing public services.
“Multiplier Effect”:
Government spending doesn’t just affect the economy once—it has a multiplier effect, where one person’s spending becomes someone else’s income, which they then spend, and so on.
Deficits Are Okay During Recessions:
Governments should run deficits (spend more than they collect in taxes) during downturns to support demand.
In boom times, they can cut back and reduce debt.
Sticky Wages and Prices:
Wages and prices don’t adjust quickly in the real world.
So markets can remain out of balance (like high unemployment) unless there’s active intervention.
Contrast with Classical Economics:
Classical theory assumes markets always clear (supply = demand) and economies self-correct.
Keynes argued this doesn’t happen quickly, especially during deep recessions.
Real-World Example:
During the 2008 financial crisis, many governments adopted Keynesian-style policies—like stimulus packages and bailouts—to prevent economic collapse.
Would you like to see a simple chart or example to illustrate how Keynesian spending works in practice?