Keynesian economics

Keynesian economics takes its name from John Maynard Keynes, whose General Theory of Employment, Interest and Money (1936) argued that economies can stay in prolonged slumps because total spending, or aggregate demand, falls short, and that markets will not always fix this quickly. His proposed remedy was for government to increase spending or cut taxes during downturns, running deficits to restore demand.

Key ideas include the multiplier, in which an initial boost to spending yields a larger total increase in output, and "sticky" wages and prices that delay adjustment. Keynesian ideas shaped postwar policy, including the use of fiscal policy for stabilization, and returned after the 2008 crisis and in the 2020 pandemic response. "New Keynesian" models combine them with rational expectations.

The school's critics include monetarists, who stress money supply, Austrian economists, who reject aggregate demand management, and supply-siders. The stagflation of the 1970s damaged its reputation for a time. Conservatives often argue that stimulus spending is ineffective, crowds out private investment and leads to permanent deficits; defenders reply that it matters most in deep downturns and that governments should save in good times. Most economists accept some Keynesian insights.