Keynesian

Keynesian economics, or Keynesianism, is a school of macroeconomic thought built on the ideas of John Maynard Keynes. Originating during the Great Depression, it argues that aggregate demand is the primary driver of short-run economic output and employment, and that markets may not automatically restore full employment after a shock. Prices and wages are often considered sticky, which can prolong downturns and keep unemployment higher than desired. Keynes argued that policy makers should use fiscal and monetary tools to manage demand.

Fiscal policy plays a central role in Keynesian theory. Government spending and taxation can influence overall demand, with the concept of spending and tax multipliers measuring the impact on output. Public investment, transfers, and countercyclical spending are seen as ways to offset shortfalls in private demand. Automatic stabilizers, such as unemployment benefits and progressive taxes, help cushion fluctuations without new legislation. In situations like a liquidity trap, when monetary policy is less effective, fiscal expansion is deemed particularly important.

Keynesianism evolved into the neoclassical synthesis in the mid-20th century, which combined Keynesian macroeconomics with classical microeconomics. New Keynesian economics later refined the framework by incorporating price stickiness and rational expectations into modern models, while post-Keynesian approaches emphasize uncertainty and financial instability.

Critics, including some classical and monetarist economists, argue that sustained fiscal stimulus can crowd out private investment, raise debt, or generate inflation. Despite debate, Keynesian ideas have influenced countercyclical policy during recessions, especially when demand weakness is viewed as the principal cause of unemployment.