keynesianism

Keynesianism refers to the economic theory developed from the ideas of John Maynard Keynes, particularly those articulated in The General Theory of Employment, Interest and Money (1936). It emphasizes the role of aggregate demand in determining overall economic activity and employment, especially in the short run when wages and prices are sticky. Keynesians argue that an economy can be trapped in underemployment equilibrium, with insufficient demand to purchase all output. In such conditions, private sector spending may be inadequate, and active policy is required to restore full employment.

Policy tools include fiscal policy (government spending and taxation) and, to a lesser extent, monetary policy. During recessions, expansionary fiscal measures—public works, transfers, tax cuts—can raise demand and output through various multipliers. Automatic stabilizers, such as unemployment insurance and progressive taxes, dampen volatility without new legislation. The IS-LM framework summarizes how fiscal and monetary policy interact to determine output and interest rates, while the broader New Keynesian view adds microfoundations and price stickiness.

Key criticisms include concerns about timing, the magnitude and sustainability of multipliers, crowding out of private investment, and the long-run costs of rising debt. Critics from classical and monetarist schools argue that fiscal stimulus can be ineffective or inflationary. Keynesian ideas influenced postwar economic policy, the management of demand during recessions, and stimulus programs in the late 2000s and during the 2020 pandemic, though they coexist with other macroeconomic theories in modern policy debates.