Where does stimulus economics come from?

By Andrew Beattie AAA
A:

Depending on which type of economist you talk to, stimulus economics originated from the ideas of either a book published in 1776 or a book published in 1936. 1776 is the year Adam Smith published his book "Wealth of Nations," bringing economics and free market economics into the world in a single book. On February 5, 1936, however, John Maynard Keynes published "The General Theory of Employment, Interest and Money," a book that rejected the classical (free market) economics of Smith in favor of a government-led economy.

Keynes believed capitalism was inherently unstable and that it needed the calming influence of government control to reach economic prosperity. The General Theory held that government spending was superior to private investment when attempting to spur the economy. Keynes believed that a government would be more willing to spend itself out of problems and invest in projects regardless of the profitability. This unquestioning spending would overpower other economic factors to enable a rebound.

The New Deal was based upon the principles of stimulus spending in the General Theory and every government-led stimulus/recovery plan since has revived the Keynesian outlook when the chips are down. This is, at least partially, because governments enjoy the chance to spend on special projects that will result in votes. The less cynical reason that the General Theory is adopted in hard times is because it allows governments to take action. (For a related article on the New Deal, take a look at our article What Caused The Great Depression?)

Free market economics would only call on the government to help facilitate the bankruptcy and shakeout of the economy, where private entities would buy up the remaining assets at a discount. The General Theory calls on the government to use tax revenues and deficit spending to put a cushion under the economy to try and avoid hitting a true bottom. The General Theory tends to fall out favor when the economy is healthy, but it rears its head in the form of stimulus spending whenever a widespread economic crisis hits. (Learn more about the famous Keynes in our article: Giants of Finance: John Maynard Keynes.)

This question was answered by Andrew Beattie.

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