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.

RELATED FAQS
  1. How did John Maynard Keynes influence business cycle theory?

    Read about the impact of John Maynard Keynes on business cycle theory and the development of macroeconomics to study aggregate ... Read Answer >>
  2. What do Keynes and Freidman have to do with fiscal and monetary policy?

    Find out how John Maynard Keynes and Milton Friedman influenced how modern economists and analysts think about fiscal and ... Read Answer >>
  3. How can a government balance the stimulating effects of increased spending with the ...

    Read about some of the problems with analyzing the impact of government spending, both in terms of stimulus multipliers and ... Read Answer >>
  4. What are some examples of expansionary fiscal policy?

    Learn about expansionary fiscal policy – tax cuts and government spending – that are used by governments to boost spending ... Read Answer >>
  5. What does the term 'invisible hand' refer to in the economy?

    Discover and understand the concept of the "invisible hand" as explained by Adam Smith, considered the founder of modern ... Read Answer >>
Related Articles
  1. Trading

    Giants Of Finance: John Maynard Keynes

    This rock star of economics advocated government intervention at a time of free-market thinking.
  2. Insights

    Economist Guide: 5 Lessons John Maynard Keynes Teaches Us

    Read about the paradoxical and confusing world of John Maynard Keynes, including the lessons modern economists can still learn from the British thinker.
  3. Insights

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  4. Investing

    How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers laid our financial foundations.
  5. Insights

    Can Infrastructure Spending Really Stimulate the Economy?

    Public infrastructure spending rarely stimulates long-term positive growth for the economy, even in times of recession...
  6. Insights

    Adam Smith and "The Wealth Of Nations"

    Adam Smith's 1776 classic "Wealth of Nations" may have had the largest global impact on economic thought.
  7. Investing

    Explaining the Liquidity Preference Theory

    According to the liquidity preference theory, investors demand interest in return for sacrificing their liquidity.
  8. Investing

    Book Value: How Reliable Is It For Investors?

    In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
  9. Trading

    A Look At Fiscal And Monetary Policy

    Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate the economy.
RELATED TERMS
  1. John Maynard Keynes

    An author and economist who is well-known for his stance that ...
  2. Deficit Spending

    When a government's expenditures exceed its revenues, causing ...
  3. Economic Stimulus

    Attempts by governments or government agencies to financially ...
  4. Paradox Of Thrift

    The notion that individual savings rather than spending can worsen ...
  5. Keynesian Put

    A Keynesian Put is the expectation that markets and the economy ...
  6. Classical Economics

    Classical economics refers to work done by a group of economists ...
Hot Definitions
  1. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  2. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  3. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  4. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  5. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
  6. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security ...
Trading Center