Keynesian Economics

AAA

DEFINITION of 'Keynesian Economics'

An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the Depression. Subsequently, the term “Keynesian economics” was used to refer to the concept that optimal economic performance could be achieved – and economic slumps prevented – by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian economics is considered to be a “demand-side” theory that focuses on changes in the economy over the short run.

INVESTOPEDIA EXPLAINS 'Keynesian Economics'

Prior to Keynesian economics, classical economic thinking held that cyclical swings in employment and economic output would be modest and self-adjusting. According to this classical theory, if aggregate demand in the economy fell, the resulting weakness in production and jobs would precipitate a decline in prices and wages. A lower level of inflation and wages would induce employers to make capital investments and employ more people, stimulating employment and restoring economic growth.
 
The depth and severity of the Great Depression, however, severely tested this hypothesis. Keynes maintained in his seminal book, “General Theory of Employment, Interest and Money,” and other works, that structural rigidities and certain characteristics of market economies would exacerbate economic weakness and cause aggregate demand to plunge further.
 
For example, Keynesian economics refutes the notion held by some economists that lower wages can restore full employment, by arguing that employers will not add employees to produce goods that cannot be sold because demand is weak. Similarly, poor business conditions may cause companies to reduce capital investment, rather than take advantage of lower prices to invest in new plant and equipment; this would also have the effect of reducing overall expenditures and employment.
 

There is more to this economic theory - Read Can Keynesian Economics Reduce Boom-Bust Cycles?

VIDEO

RELATED TERMS
  1. Circuitism

    A macroeconomic explanation of how banks create money for production ...
  2. Marxian Economics

    A school of economic thought based on of the work of Karl Marx. ...
  3. Heterodox Economics

    The analysis and study of economic principles considered outside ...
  4. Paradox Of Thrift

    The notion that individual savings rather than spending can worsen ...
  5. Demand-Pull Inflation

    A term used in Keynesian economics to describe the scenario that ...
  6. Multiplier

    In Keynesian economic theory, a factor that quantifies the change ...
Related Articles
  1. Savings

    How is the stock market affected by Thanksgiving and Black Friday?

    See why Thanksgiving and Black Friday sales numbers are considered to be important indicators for stock market activity throughout the holiday season.
  2. Personal Finance

    How does Halloween affect the economy?

    Discover some of the differing ways in which economists evaluate the impact of Halloween on the American economy and whether it is a net benefit.
  3. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  4. Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull Inflation

    Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services.
  5. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  6. Taxes

    Parties For Taxes: Republicans Vs. Democrats

    Read about the political parties' differences in tax ideology, and how it can affect your paycheck.
  7. Options & Futures

    Breaking Down The U.S. Budget Deficit

    Find out why this particular piece of national financing gets so much attention from the media and investors.
  8. Investing

    What is the Keynesian multiplier?

    The Keynesian multiplier was introduced by Richard Kahn in the 1930s. It showed that any government spending brought about cycles of spending that increased employment and prosperity regardless ...
  9. Bonds & Fixed Income

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  10. Economics

    Stagflation, 1970s Style

    Find out how Milton Friedman's monetarist theory helped bring the U.S. out of the economic doldrums.

You May Also Like

Hot Definitions
  1. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  3. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  4. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  5. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  6. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
Trading Center