MainstreamFrom 1936
Keynesian economics
Why can an economy get stuck with mass unemployment, and what should government do about it?
The 30-second version
Keynes argued that economies can get stuck with mass unemployment because there isn't enough spending. Markets don't always fix themselves, so governments should step in during slumps. The 1970s exposed its limits, but every recession since has revived it.
Big questions it works on
Go deeperKey ideas, thinkers, evidence and where it stands today
Key ideas
- Total spending (aggregate demand) determines output and jobs in the short run.
- Wages and prices are sticky, so markets do not clear quickly.
- Paradox of thrift: if everyone saves more at once, incomes fall.
- The multiplier: government spending can raise output by more than its cost when resources are idle.
Key thinkers
John Maynard Keynes (The General Theory, 1936), John Hicks (IS–LM, 1937), Paul Samuelson, Alvin Hansen
What it got right
Demand shortfalls are real, and stimulus can shorten recessions. Policy after 2008 and in 2020 leaned heavily on Keynesian ideas.
Main criticisms
The 1970s produced high inflation and high unemployment together, breaking the simple trade-off in early Keynesian models. The Lucas critique (1976) showed that relationships estimated under one policy may change when policy changes.
Evidence worth knowing
Keynes: practical people who think themselves free of intellectual influence are usually “the slaves of some defunct economist”.
Where it stands today
Its core ideas live on inside New Keynesian models and central-bank practice.
Family line
Reacting against classical faith in self-correcting markets during the Great Depression.