Keynesianism

Keynesianism is an economic theory and associated macroeconomic model of the 20th century, primarily attributed to British economist John Maynard Keynes. It advocates for government intervention in the economy, particularly during recessions or depressions, to stimulate demand and promote economic stability. This intervention often involves increased government spending (fiscal policy) and/or adjustments to interest rates and the money supply (monetary policy). The core principle is that aggregate demand, the total spending in the economy, is the primary driver of economic activity, and that insufficient demand can lead to unemployment and other economic downturns. Keynesian economics suggests that governments can moderate these fluctuations through active management of the economy. The theory emphasizes the importance of government policies to smooth the business cycle.

Keynesianism meaning with examples

• During the Great Depression, President Roosevelt implemented policies heavily influenced by Keynesianism, including massive public works programs like the Civilian Conservation Corps (CCC) and the Works Progress Administration (WPA). This government spending aimed to create jobs and stimulate demand, helping to lift the US economy out of its slump. The 'New Deal' programs, rooted in Keynesian principles, significantly altered the relationship between the government and the economy. Keynesian approaches emphasized the role of the government in stabilizing the economy.
• Following the 2008 financial crisis, many governments adopted Keynesian policies. These policies involved fiscal stimulus packages, such as tax cuts and increased infrastructure spending. These were coupled with monetary easing, such as lower interest rates and quantitative easing, to bolster the economy. Proponents of Keynesianism argued that these measures were essential to prevent a deeper recession and to support recovery. Critics debated their effectiveness and long-term impact on debt.
• Keynesianism often supports progressive taxation, where higher earners pay a greater percentage of their income in taxes, to fund government spending and provide social safety nets. The economic stimulus is often implemented during economic downturns to provide temporary relief and stimulate economic activity. This can include unemployment benefits and support for social welfare programs. Critics sometimes argue that the resulting increased government spending leads to inflation and government debt.
• In the context of a recession, a Keynesian approach would involve increasing government spending on infrastructure projects like roads, bridges, and public transit. The investment creates jobs and puts money into the economy, increasing aggregate demand, ultimately boosting private sector activity. This focus is intended to counteract declining consumer and business spending. The multiplier effect suggests that such spending can have a positive impact on the overall economy.
• Keynesianism, by encouraging government intervention, fundamentally seeks to stabilize the business cycle. The cyclicality of the economy is managed through the active use of monetary and fiscal policies, making efforts to achieve full employment. This means utilizing policies to promote economic growth during a recession. The primary goal of the system is the promotion of economic stability for the broader population.