Keynesian Economics
Born from the Great Depression (1936). Keynes argued that aggregate demand drives the economy and government intervention is essential to smooth business cycles.
Sub-topics
The General Theory of Employment, Interest and Money (1936) revolutionized economics. Argued that markets do not self-correct, aggregate demand drives output, and government spending can cure recessions.
John Hicks's 1937 formalization of Keynes — two curves showing equilibrium in goods (IS) and money (LM) markets simultaneously. Dominated macroeconomic teaching for decades.
Government spending has a multiplied effect on national income. One dollar of public investment generates more than one dollar of GDP through successive rounds of spending.
1980s-present synthesis of Keynesian insights with neoclassical microfoundations. Sticky prices, menu costs, and imperfect competition explain why markets fail to clear.
Heterodox Keynesians who reject the neoclassical synthesis. Emphasize fundamental uncertainty, endogenous money, financial instability, and the role of power in economic outcomes.
The Keynesian prescription: governments should use taxation and spending to manage aggregate demand — deficit spending in recessions, surpluses in booms. Counter-cyclical stabilization.
When interest rates hit zero, monetary policy loses traction — people hoard cash rather than spend or invest. Only fiscal policy can break the trap. Japan's lost decades and the 2008 crisis are textbook cases.
Total spending in the economy: consumption + investment + government + net exports. Keynes's central insight was that insufficient aggregate demand, not supply failures, causes recessions.