Keynesian economics (also called Keynesianism) describes the economics theories of John Maynard Keynes. Keynes wrote about his theories in his book The General Theory of Employment, Interest and Money. The book was published in 1936.
Keynes said capitalism is a good economic system. In a capitalist system, people earn money from their work. Businesses employ and pay people to work. Then people can spend their money on things they want. Other people work and make things to buy. Sometimes the capitalist system has problems. People lose their work. Businesses close. People cannot work and cannot spend money. Keynes said the government should step in and help people who do not have work.
This idea is called "demand-side policy". If people are working, the economy is good. If people are not working, the economy is bad.
Keynes said when the economy is bad, people want to save their money. That is, they do not spend their money on, or invest in, things they want. As a result, there is less economic activity.
Keynes said the government should spend more money when people do not have work. The government can borrow money and give people jobs (work). Then people can spend money again and buy things. This helps other people find work.
Some people, such as conservatives, libertarians, and people who believe in Austrian economics, do not agree with Keynes' ideas. They say government work does not help capitalism. They say when the government borrows money, it takes money away from businesses. They do not like Keynesian economics because they say the economy can get better without government help.
During the late 1970s, Keynesian economics became less popular because inflation was high at the same time that unemployment was high. This is because many people interpreted Keynesian theory to say that it was impossible for there to be both high inflation and high unemployment.
When a big recession happened in 2007, Keynesian economics became more popular. Leaders around the world (including Barack Obama) created stimulus packages which would allow their government to spend a lot of money to create jobs. Conservatives and Libertarians would say that the stimulus package rewards the bad behavior that lead to the recession. It tells big banks that they can misbehave and the government will step in and get them out of trouble.
Keynes had the following ideas:
- The market for goods controls employment and production. The market for work does not.
- It is possible that people become unemployed even if they want to work.
- An increase in savings will not lead to an increase in investment of the same amount. People have the choice between investing their money or saving it.
- An economic system based on money is different from one that is based on the exchange of goods.
- The quantity theory of money is only valid if there is no unemployment.
- In a market economy, investor behavior is governed by what Keynes called the animal spirits of investors.