Keynesian Economics: Theory and How It’s Used

What Is Keynesian Economics? Keynesian economics is a macroeconomic theory of total spending in the economy and its effects on output, employment, and inflation. It was developed by British economist John Maynard Keynes during the 1930s in an attempt to deal with the effects of the Great Depression. The central belief of Keynesian economics is that government intervention can stabilize the economy. Keynes’ theory was the first to sharply separate the study of economic behavior and individual incentives from the study of broad aggregate variables and constructs. Based on his theory, Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the Depression. Subsequently, Keynesian economics was used to refer to the concept that optimal economic performance could be achieved—and economic slumps could be prevented—by influencing aggregate demand through economic intervention by the government. Keynesian economists believe t...