Keynesian economic1

8/3/2019 Keynesian economic1

1/22

Keynesian economics

From Wikipedia, the free encyclopedia

Jump to: navigation,search

Economics

Economies by region [show]

General categories

MicroeconomicsMacroeconomics

History of economic thought

MethodologyMainstream &heterodox

Mathematical & quantitative

methods

Mathematical economics Game theory

OptimizationComputational

Econometrics Experimental

StatisticsNational accounting

Fields and subfields

BehavioralCulturalEvolutionary

GrowthDevelopmentHistory

InternationalEconomic systems

Monetaryand Financial economics

Public andWelfare economics

HealthEducationWelfare

PopulationLabourManagerial

BusinessInformation

Industrial organizationLaw

AgriculturalNatural resource

EnvironmentalEcological

UrbanRuralRegionalGeography

Lists

Journals Publications

Categories Topics EconomistsEconomy: concept and history

Business and Economics PortalThis box:view talkedit
http://en.wikipedia.org/wiki/Keynesian_economics#mw-headhttp://en.wikipedia.org/wiki/Keynesian_economics#mw-headhttp://en.wikipedia.org/wiki/Keynesian_economics#p-searchhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Outline_of_economicshttp://en.wikipedia.org/wiki/Microeconomicshttp://en.wikipedia.org/wiki/Macroeconomicshttp://en.wikipedia.org/wiki/Macroeconomicshttp://en.wikipedia.org/wiki/History_of_economic_thoughthttp://en.wikipedia.org/wiki/Economic_methodologyhttp://en.wikipedia.org/wiki/Mainstream_economicshttp://en.wikipedia.org/wiki/Heterodox_economicshttp://en.wikipedia.org/wiki/Heterodox_economicshttp://en.wikipedia.org/wiki/JEL_classification_codes#Mathematical_and_quantitative_methods_JEL:_C_Subcategorieshttp://en.wikipedia.org/wiki/JEL_classification_codes#Mathematical_and_quantitative_methods_JEL:_C_Subcategorieshttp://en.wikipedia.org/wiki/Mathematical_economicshttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Optimization_(mathematics)#Economicshttp://en.wikipedia.org/wiki/Computational_economicshttp://en.wikipedia.org/wiki/Econometricshttp://en.wikipedia.org/wiki/Experimental_economicshttp://en.wikipedia.org/wiki/Experimental_economicshttp://en.wikipedia.org/wiki/Economic_statisticshttp://en.wikipedia.org/wiki/National_accountinghttp://en.wikipedia.org/wiki/JEL_classification_codeshttp://en.wikipedia.org/wiki/Behavioral_economicshttp://en.wikipedia.org/wiki/Cultural_economicshttp://en.wikipedia.org/wiki/Cultural_economicshttp://en.wikipedia.org/wiki/Evolutionary_economicshttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Development_economicshttp://en.wikipedia.org/wiki/Development_economicshttp://en.wikipedia.org/wiki/Economic_historyhttp://en.wikipedia.org/wiki/International_economicshttp://en.wikipedia.org/wiki/Economic_systemhttp://en.wikipedia.org/wiki/Monetary_economicshttp://en.wikipedia.org/wiki/Monetary_economicshttp://en.wikipedia.org/wiki/Financial_economicshttp://en.wikipedia.org/wiki/Public_economicshttp://en.wikipedia.org/wiki/Welfare_economicshttp://en.wikipedia.org/wiki/Welfare_economicshttp://en.wikipedia.org/wiki/Health_economicshttp://en.wikipedia.org/wiki/Health_economicshttp://en.wikipedia.org/wiki/Education_economicshttp://en.wikipedia.org/wiki/Education_economicshttp://en.wikipedia.org/wiki/Welfarehttp://en.wikipedia.org/wiki/Demographic_economicshttp://en.wikipedia.org/wiki/Labour_economicshttp://en.wikipedia.org/wiki/Labour_economicshttp://en.wikipedia.org/wiki/Managerial_economicshttp://en.wikipedia.org/wiki/Managerial_economicshttp://en.wikipedia.org/wiki/Business_economicshttp://en.wikipedia.org/wiki/Information_economicshttp://en.wikipedia.org/wiki/Industrial_organizationhttp://en.wikipedia.org/wiki/Law_and_economicshttp://en.wikipedia.org/wiki/Agricultural_economicshttp://en.wikipedia.org/wiki/Agricultural_economicshttp://en.wikipedia.org/wiki/Natural_resource_economicshttp://en.wikipedia.org/wiki/Natural_resource_economicshttp://en.wikipedia.org/wiki/Environmental_economicshttp://en.wikipedia.org/wiki/Environmental_economicshttp://en.wikipedia.org/wiki/Ecological_economicshttp://en.wikipedia.org/wiki/Urban_economicshttp://en.wikipedia.org/wiki/Rural_economicshttp://en.wikipedia.org/wiki/Rural_economicshttp://en.wikipedia.org/wiki/Regional_sciencehttp://en.wikipedia.org/wiki/Economic_geographyhttp://en.wikipedia.org/wiki/Category:Economics_listshttp://en.wikipedia.org/wiki/List_of_scholarly_journals_in_economicshttp://en.wikipedia.org/wiki/List_of_important_publications_in_economicshttp://en.wikipedia.org/wiki/Category:Economicshttp://en.wikipedia.org/wiki/Category:Economicshttp://en.wikipedia.org/wiki/List_of_economics_topicshttp://en.wikipedia.org/wiki/List_of_economistshttp://en.wikipedia.org/wiki/List_of_economistshttp://en.wikipedia.org/wiki/Economyhttp://en.wikipedia.org/wiki/Portal:Business_and_economicshttp://en.wikipedia.org/wiki/Template:Economics_sidebarhttp://en.wikipedia.org/wiki/Template:Economics_sidebarhttp://en.wikipedia.org/wiki/Template_talk:Economics_sidebarhttp://en.wikipedia.org/wiki/Template_talk:Economics_sidebarhttp://en.wikipedia.org/w/index.php?title=Template:Economics_sidebar&action=edithttp://en.wikipedia.org/w/index.php?title=Template:Economics_sidebar&action=edithttp://en.wikipedia.org/wiki/File:GDP_PPP_Per_Capita_IMF_2008.svghttp://en.wikipedia.org/wiki/Keynesian_economics#mw-headhttp://en.wikipedia.org/wiki/Keynesian_economics#p-searchhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Outline_of_economicshttp://en.wikipedia.org/wiki/Microeconomicshttp://en.wikipedia.org/wiki/Macroeconomicshttp://en.wikipedia.org/wiki/History_of_economic_thoughthttp://en.wikipedia.org/wiki/Economic_methodologyhttp://en.wikipedia.org/wiki/Mainstream_economicshttp://en.wikipedia.org/wiki/Heterodox_economicshttp://en.wikipedia.org/wiki/JEL_classification_codes#Mathematical_and_quantitative_methods_JEL:_C_Subcategorieshttp://en.wikipedia.org/wiki/JEL_classification_codes#Mathematical_and_quantitative_methods_JEL:_C_Subcategorieshttp://en.wikipedia.org/wiki/Mathematical_economicshttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Optimization_(mathematics)#Economicshttp://en.wikipedia.org/wiki/Computational_economicshttp://en.wikipedia.org/wiki/Econometricshttp://en.wikipedia.org/wiki/Experimental_economicshttp://en.wikipedia.org/wiki/Economic_statisticshttp://en.wikipedia.org/wiki/National_accountinghttp://en.wikipedia.org/wiki/JEL_classification_codeshttp://en.wikipedia.org/wiki/Behavioral_economicshttp://en.wikipedia.org/wiki/Cultural_economicshttp://en.wikipedia.org/wiki/Evolutionary_economicshttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Development_economicshttp://en.wikipedia.org/wiki/Economic_historyhttp://en.wikipedia.org/wiki/International_economicshttp://en.wikipedia.org/wiki/Economic_systemhttp://en.wikipedia.org/wiki/Monetary_economicshttp://en.wikipedia.org/wiki/Financial_economicshttp://en.wikipedia.org/wiki/Public_economicshttp://en.wikipedia.org/wiki/Welfare_economicshttp://en.wikipedia.org/wiki/Health_economicshttp://en.wikipedia.org/wiki/Education_economicshttp://en.wikipedia.org/wiki/Welfarehttp://en.wikipedia.org/wiki/Demographic_economicshttp://en.wikipedia.org/wiki/Labour_economicshttp://en.wikipedia.org/wiki/Managerial_economicshttp://en.wikipedia.org/wiki/Business_economicshttp://en.wikipedia.org/wiki/Information_economicshttp://en.wikipedia.org/wiki/Industrial_organizationhttp://en.wikipedia.org/wiki/Law_and_economicshttp://en.wikipedia.org/wiki/Agricultural_economicshttp://en.wikipedia.org/wiki/Natural_resource_economicshttp://en.wikipedia.org/wiki/Environmental_economicshttp://en.wikipedia.org/wiki/Ecological_economicshttp://en.wikipedia.org/wiki/Urban_economicshttp://en.wikipedia.org/wiki/Rural_economicshttp://en.wikipedia.org/wiki/Regional_sciencehttp://en.wikipedia.org/wiki/Economic_geographyhttp://en.wikipedia.org/wiki/Category:Economics_listshttp://en.wikipedia.org/wiki/List_of_scholarly_journals_in_economicshttp://en.wikipedia.org/wiki/List_of_important_publications_in_economicshttp://en.wikipedia.org/wiki/Category:Economicshttp://en.wikipedia.org/wiki/List_of_economics_topicshttp://en.wikipedia.org/wiki/List_of_economistshttp://en.wikipedia.org/wiki/Economyhttp://en.wikipedia.org/wiki/Portal:Business_and_economicshttp://en.wikipedia.org/wiki/Template:Economics_sidebarhttp://en.wikipedia.org/wiki/Template_talk:Economics_sidebarhttp://en.wikipedia.org/w/index.php?title=Template:Economics_sidebar&action=edit


2/22

Keynesian economics ( /k en z in/KAYN-zee-n; also called Keynesianism and

Keynesian theory) is a macroeconomic theory based on the ideas of 20th century

English economist John Maynard Keynes. Keynesian economics argues thatprivate

sectordecisions sometimes lead to inefficientmacroeconomic outcomes and thereforeadvocates active policy responses by thepublic sector, including monetary policy actions

by the central bankand fiscal policy actions by the government to stabilize output overthebusiness cycle.[1] The theories forming the basis of Keynesian economics were firstpresented in The General Theory of Employment, Interest and Money, published in 1936;

the interpretations of Keynes are contentious, and several schools of thought claim his

legacy.

Keynesian economics advocates amixed economypredominantly private sector, butwith a large role of government and public sectorand served as the economic model

during the later part of the Great Depression,World War II, and the post-wareconomic

expansion (19451973), though it lost some influence following the stagflation of the1970s. The advent of the global financial crisisin 2007 has caused aresurgence in

Keynesian thought. The former British Prime MinisterGordon Brown, former Presidentof the United States George W. Bush, President Barack Obama, and other world leadershave used Keynesian economics through government stimulus programs to attempt to

assist the economic state of their countries.[2][3]

Contents

[hide]

1 Overview

2 Precursors

o 2.1 Schoolso 2.2 Concepts

3 Keynes and the classics

o 3.1 Wages and spending

o 3.2 Excessive saving

o 3.3 Active fiscal policy

o 3.4 "Multiplier effect" and interest rates

4 Postwar Keynesianismo 4.1 Main theories

5 Criticism

o 5.1 Monetarist criticism

o 5.2 New classical macroeconomics criticism

o 5.3 Austrian School criticism

o 5.4 Methodological disagreement and different results that emerge

6 Keynesian responses to the critics

7 See also

8 References
http://en.wikipedia.org/wiki/Wikipedia:IPA_for_Englishhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_Englishhttp://en.wikipedia.org/wiki/Wikipedia:Pronunciation_respelling_keyhttp://en.wikipedia.org/wiki/Wikipedia:Pronunciation_respelling_keyhttp://en.wikipedia.org/wiki/Wikipedia:Pronunciation_respelling_keyhttp://en.wikipedia.org/wiki/Macroeconomicshttp://en.wikipedia.org/wiki/John_Maynard_Keyneshttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Pareto_efficiencyhttp://en.wikipedia.org/wiki/Pareto_efficiencyhttp://en.wikipedia.org/wiki/Public_sectorhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Business_cyclehttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-0http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-0http://en.wikipedia.org/wiki/The_General_Theory_of_Employment,_Interest_and_Moneyhttp://en.wikipedia.org/wiki/The_General_Theory_of_Employment,_Interest_and_Moneyhttp://en.wikipedia.org/wiki/Keynesian_economics#Postwar_Keynesianismhttp://en.wikipedia.org/wiki/Mixed_economyhttp://en.wikipedia.org/wiki/Mixed_economyhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Post-World_War_II_economic_expansionhttp://en.wikipedia.org/wiki/Post-World_War_II_economic_expansionhttp://en.wikipedia.org/wiki/Post-World_War_II_economic_expansionhttp://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010http://en.wikipedia.org/wiki/2008%E2%80%932009_Keynesian_resurgencehttp://en.wikipedia.org/wiki/2008%E2%80%932009_Keynesian_resurgencehttp://en.wikipedia.org/wiki/2008%E2%80%932009_Keynesian_resurgencehttp://en.wikipedia.org/wiki/2008%E2%80%932009_Keynesian_resurgencehttp://en.wikipedia.org/wiki/Gordon_Brownhttp://en.wikipedia.org/wiki/Gordon_Brownhttp://en.wikipedia.org/wiki/George_W._Bushhttp://en.wikipedia.org/wiki/George_W._Bushhttp://en.wikipedia.org/wiki/Barack_Obamahttp://en.wikipedia.org/wiki/Stimulus_(economic)http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-1http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-2http://en.wikipedia.org/wiki/Keynesian_economicshttp://en.wikipedia.org/wiki/Keynesian_economics#Overviewhttp://en.wikipedia.org/wiki/Keynesian_economics#Precursorshttp://en.wikipedia.org/wiki/Keynesian_economics#Schoolshttp://en.wikipedia.org/wiki/Keynesian_economics#Conceptshttp://en.wikipedia.org/wiki/Keynesian_economics#Keynes_and_the_classicshttp://en.wikipedia.org/wiki/Keynesian_economics#Wages_and_spendinghttp://en.wikipedia.org/wiki/Keynesian_economics#Excessive_savinghttp://en.wikipedia.org/wiki/Keynesian_economics#Active_fiscal_policyhttp://en.wikipedia.org/wiki/Keynesian_economics#.22Multiplier_effect.22_and_interest_rateshttp://en.wikipedia.org/wiki/Keynesian_economics#Postwar_Keynesianismhttp://en.wikipedia.org/wiki/Keynesian_economics#Main_theorieshttp://en.wikipedia.org/wiki/Keynesian_economics#Criticismhttp://en.wikipedia.org/wiki/Keynesian_economics#Monetarist_criticismhttp://en.wikipedia.org/wiki/Keynesian_economics#New_classical_macroeconomics_criticismhttp://en.wikipedia.org/wiki/Keynesian_economics#Austrian_School_criticismhttp://en.wikipedia.org/wiki/Keynesian_economics#Methodological_disagreement_and_different_results_that_emergehttp://en.wikipedia.org/wiki/Keynesian_economics#Keynesian_responses_to_the_criticshttp://en.wikipedia.org/wiki/Keynesian_economics#See_alsohttp://en.wikipedia.org/wiki/Keynesian_economics#Referenceshttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_Englishhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Keyhttp://en.wikipedia.org/wiki/Wikipedia:IPA_for_Englishhttp://en.wikipedia.org/wiki/Wikipedia:Pronunciation_respelling_keyhttp://en.wikipedia.org/wiki/Macroeconomicshttp://en.wikipedia.org/wiki/John_Maynard_Keyneshttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Pareto_efficiencyhttp://en.wikipedia.org/wiki/Public_sectorhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Business_cyclehttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-0http://en.wikipedia.org/wiki/The_General_Theory_of_Employment,_Interest_and_Moneyhttp://en.wikipedia.org/wiki/Keynesian_economics#Postwar_Keynesianismhttp://en.wikipedia.org/wiki/Mixed_economyhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Post-World_War_II_economic_expansionhttp://en.wikipedia.org/wiki/Post-World_War_II_economic_expansionhttp://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010http://en.wikipedia.org/wiki/2008%E2%80%932009_Keynesian_resurgencehttp://en.wikipedia.org/wiki/2008%E2%80%932009_Keynesian_resurgencehttp://en.wikipedia.org/wiki/Gordon_Brownhttp://en.wikipedia.org/wiki/George_W._Bushhttp://en.wikipedia.org/wiki/Barack_Obamahttp://en.wikipedia.org/wiki/Stimulus_(economic)http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-1http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-2http://en.wikipedia.org/wiki/Keynesian_economicshttp://en.wikipedia.org/wiki/Keynesian_economics#Overviewhttp://en.wikipedia.org/wiki/Keynesian_economics#Precursorshttp://en.wikipedia.org/wiki/Keynesian_economics#Schoolshttp://en.wikipedia.org/wiki/Keynesian_economics#Conceptshttp://en.wikipedia.org/wiki/Keynesian_economics#Keynes_and_the_classicshttp://en.wikipedia.org/wiki/Keynesian_economics#Wages_and_spendinghttp://en.wikipedia.org/wiki/Keynesian_economics#Excessive_savinghttp://en.wikipedia.org/wiki/Keynesian_economics#Active_fiscal_policyhttp://en.wikipedia.org/wiki/Keynesian_economics#.22Multiplier_effect.22_and_interest_rateshttp://en.wikipedia.org/wiki/Keynesian_economics#Postwar_Keynesianismhttp://en.wikipedia.org/wiki/Keynesian_economics#Main_theorieshttp://en.wikipedia.org/wiki/Keynesian_economics#Criticismhttp://en.wikipedia.org/wiki/Keynesian_economics#Monetarist_criticismhttp://en.wikipedia.org/wiki/Keynesian_economics#New_classical_macroeconomics_criticismhttp://en.wikipedia.org/wiki/Keynesian_economics#Austrian_School_criticismhttp://en.wikipedia.org/wiki/Keynesian_economics#Methodological_disagreement_and_different_results_that_emergehttp://en.wikipedia.org/wiki/Keynesian_economics#Keynesian_responses_to_the_criticshttp://en.wikipedia.org/wiki/Keynesian_economics#See_alsohttp://en.wikipedia.org/wiki/Keynesian_economics#References


3/22

9 Further reading

10 External links

[edit] Overview

According to Keynesian theory, somemicroeconomic-level actionsif taken collectivelyby a large proportion of individuals and firmscan lead to inefficientaggregate

macroeconomic outcomes, where the economy operates below itspotential output and

growth rate. Such a situation had previously been referred to byclassical economistsas ageneral glut. There was disagreement among classical economists (some of whombelieved in Say's Lawthat "supply creates its own demand"), on whether a general glut

was possible. Keynes contended that a general glut would occur when aggregate demand

forgoods was insufficient, leading to an economic downturn resulting in losses ofpotential output due to unnecessarily high unemployment, which results from the

defensive (or reactive) decisions of the producers. In such a situation, government

policies could be used to increase aggregate demand, thus increasing economic activityand reducing unemployment anddeflation. Most Keynesians advocate an activist

stabilization policy to reduce the amplitude of the business cycle, which they rank among

the most serious of economic problems. This does not necessarily mean fine-tuning, but itdoes mean what might be called 'coarse-tuning.' For example, when the unemployment

rate is very high, a government can use a dose of expansionary monetary policy.

Keynes argued that the solution to the Great Depression was to stimulate the economy

("inducement to invest") through some combination of two approaches: a reduction ininterest rates and government investment in infrastructure. Investment by government

injects income, which results in more spending in the general economy, which in turn

stimulates more production and investment involving still more income and spending andso forth. The initial stimulation starts a cascade of events, whose total increase ineconomic activity is a multiple of the original investment.[4]

A central conclusion of Keynesian economics is that, in some situations, no strong

automatic mechanism moves output and employment towards full employment levels.This conclusion conflicts with economic approaches that assume a strong general

tendency towards equilibrium. In the 'neoclassical synthesis', which combines Keynesian

macro concepts with a micro foundation, the conditions ofgeneral equilibrium allow for

price adjustment to eventually achieve this goal. More broadly, Keynes saw his theory asageneraltheory, in which utilization of resources could be high or low, whereas previous

economics focused on theparticularcase of full utilization.

The new classical macroeconomics movement, which began in the late 1960s and early

1970s, criticized Keynesian theories, whileNew Keynesian economicshas sought to baseKeynes' ideas on more rigorous theoretical foundations.
http://en.wikipedia.org/wiki/Keynesian_economics#Further_readinghttp://en.wikipedia.org/wiki/Keynesian_economics#External_linkshttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=1http://en.wikipedia.org/wiki/Microeconomicshttp://en.wikipedia.org/wiki/Microeconomicshttp://en.wikipedia.org/wiki/Economic_efficiencyhttp://en.wikipedia.org/wiki/Economic_efficiencyhttp://en.wikipedia.org/wiki/Macroeconomicshttp://en.wikipedia.org/wiki/Potential_outputhttp://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/General_gluthttp://en.wikipedia.org/wiki/General_gluthttp://en.wikipedia.org/wiki/Say's_Lawhttp://en.wikipedia.org/wiki/Supply_creates_its_own_demandhttp://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Deflation_(economics)http://en.wikipedia.org/wiki/Deflation_(economics)http://en.wikipedia.org/wiki/Deflation_(economics)http://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-3http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-3http://en.wikipedia.org/wiki/Full_employmenthttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Neoclassical_synthesishttp://en.wikipedia.org/wiki/Neoclassical_synthesishttp://en.wikipedia.org/wiki/General_equilibriumhttp://en.wikipedia.org/wiki/New_classical_macroeconomicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Keynesian_economics#Further_readinghttp://en.wikipedia.org/wiki/Keynesian_economics#External_linkshttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=1http://en.wikipedia.org/wiki/Microeconomicshttp://en.wikipedia.org/wiki/Economic_efficiencyhttp://en.wikipedia.org/wiki/Macroeconomicshttp://en.wikipedia.org/wiki/Potential_outputhttp://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/General_gluthttp://en.wikipedia.org/wiki/Say's_Lawhttp://en.wikipedia.org/wiki/Supply_creates_its_own_demandhttp://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Deflation_(economics)http://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-3http://en.wikipedia.org/wiki/Full_employmenthttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Neoclassical_synthesishttp://en.wikipedia.org/wiki/General_equilibriumhttp://en.wikipedia.org/wiki/New_classical_macroeconomicshttp://en.wikipedia.org/wiki/New_Keynesian_economics


4/22

Some interpretations of Keynes have emphasized his stress on the international

coordination of Keynesian policies, the need for international economic institutions, and

the ways in which economic forces could lead to waror could promote peace.[5]

[edit] Precursors

Keynes' work was part of a long-running debate within economics over the existence and

nature ofgeneral gluts. While a number of the policies Keynes advocated (notably

government deficit spending) and the theoretical ideas he proposed (effective demand,the multiplier, the paradox of thrift) were advanced by various authors in the 19th and

early 20th century, Keynes's unique contribution was to provide ageneral theory of

these, which proved acceptable to the political and economic establishments.

[edit] Schools

See also: Underconsumption, Birmingham School (economics), and Stockholm school

(economics)

An intellectual precursor of Keynesian economics was underconsumptiontheory in

classical economics, dating from such 19th century economists asThomas Malthus, the

Birmingham School ofThomas Attwood,[6] and the American economists WilliamTrufant FosterandWaddill Catchings, who were influential in the 1920s and 1930s.

Underconsumptionists were, like Keynes after them, concerned with failure ofaggregate

demand to attainpotential output, calling this "underconsumption" (focusing on thedemand side), rather than "overproduction" (which would focus on the supply side), and

advocating economic interventionism. Keynes specifically discussed underconsumption

(which he wrote "under-consumption") in the General Theory, in Chapter 22, Section IV

andChapter 23, Section VII.

Numerous concepts were developed earlier and independently of Keynes by the

Stockholm school during the 1930s; these accomplishments were described in a 1937

article, published in response to the 1936 General Theory, sharing the Swedishdiscoveries.[7]

[edit] Concepts

The multiplierdates to work in the 1890s by the Australian economist Alfred De Lissa,the Danish economist Julius Wulff, and theGerman American economistNicholas

Johannsen,[8] the latter being cited in a footnote of Keynes. [9] Nicholas Johannsen also

proposed a theory ofeffective demand in the 1890s.

Theparadox of thriftwas stated in 1892 by John M. Robertson in his The Fallacy of

Savings, in earlier forms bymercantilist economists since the 16th century, and similar

sentiments date to antiquity:[10][11]
http://en.wikipedia.org/wiki/Warhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-4http://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=2http://en.wikipedia.org/wiki/General_gluthttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=3http://en.wikipedia.org/wiki/Underconsumptionhttp://en.wikipedia.org/wiki/Birmingham_School_(economics)http://en.wikipedia.org/wiki/Birmingham_School_(economics)http://en.wikipedia.org/wiki/Stockholm_school_(economics)http://en.wikipedia.org/wiki/Stockholm_school_(economics)http://en.wikipedia.org/wiki/Underconsumptionhttp://en.wikipedia.org/wiki/Underconsumptionhttp://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/Thomas_Malthushttp://en.wikipedia.org/wiki/Thomas_Malthushttp://en.wikipedia.org/wiki/Birmingham_School_(economics)http://en.wikipedia.org/wiki/Thomas_Attwoodhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-5http://en.wikipedia.org/wiki/William_Trufant_Fosterhttp://en.wikipedia.org/wiki/William_Trufant_Fosterhttp://en.wikipedia.org/wiki/Waddill_Catchingshttp://en.wikipedia.org/wiki/Waddill_Catchingshttp://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Potential_outputhttp://en.wikipedia.org/wiki/Overproductionhttp://en.wikipedia.org/wiki/Economic_interventionismhttp://www.marxists.org/reference/subject/economics/keynes/general-theory/ch22.htm#ivhttp://www.marxists.org/reference/subject/economics/keynes/general-theory/ch23.htm#viihttp://www.marxists.org/reference/subject/economics/keynes/general-theory/ch23.htm#viihttp://en.wikipedia.org/wiki/Stockholm_school_(economics)http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-6http://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=4http://en.wikipedia.org/wiki/Multiplier_(economics)http://en.wikipedia.org/w/index.php?title=Alfred_De_Lissa&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Julius_Wulff&action=edit&redlink=1http://en.wikipedia.org/wiki/German_Americanhttp://en.wikipedia.org/wiki/German_Americanhttp://en.wikipedia.org/wiki/Nicholas_Johannsenhttp://en.wikipedia.org/wiki/Nicholas_Johannsenhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-7http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-8http://en.wikipedia.org/wiki/Effective_demandhttp://en.wikipedia.org/wiki/Paradox_of_thrifthttp://en.wikipedia.org/wiki/Paradox_of_thrifthttp://en.wikipedia.org/wiki/John_M._Robertsonhttp://en.wikipedia.org/wiki/Mercantilisthttp://en.wikipedia.org/wiki/Mercantilisthttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-neglect-9http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-10http://en.wikipedia.org/wiki/Warhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-4http://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=2http://en.wikipedia.org/wiki/General_gluthttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=3http://en.wikipedia.org/wiki/Underconsumptionhttp://en.wikipedia.org/wiki/Birmingham_School_(economics)http://en.wikipedia.org/wiki/Stockholm_school_(economics)http://en.wikipedia.org/wiki/Stockholm_school_(economics)http://en.wikipedia.org/wiki/Underconsumptionhttp://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/Thomas_Malthushttp://en.wikipedia.org/wiki/Birmingham_School_(economics)http://en.wikipedia.org/wiki/Thomas_Attwoodhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-5http://en.wikipedia.org/wiki/William_Trufant_Fosterhttp://en.wikipedia.org/wiki/William_Trufant_Fosterhttp://en.wikipedia.org/wiki/Waddill_Catchingshttp://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Potential_outputhttp://en.wikipedia.org/wiki/Overproductionhttp://en.wikipedia.org/wiki/Economic_interventionismhttp://www.marxists.org/reference/subject/economics/keynes/general-theory/ch22.htm#ivhttp://www.marxists.org/reference/subject/economics/keynes/general-theory/ch23.htm#viihttp://en.wikipedia.org/wiki/Stockholm_school_(economics)http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-6http://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=4http://en.wikipedia.org/wiki/Multiplier_(economics)http://en.wikipedia.org/w/index.php?title=Alfred_De_Lissa&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Julius_Wulff&action=edit&redlink=1http://en.wikipedia.org/wiki/German_Americanhttp://en.wikipedia.org/wiki/Nicholas_Johannsenhttp://en.wikipedia.org/wiki/Nicholas_Johannsenhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-7http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-8http://en.wikipedia.org/wiki/Effective_demandhttp://en.wikipedia.org/wiki/Paradox_of_thrifthttp://en.wikipedia.org/wiki/John_M._Robertsonhttp://en.wikipedia.org/wiki/Mercantilisthttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-neglect-9http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-10


5/22

Today these ideas, regardless of provenance, are referred to in academia under the rubric

of "Keynesian economics", due to Keynes's role in consolidating, elaborating, and

popularizing them.

[edit] Keynes and the classics

Part of the series on

Capitalism

Concepts[show]

Central bank

Commercial law

Companies lawComparative advantage

Competition law

Consumer protection

CopyrightCorporations

Deregulation

Economic freedomEconomic liberalism

Financial regulation

Fiscal policyFree market

Free price system

Free trade agreements

Freedom of contractGlobalization

Inflation

Intellectual propertyInvisible hand

Labour law

Limited governmentMarket

Monetary policy

MonopolyOligopoly

Patents

Private property

PrivatizationRegulated market

Recession

Spontaneous order
http://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=5http://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Commercial_lawhttp://en.wikipedia.org/wiki/Companies_lawhttp://en.wikipedia.org/wiki/Comparative_advantagehttp://en.wikipedia.org/wiki/Competition_lawhttp://en.wikipedia.org/wiki/Consumer_protectionhttp://en.wikipedia.org/wiki/Copyrighthttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Deregulationhttp://en.wikipedia.org/wiki/Economic_freedomhttp://en.wikipedia.org/wiki/Economic_liberalismhttp://en.wikipedia.org/wiki/Financial_regulationhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Free_price_systemhttp://en.wikipedia.org/wiki/Free_trade_agreementhttp://en.wikipedia.org/wiki/Freedom_of_contracthttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Intellectual_propertyhttp://en.wikipedia.org/wiki/Invisible_handhttp://en.wikipedia.org/wiki/Labour_lawhttp://en.wikipedia.org/wiki/Limited_governmenthttp://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Patenthttp://en.wikipedia.org/wiki/Private_propertyhttp://en.wikipedia.org/wiki/Privatizationhttp://en.wikipedia.org/wiki/Regulated_markethttp://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Spontaneous_orderhttp://en.wikipedia.org/wiki/File:Economic_template.svghttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=5http://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Commercial_lawhttp://en.wikipedia.org/wiki/Companies_lawhttp://en.wikipedia.org/wiki/Comparative_advantagehttp://en.wikipedia.org/wiki/Competition_lawhttp://en.wikipedia.org/wiki/Consumer_protectionhttp://en.wikipedia.org/wiki/Copyrighthttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Deregulationhttp://en.wikipedia.org/wiki/Economic_freedomhttp://en.wikipedia.org/wiki/Economic_liberalismhttp://en.wikipedia.org/wiki/Financial_regulationhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Free_price_systemhttp://en.wikipedia.org/wiki/Free_trade_agreementhttp://en.wikipedia.org/wiki/Freedom_of_contracthttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Intellectual_propertyhttp://en.wikipedia.org/wiki/Invisible_handhttp://en.wikipedia.org/wiki/Labour_lawhttp://en.wikipedia.org/wiki/Limited_governmenthttp://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Patenthttp://en.wikipedia.org/wiki/Private_propertyhttp://en.wikipedia.org/wiki/Privatizationhttp://en.wikipedia.org/wiki/Regulated_markethttp://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Spontaneous_order


6/22

Stagflation

Supply and demand

Wage labour

Economic theories[show]

Austrian school

Chicago schoolClassical economics

Keynesian economics

New Keynesian economicsMarxian economics

Monetarism

Neoclassical economicsSupply-side economics

Institutional economics

New institutional economics

Origins[show]

Age of Enlightenment

FeudalismIndustrial Revolution

Physiocrats

MercantilismIslamic capitalism

People[show]

Ronald CoaseMilton Friedman

Friedrich Hayek

John Maynard Keynes

Alfred MarshallKarl Marx

John Stuart Mill

Ludwig von MisesAyn Rand

David RicardoJoseph Schumpeter

Adam Smith

Thorstein Veblen

Max Weber

Variants[show]
http://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/Supply_and_demandhttp://en.wikipedia.org/wiki/Wage_labourhttp://en.wikipedia.org/wiki/Austrian_schoolhttp://en.wikipedia.org/wiki/Chicago_school_(economics)http://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Marxian_economicshttp://en.wikipedia.org/wiki/Monetarismhttp://en.wikipedia.org/wiki/Neoclassical_economicshttp://en.wikipedia.org/wiki/Supply-side_economicshttp://en.wikipedia.org/wiki/Institutional_economicshttp://en.wikipedia.org/wiki/New_institutional_economicshttp://en.wikipedia.org/wiki/Age_of_Enlightenmenthttp://en.wikipedia.org/wiki/Feudalismhttp://en.wikipedia.org/wiki/Industrial_Revolutionhttp://en.wikipedia.org/wiki/Physiocratshttp://en.wikipedia.org/wiki/Mercantilismhttp://en.wikipedia.org/wiki/Islamic_capitalismhttp://en.wikipedia.org/wiki/Ronald_Coasehttp://en.wikipedia.org/wiki/Milton_Friedmanhttp://en.wikipedia.org/wiki/Friedrich_Hayekhttp://en.wikipedia.org/wiki/John_Maynard_Keyneshttp://en.wikipedia.org/wiki/Alfred_Marshallhttp://en.wikipedia.org/wiki/Karl_Marxhttp://en.wikipedia.org/wiki/John_Stuart_Millhttp://en.wikipedia.org/wiki/Ludwig_von_Miseshttp://en.wikipedia.org/wiki/Ayn_Randhttp://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/Joseph_Schumpeterhttp://en.wikipedia.org/wiki/Adam_Smithhttp://en.wikipedia.org/wiki/Thorstein_Veblenhttp://en.wikipedia.org/wiki/Max_Weberhttp://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/Supply_and_demandhttp://en.wikipedia.org/wiki/Wage_labourhttp://en.wikipedia.org/wiki/Austrian_schoolhttp://en.wikipedia.org/wiki/Chicago_school_(economics)http://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Marxian_economicshttp://en.wikipedia.org/wiki/Monetarismhttp://en.wikipedia.org/wiki/Neoclassical_economicshttp://en.wikipedia.org/wiki/Supply-side_economicshttp://en.wikipedia.org/wiki/Institutional_economicshttp://en.wikipedia.org/wiki/New_institutional_economicshttp://en.wikipedia.org/wiki/Age_of_Enlightenmenthttp://en.wikipedia.org/wiki/Feudalismhttp://en.wikipedia.org/wiki/Industrial_Revolutionhttp://en.wikipedia.org/wiki/Physiocratshttp://en.wikipedia.org/wiki/Mercantilismhttp://en.wikipedia.org/wiki/Islamic_capitalismhttp://en.wikipedia.org/wiki/Ronald_Coasehttp://en.wikipedia.org/wiki/Milton_Friedmanhttp://en.wikipedia.org/wiki/Friedrich_Hayekhttp://en.wikipedia.org/wiki/John_Maynard_Keyneshttp://en.wikipedia.org/wiki/Alfred_Marshallhttp://en.wikipedia.org/wiki/Karl_Marxhttp://en.wikipedia.org/wiki/John_Stuart_Millhttp://en.wikipedia.org/wiki/Ludwig_von_Miseshttp://en.wikipedia.org/wiki/Ayn_Randhttp://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/Joseph_Schumpeterhttp://en.wikipedia.org/wiki/Adam_Smithhttp://en.wikipedia.org/wiki/Thorstein_Veblenhttp://en.wikipedia.org/wiki/Max_Weber


7/22

Anarcho-capitalism

Consumer capitalism

Corporate capitalismCreative capitalism

Crony capitalism

Democratic capitalismEco-capitalism

Finance capitalism

Global capitalismHumanistic capitalism

Inclusive capitalism

Late capitalismLaissez-faire capitalism

Liberal capitalism

Merchant capitalism

Mixed economy

Monopoly capitalismNeo-Capitalism

PhilanthrocapitalismTechnocapitalism

Regulatory capitalism

Rentier capitalismSocial capitalism

Social market economy

State capitalism

State monopoly capitalismWelfare capitalism

Related topics[show]

Anti-capitalismAdvanced capitalism

Criticism of capitalism

ConsumerismCorporate nationalism

Corporatism

Culture of capitalismHistory

History of theoryPerspectives on capitalism

Periodizations of capitalismTrickle-down economics

Movements[show]

Liberalism
http://en.wikipedia.org/wiki/Anarcho-capitalismhttp://en.wikipedia.org/wiki/Consumer_capitalismhttp://en.wikipedia.org/wiki/Corporate_capitalismhttp://en.wikipedia.org/w/index.php?title=Creative_capitalism&action=edit&redlink=1http://en.wikipedia.org/wiki/Crony_capitalismhttp://en.wikipedia.org/wiki/Democratic_capitalismhttp://en.wikipedia.org/wiki/Eco-capitalismhttp://en.wikipedia.org/wiki/Finance_capitalismhttp://en.wikipedia.org/wiki/Global_capitalismhttp://en.wikipedia.org/wiki/Humanistic_capitalismhttp://en.wikipedia.org/wiki/Inclusive_capitalismhttp://en.wikipedia.org/wiki/Late_capitalismhttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Liberal_capitalismhttp://en.wikipedia.org/wiki/Merchant_capitalismhttp://en.wikipedia.org/wiki/Mixed_economyhttp://en.wikipedia.org/wiki/Monopoly_capitalismhttp://en.wikipedia.org/wiki/Neo-Capitalismhttp://en.wikipedia.org/wiki/Philanthrocapitalismhttp://en.wikipedia.org/wiki/Technocapitalismhttp://en.wikipedia.org/wiki/Regulatory_capitalismhttp://en.wikipedia.org/wiki/Rentier_capitalismhttp://en.wikipedia.org/wiki/Social_capitalismhttp://en.wikipedia.org/wiki/Social_market_economyhttp://en.wikipedia.org/wiki/State_capitalismhttp://en.wikipedia.org/wiki/State_monopoly_capitalismhttp://en.wikipedia.org/wiki/Welfare_capitalismhttp://en.wikipedia.org/wiki/Anti-capitalismhttp://en.wikipedia.org/wiki/Advanced_capitalismhttp://en.wikipedia.org/wiki/Criticism_of_capitalismhttp://en.wikipedia.org/wiki/Consumerismhttp://en.wikipedia.org/wiki/Corporate_nationalismhttp://en.wikipedia.org/wiki/Corporatismhttp://en.wikipedia.org/wiki/Culture_of_capitalismhttp://en.wikipedia.org/wiki/History_of_capitalismhttp://en.wikipedia.org/wiki/History_of_theory_of_capitalismhttp://en.wikipedia.org/wiki/Perspectives_on_capitalismhttp://en.wikipedia.org/wiki/Periodizations_of_capitalismhttp://en.wikipedia.org/wiki/Trickle-down_economicshttp://en.wikipedia.org/wiki/Liberalismhttp://en.wikipedia.org/wiki/Anarcho-capitalismhttp://en.wikipedia.org/wiki/Consumer_capitalismhttp://en.wikipedia.org/wiki/Corporate_capitalismhttp://en.wikipedia.org/w/index.php?title=Creative_capitalism&action=edit&redlink=1http://en.wikipedia.org/wiki/Crony_capitalismhttp://en.wikipedia.org/wiki/Democratic_capitalismhttp://en.wikipedia.org/wiki/Eco-capitalismhttp://en.wikipedia.org/wiki/Finance_capitalismhttp://en.wikipedia.org/wiki/Global_capitalismhttp://en.wikipedia.org/wiki/Humanistic_capitalismhttp://en.wikipedia.org/wiki/Inclusive_capitalismhttp://en.wikipedia.org/wiki/Late_capitalismhttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Liberal_capitalismhttp://en.wikipedia.org/wiki/Merchant_capitalismhttp://en.wikipedia.org/wiki/Mixed_economyhttp://en.wikipedia.org/wiki/Monopoly_capitalismhttp://en.wikipedia.org/wiki/Neo-Capitalismhttp://en.wikipedia.org/wiki/Philanthrocapitalismhttp://en.wikipedia.org/wiki/Technocapitalismhttp://en.wikipedia.org/wiki/Regulatory_capitalismhttp://en.wikipedia.org/wiki/Rentier_capitalismhttp://en.wikipedia.org/wiki/Social_capitalismhttp://en.wikipedia.org/wiki/Social_market_economyhttp://en.wikipedia.org/wiki/State_capitalismhttp://en.wikipedia.org/wiki/State_monopoly_capitalismhttp://en.wikipedia.org/wiki/Welfare_capitalismhttp://en.wikipedia.org/wiki/Anti-capitalismhttp://en.wikipedia.org/wiki/Advanced_capitalismhttp://en.wikipedia.org/wiki/Criticism_of_capitalismhttp://en.wikipedia.org/wiki/Consumerismhttp://en.wikipedia.org/wiki/Corporate_nationalismhttp://en.wikipedia.org/wiki/Corporatismhttp://en.wikipedia.org/wiki/Culture_of_capitalismhttp://en.wikipedia.org/wiki/History_of_capitalismhttp://en.wikipedia.org/wiki/History_of_theory_of_capitalismhttp://en.wikipedia.org/wiki/Perspectives_on_capitalismhttp://en.wikipedia.org/wiki/Periodizations_of_capitalismhttp://en.wikipedia.org/wiki/Trickle-down_economicshttp://en.wikipedia.org/wiki/Liberalism


8/22

Libertarianism

Neoconservatism

NeoliberalismObjectivism

Objectivist movement

OrdoliberalismSocial democracy

Capitalism Portal

Philosophy Portal

Economics Portal

Politics Portal

vde

Keynes sought to distinguish his theories from and oppose them to "classical economics,"

by which he meant the economic theories ofDavid Ricardo and his followers, including

John Stuart Mill, Alfred Marshall, Francis Ysidro Edgeworth, and Arthur Cecil Pigou. A

central tenet of the classical view, known as Say's law, states that "supply creates its owndemand". Say's Law can be interpreted in two ways. First, the claim that the total value of

output is equal to the sum of income earned in production is a result of a national income

accounting identity, and is therefore indisputable. A second and stronger claim, however,that the "costs of output are always covered in the aggregate by the sale-proceeds

resulting from demand" depends on how consumption and saving are linked to

production and investment. In particular, Keynes argued that the second, strong form ofSay's Law only holds if increases in individual savings exactly match an increase in

aggregate investment.[12]

Keynes sought to develop a theory that would explain determinants of saving,

consumption, investment and production. In that theory, the interaction of aggregatedemand and aggregate supply determines the level of output and employment in the

economy.

Because of what he considered the failure of the Classical Theory in the 1930s, Keynes

firmly objects to its main theoryadjustments in prices would automatically makedemand tend to the full employment level.

Neo-classical theory supports that the two main costs that shift demand and supply are

labor and money. Through the distribution of the monetary policy, demand and supply

can be adjusted. If there were more labor than demand for it, wages would fall until

hiring began again. If there was too much saving, and not enough consumption, theninterest rates would fall until people either cut their savings rate or started borrowing.

[edit] Wages and spending

During the Great Depression, the classical theory defined economic collapse as simply a

lost incentive to produce, and the mass unemploymentas a result of high and rigid real

wages.[citation needed]
http://en.wikipedia.org/wiki/Libertarian_movementhttp://en.wikipedia.org/wiki/Neoconservatismhttp://en.wikipedia.org/wiki/Neoliberalismhttp://en.wikipedia.org/wiki/Objectivism_(Ayn_Rand)http://en.wikipedia.org/wiki/Objectivist_movementhttp://en.wikipedia.org/wiki/Ordoliberalismhttp://en.wikipedia.org/wiki/Social_democracyhttp://en.wikipedia.org/wiki/Portal:Capitalismhttp://en.wikipedia.org/wiki/Portal:Philosophyhttp://en.wikipedia.org/wiki/Portal:Economicshttp://en.wikipedia.org/wiki/Portal:Politicshttp://en.wikipedia.org/wiki/Template:Capitalismhttp://en.wikipedia.org/wiki/Template:Capitalismhttp://en.wikipedia.org/wiki/Template_talk:Capitalismhttp://en.wikipedia.org/wiki/Template_talk:Capitalismhttp://en.wikipedia.org/w/index.php?title=Template:Capitalism&action=edithttp://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/John_Stuart_Millhttp://en.wikipedia.org/wiki/Alfred_Marshallhttp://en.wikipedia.org/wiki/Francis_Ysidro_Edgeworthhttp://en.wikipedia.org/wiki/Arthur_Cecil_Pigouhttp://en.wikipedia.org/wiki/Say's_lawhttp://en.wikipedia.org/wiki/Supply_creates_its_own_demandhttp://en.wikipedia.org/wiki/Supply_creates_its_own_demandhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-11http://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=6http://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Unemployment#Classical_unemploymenthttp://en.wikipedia.org/wiki/Unemployment#Classical_unemploymenthttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/File:Portal-puzzle.svghttp://en.wikipedia.org/wiki/File:Portal-puzzle.svghttp://en.wikipedia.org/wiki/File:Portal-puzzle.svghttp://en.wikipedia.org/wiki/File:Portal-puzzle.svghttp://en.wikipedia.org/wiki/Libertarian_movementhttp://en.wikipedia.org/wiki/Neoconservatismhttp://en.wikipedia.org/wiki/Neoliberalismhttp://en.wikipedia.org/wiki/Objectivism_(Ayn_Rand)http://en.wikipedia.org/wiki/Objectivist_movementhttp://en.wikipedia.org/wiki/Ordoliberalismhttp://en.wikipedia.org/wiki/Social_democracyhttp://en.wikipedia.org/wiki/Portal:Capitalismhttp://en.wikipedia.org/wiki/Portal:Philosophyhttp://en.wikipedia.org/wiki/Portal:Economicshttp://en.wikipedia.org/wiki/Portal:Politicshttp://en.wikipedia.org/wiki/Template:Capitalismhttp://en.wikipedia.org/wiki/Template_talk:Capitalismhttp://en.wikipedia.org/w/index.php?title=Template:Capitalism&action=edithttp://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/John_Stuart_Millhttp://en.wikipedia.org/wiki/Alfred_Marshallhttp://en.wikipedia.org/wiki/Francis_Ysidro_Edgeworthhttp://en.wikipedia.org/wiki/Arthur_Cecil_Pigouhttp://en.wikipedia.org/wiki/Say's_lawhttp://en.wikipedia.org/wiki/Supply_creates_its_own_demandhttp://en.wikipedia.org/wiki/Supply_creates_its_own_demandhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-11http://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=6http://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Unemployment#Classical_unemploymenthttp://en.wikipedia.org/wiki/Wikipedia:Citation_needed


9/22

To Keynes, the determination of wages is more complicated. First, he argued that it is notrealbut nominalwages that are set in negotiations between employers and workers, as

opposed to abarterrelationship. Second, nominal wage cuts would be difficult to put intoeffect because of laws and wage contracts. Even classical economists admitted that these

exist; unlike Keynes, they advocated abolishing minimum wages, unions, and long-term

contracts, increasing labor-market flexibility. However, to Keynes, people will resistnominal wage reductions, even without unions, until they see other wages falling and a

general fall of prices.

He also argued that to boost employment, realwages had to go down: nominal wages

would have to fall more than prices. However, doing so would reduceconsumer demand,so that the aggregate demand for goods would drop. This would in turn reduce business

sales revenues and expected profits. Investment in new plants and equipmentperhaps

already discouraged by previous excesseswould then become more risky, less likely.Instead of raising business expectations, wage cuts could make matters much worse.

Further, if wages and prices were falling, people would start to expect them to fall. Thiscould make the economy spiral downward as those who had money would simply wait as

falling prices made it more valuablerather than spending. As Irving Fisherargued in1933, in hisDebt-Deflation Theory of Great Depressions, deflation(falling prices) can

make a depression deeper as falling prices and wages made pre-existing nominal debts

more valuable in real terms.

[edit] Excessive saving

To Keynes, excessive saving, i.e. saving beyond planned investment, was a serious

problem, encouraging recession or evendepression. Excessive saving results if

investment falls, perhaps due to falling consumer demand, over-investment in earlier
http://en.wikipedia.org/wiki/Real_vs._nominal_in_economicshttp://en.wikipedia.org/wiki/Real_vs._nominal_in_economicshttp://en.wikipedia.org/wiki/Real_vs._nominal_in_economicshttp://en.wikipedia.org/wiki/Barter_(economics)http://en.wikipedia.org/wiki/Consumption_(economics)http://en.wikipedia.org/wiki/Consumption_(economics)http://en.wikipedia.org/wiki/Consumption_(economics)http://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Irving_Fisherhttp://en.wikipedia.org/wiki/Deflation_(economics)http://en.wikipedia.org/wiki/Deflation_(economics)http://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=7http://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Depression_(economics)http://en.wikipedia.org/wiki/Depression_(economics)http://en.wikipedia.org/wiki/File:CLASSIX.pnghttp://en.wikipedia.org/wiki/Real_vs._nominal_in_economicshttp://en.wikipedia.org/wiki/Barter_(economics)http://en.wikipedia.org/wiki/Consumption_(economics)http://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Irving_Fisherhttp://en.wikipedia.org/wiki/Deflation_(economics)http://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=7http://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Depression_(economics)


10/22

years, or pessimistic business expectations, and if saving does not immediately fall in

step, the economy would decline.

The classical economistsargued that interest rates would fall due to the excess supply of"loanable funds". The first diagram, adapted from the only graph in The General Theory,

shows this process. (For simplicity, other sources of the demand for or supply of fundsare ignored here.) Assume that fixed investment in capital goods falls from "old I" to

"new I" (step a). Second (step b), the resulting excess of saving causes interest-rate cuts,abolishing the excess supply: so again we have saving (S) equal to investment. The

interest-rate (i) fall prevents that of production and employment.

Keynes had a complex argument against thislaissez-faireresponse. The graph below

summarizes his argument, assuming again that fixed investment falls (step A).First,saving does not fall much as interest rates fall, since theincome and substitution effects

of falling rates go in conflicting directions. Second, since planned fixed investmentin

plant and equipment is mostly based on long-term expectations of future profitability,

that spending does not rise much as interest rates fall. So S and I are drawn as steep(inelastic) in the graph. Given the inelasticity of both demand and supply, a large

interest-rate fall is needed to close the saving/investment gap. As drawn, this requires anegative interest rate at equilibrium (where the new I line would intersect the old S line).

However, this negative interest rate is not necessary to Keynes's argument.

Third, Keynes argued that saving and investment are not the main determinants of

interest rates, especially in the short run. Instead, the supply of and the demand for the

stock ofmoney determine interest rates in the short run. (This is not drawn in the graph.)

Neither changes quickly in response to excessive saving to allow fast interest-rateadjustment.
http://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/Loanable_fundshttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Income_effecthttp://en.wikipedia.org/wiki/Income_effecthttp://en.wikipedia.org/wiki/Substitution_effecthttp://en.wikipedia.org/wiki/Fixed_investmenthttp://en.wikipedia.org/wiki/Fixed_investmenthttp://en.wikipedia.org/wiki/Elasticity_(economics)http://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/File:KEYNES.pnghttp://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/Loanable_fundshttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Income_effecthttp://en.wikipedia.org/wiki/Substitution_effecthttp://en.wikipedia.org/wiki/Fixed_investmenthttp://en.wikipedia.org/wiki/Elasticity_(economics)http://en.wikipedia.org/wiki/Money


11/22

Finally, because of fear of capital losses on assets besides money, Keynes suggested that

there may be a "liquidity trap" setting a floor under which interest rates cannot fall. While

in this trap, interest rates are so low that any increase in money supply will cause bond-holders (fearing rises in interest rates and hence capital losses on their bonds) to sell their

bonds to attain money (liquidity). In the diagram, the equilibrium suggested by the new I

line and the old S line cannot be reached, so that excess saving persists. Some (such asPaul Krugman) see this latter kind of liquidity trap as prevailing inJapan in the 1990s.

Most economists agree thatnominal interest rates cannot fall below zero. However, some

economists (particularly those from theChicago school) reject the existence of a liquiditytrap.

Even if the liquidity trap does not exist, there is afourth (perhaps most important)

element to Keynes's critique. Saving involves not spending all of one's income. It thus

means insufficient demand for business output, unless it is balanced by other sources ofdemand, such as fixed investment. Thus, excessive saving corresponds to an unwanted

accumulation of inventories, or what classical economists called a general glut.[13] This

pile-up of unsold goods and materials encourages businesses to decrease both productionand employment. This in turn lowers people's incomesand saving, causing a leftwardshift in the S line in the diagram (step B). For Keynes, the fall in income did most of the

job by ending excessive saving and allowing the loanable funds market to attain

equilibrium. Instead of interest-rate adjustment solving the problem, a recession does so.Thus in the diagram, the interest-rate change is small.

Whereas the classical economists assumed that the level of output and income was

constant and given at any one time (except for short-lived deviations), Keynes saw this as

the key variable that adjusted to equate saving and investment.

Finally, a recession undermines the business incentive to engage infixed investment.With falling incomes and demand for products, the desired demand for factories and

equipment (not to mention housing) will fall. This accelerator effect would shift the I line

to the left again, a change not shown in the diagram above. This recreates the problem ofexcessive saving and encourages the recession to continue.

In sum, to Keynes there is interaction between excess supplies in different markets, as

unemployment in labor markets encourages excessive savingand vice-versa. Ratherthan prices adjusting to attain equilibrium, the main story is one ofquantity adjustment

allowing recessions and possible attainment ofunderemployment equilibrium.

[edit] Active fiscal policy

This section does not cite anyreferences or sources.Please help improve this section by adding citations toreliable sources. Unsourced material may

be challengedand removed. (March 2009)

As noted,[clarification needed] the classicals wanted to balance the government budget. To

Keynes, this would exacerbate the underlying problem: following either policy[clarification
http://en.wikipedia.org/wiki/Liquidity_traphttp://en.wikipedia.org/wiki/Paul_Krugmanhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Real_vs._nominal_in_economicshttp://en.wikipedia.org/wiki/Real_vs._nominal_in_economicshttp://en.wikipedia.org/wiki/Chicago_school_(economics)http://en.wikipedia.org/wiki/Chicago_school_(economics)http://en.wikipedia.org/wiki/General_gluthttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-12http://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Fixed_investmenthttp://en.wikipedia.org/wiki/Fixed_investmenthttp://en.wikipedia.org/wiki/Accelerator_effecthttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Quantity_adjustmenthttp://en.wikipedia.org/wiki/Underemployment_equilibriumhttp://en.wikipedia.org/wiki/Underemployment_equilibriumhttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=8http://en.wikipedia.org/wiki/Wikipedia:Citing_sourceshttp://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttp://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttp://en.wikipedia.org/wiki/Wikipedia:Identifying_reliable_sourceshttp://en.wikipedia.org/wiki/Wikipedia:Identifying_reliable_sourceshttp://en.wikipedia.org/wiki/Template:Citation_neededhttp://en.wikipedia.org/wiki/Template:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Verifiability#Burden_of_evidencehttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Liquidity_traphttp://en.wikipedia.org/wiki/Paul_Krugmanhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Real_vs._nominal_in_economicshttp://en.wikipedia.org/wiki/Chicago_school_(economics)http://en.wikipedia.org/wiki/General_gluthttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-12http://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Fixed_investmenthttp://en.wikipedia.org/wiki/Accelerator_effecthttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Quantity_adjustmenthttp://en.wikipedia.org/wiki/Underemployment_equilibriumhttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=8http://en.wikipedia.org/wiki/Wikipedia:Citing_sourceshttp://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttp://en.wikipedia.org/wiki/Wikipedia:Identifying_reliable_sourceshttp://en.wikipedia.org/wiki/Template:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Verifiability#Burden_of_evidencehttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Wikipedia:Please_clarify


12/22

needed] would raise saving(broadly defined) and thus lower the demand for both products

and labor. For example, Keynesians see Herbert Hoover's June 1932 tax increase as

making the Depression worse.[citation needed][clarification needed]

Keynes ideas influenced Franklin D. Roosevelt's view that insufficient buying-power

caused the Depression. During his presidency, Roosevelt adopted some aspects ofKeynesian economics, especially after 1937, when, in the depths of the Depression, the

United States suffered from recession yet again following fiscal contraction. But to manythe true success of Keynesian policy can be seen at the onset ofWorld War II, which

provided a kick to the world economy, removed uncertainty, and forced the rebuilding of

destroyed capital. Keynesian ideas became almost official insocial-democratic Europeafter the war and in the U.S. in the 1960s.

Keynes theory suggested that active government policy could be effective in managing

the economy. Rather than seeing unbalanced government budgets as wrong, Keynes

advocated what has been called countercyclical fiscal policies, that is policies which

acted against the tide of thebusiness cycle: deficit spending when a nation's economysuffers from recession or when recovery is long-delayed and unemployment is

persistently highand the suppression of inflation in boom times by either increasingtaxes or cutting back on government outlays. He argued that governments should solve

problems in the short run rather than waiting for market forces to do it in the long run,

because "in the long run, we are all dead."[14]

This contrasted with the classicaland neoclassical economic analysis of fiscal policy.Fiscal stimulus (deficit spending) could actuate production. But to these schools, there

was no reason to believe that this stimulation would outrun the side-effects that "crowd

out" private investment: first, it would increase the demand for labor and raise wages,

hurtingprofitability; Second, a government deficit increases the stock of governmentbonds, reducing their market price and encouraging high interest rates, making it more

expensive for business to finance fixed investment. Thus, efforts to stimulate the

economy would be self-defeating.

The Keynesian response is that such fiscal policy is only appropriate when

unemployment is persistently high, above the non-accelerating inflation rate of

unemployment (NAIRU). In that case, crowding out is minimal. Further, privateinvestment can be "crowded in": fiscal stimulus raises the market for business output,

raising cash flow and profitability, spurring business optimism. To Keynes, this

accelerator effect meant that government and business could becomplementsrather than

substitutes in this situation. Second, as the stimulus occurs,gross domestic product rises,raising the amount ofsaving, helping to finance the increase in fixed investment. Finally,

government outlays need not always be wasteful: government investment inpublic goods

that will not be provided by profit-seekers will encourage the private sector's growth.That is, government spending on such things as basic research, public health, education,

andinfrastructure could help the long-term growth ofpotential output.
http://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Herbert_Hooverhttp://en.wikipedia.org/wiki/Herbert_Hooverhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Franklin_D._Roosevelthttp://en.wikipedia.org/wiki/Franklin_D._Roosevelthttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Social_democracyhttp://en.wikipedia.org/wiki/Social_democracyhttp://en.wikipedia.org/wiki/Countercyclicalhttp://en.wikipedia.org/wiki/Business_cyclehttp://en.wikipedia.org/wiki/Business_cyclehttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-13http://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/Neoclassical_economicshttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Crowding_out_(economics)http://en.wikipedia.org/wiki/Crowding_out_(economics)http://en.wikipedia.org/wiki/Rate_of_profithttp://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/Fixed_investmenthttp://en.wikipedia.org/wiki/NAIRUhttp://en.wikipedia.org/wiki/NAIRUhttp://en.wikipedia.org/wiki/Accelerator_effecthttp://en.wikipedia.org/wiki/Complement_goodhttp://en.wikipedia.org/wiki/Complement_goodhttp://en.wikipedia.org/wiki/Complement_goodhttp://en.wikipedia.org/wiki/Substitute_goodhttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Savinghttp://en.wikipedia.org/wiki/Public_goodshttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Potential_outputhttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Herbert_Hooverhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Franklin_D._Roosevelthttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Social_democracyhttp://en.wikipedia.org/wiki/Countercyclicalhttp://en.wikipedia.org/wiki/Business_cyclehttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-13http://en.wikipedia.org/wiki/Classical_economicshttp://en.wikipedia.org/wiki/Neoclassical_economicshttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Crowding_out_(economics)http://en.wikipedia.org/wiki/Crowding_out_(economics)http://en.wikipedia.org/wiki/Rate_of_profithttp://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/Fixed_investmenthttp://en.wikipedia.org/wiki/NAIRUhttp://en.wikipedia.org/wiki/NAIRUhttp://en.wikipedia.org/wiki/Accelerator_effecthttp://en.wikipedia.org/wiki/Complement_goodhttp://en.wikipedia.org/wiki/Substitute_goodhttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Savinghttp://en.wikipedia.org/wiki/Public_goodshttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Potential_output


13/22

A Keynesian economist might point out that classical and neoclassical theory does not

explain why firms acting as "special interests" to influence government policy are

assumed to produce a negative outcome, while those same firms acting with the samemotivations outside of the government are supposed to produce positive outcomes.

Libertarians counter that because both parties consent, free trade increases net happiness,

but government imposes its will by force, decreasing happiness. Therefore firms thatmanipulate the government do net harm, while firms that respond to the free market do

net good. Theoretically, in a democracy, the populace consents to or refutes government

policy through elections and could thereby be considered a consenting party not subjectedunilaterally to the government's will.

In Keynes' theory, there must be significant slack in the labor market before fiscal

expansion is justified. Both conservative and someneoliberal economists question this

assumption, unless labor unions or the government "meddle" in thefree market, creatingpersistent supply-side orclassical unemployment.[clarification needed] Their solution is to

increase labor-market flexibility, e.g., by cutting wages, busting unions, and deregulating

business.

Contrary to some critical characterizations of it, Keynesianism does not consist solely ofdeficit spending. Keynesianism recommends counter-cyclical policies to smooth out

fluctuations in thebusiness cycle. An example of a counter-cyclical policy is raising taxes

to cool the economy and to prevent inflation when there is abundant demand-side growth,and engaging in deficit spending on labor-intensive infrastructure projects to stimulate

employment and stabilize wages during economic downturns. Classical economics, on

the other hand, argues that one should cuttaxes when there are budget surpluses, and cut

spendingor, less likely, increase taxesduring economic downturns. Keynesianeconomists believe that adding to profits and incomes during boom cycles through tax

cuts, and removing income and profits from the economy through cuts in spending and/orincreased taxes during downturns, tends to exacerbate the negative effects of the businesscycle. This effect is especially pronounced when the government controls a large fraction

of the economy, and is therefore one reason fiscal conservatives advocate a much smaller

government.

[edit] "Multiplier effect" and interest rates

Main article: Spending multiplier

Two aspects of Keynes' model had implications for policy:

First, there is the "Keynesian multiplier", first developed by Richard F. Kahn in 1931.

Exogenous increases in spending, such as an increase in government outlays, increases

total spending by a multiple of that increase. A government could stimulate a great deal

of new production with a modest outlay if:

1. The people who receive this money then spend most on consumption goods and

save the rest.
http://en.wikipedia.org/wiki/Libertarianismhttp://en.wikipedia.org/wiki/Unemployment#Cyclical_unemploymenthttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Neoliberalismhttp://en.wikipedia.org/wiki/Neoliberalismhttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Unemployment#Classical_unemploymenthttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Business_cyclehttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=9http://en.wikipedia.org/wiki/Spending_multiplierhttp://en.wikipedia.org/wiki/Multiplier_(economics)http://en.wikipedia.org/wiki/Richard_Ferdinand_Kahnhttp://en.wikipedia.org/wiki/Exogenoushttp://en.wikipedia.org/wiki/Libertarianismhttp://en.wikipedia.org/wiki/Unemployment#Cyclical_unemploymenthttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Neoliberalismhttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Unemployment#Classical_unemploymenthttp://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Business_cyclehttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=9http://en.wikipedia.org/wiki/Spending_multiplierhttp://en.wikipedia.org/wiki/Multiplier_(economics)http://en.wikipedia.org/wiki/Richard_Ferdinand_Kahnhttp://en.wikipedia.org/wiki/Exogenous


14/22

2. This extra spending allows businesses to hire more people and pay them, which in

turn allows a further increase consumer spending.

This process continues. At each step, the increase in spending is smaller than in theprevious step, so that the multiplier process tapers off and allows the attainment of an

equilibrium. This story is modified and moderated if we move beyond a "closedeconomy" and bring in the role of taxation: the rise in imports and tax payments at each

step reduces the amount of induced consumer spending and the size of the multipliereffect.

Second, Keynes re-analyzed the effect of the interest rate on investment. In the classical

model, the supply of funds (saving) determined the amount of fixed business investment.

That is, since all savings was placed in banks, and all business investors in need ofborrowed funds went to banks, the amount of savings determined the amount that was

available to invest. To Keynes, the amount of investment was determined independently

by long-term profit expectations and, to a lesser extent, the interest rate. The latter opens

the possibility of regulating the economy through money supply changes, via monetarypolicy. Under conditions such as the Great Depression, Keynes argued that this approach

would be relatively ineffective compared to fiscal policy. But during more "normal"times, monetary expansion can stimulate the economy.[citation needed]

[edit] Postwar Keynesianism

Main articles:Neo-Keynesian economics,New Keynesian economics, and Post-

Keynesian economics

Keynes's ideas became widely accepted afterWWII, and until the early 1970s, Keynesian

economics provided the main inspiration for economic policy makers in Westernindustrialized countries.[15] Governments prepared high quality economic statistics on an

ongoing basis and tried to base their policies on the Keynesian theory that had becomethe norm. In the early era ofnew liberalismand social democracy, most western capitalist

countries enjoyed low, stable unemployment and modest inflation, an era called the

Golden Age of Capitalism.

In terms of policy, the twin tools of post-war Keynesian economics were fiscal policy andmonetary policy. While these are credited to Keynes, others, such as economic historian

David Colander, argue that they are rather due to the interpretation of Keynes by Abba

Lernerin his theory ofFunctional Finance, and should instead be called "Lernerian"

rather than "Keynesian".[16]

Through the 1950s, moderate degrees of government demand leading industrial

development, and use of fiscal and monetary counter-cyclical policies continued, and

reached a peak in the "go go" 1960s, where it seemed to many Keynesians that prosperitywas now permanent. In 1971, Republican US PresidentRichard Nixon even proclaimed

"we are all Keynesians now".[17] However, with the oil shock of 1973, and the economic

problems of the 1970s, modern liberal economics began to fall out of favor. During this
http://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=10http://en.wikipedia.org/wiki/Neo-Keynesian_economicshttp://en.wikipedia.org/wiki/Neo-Keynesian_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-K_rev._and_critics-14http://en.wikipedia.org/wiki/New_liberalismhttp://en.wikipedia.org/wiki/New_liberalismhttp://en.wikipedia.org/wiki/Social_democracyhttp://en.wikipedia.org/wiki/Social_democracyhttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Golden_Age_of_Capitalismhttp://en.wikipedia.org/wiki/Golden_Age_of_Capitalismhttp://en.wikipedia.org/wiki/David_Colanderhttp://en.wikipedia.org/wiki/David_Colanderhttp://en.wikipedia.org/wiki/Abba_P._Lernerhttp://en.wikipedia.org/wiki/Abba_P._Lernerhttp://en.wikipedia.org/wiki/Functional_Financehttp://en.wikipedia.org/wiki/Functional_Financehttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-15http://en.wikipedia.org/wiki/Richard_Nixonhttp://en.wikipedia.org/wiki/Richard_Nixonhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-Keyn2-16http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-Keyn2-16http://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=10http://en.wikipedia.org/wiki/Neo-Keynesian_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-K_rev._and_critics-14http://en.wikipedia.org/wiki/New_liberalismhttp://en.wikipedia.org/wiki/Social_democracyhttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/Golden_Age_of_Capitalismhttp://en.wikipedia.org/wiki/David_Colanderhttp://en.wikipedia.org/wiki/Abba_P._Lernerhttp://en.wikipedia.org/wiki/Abba_P._Lernerhttp://en.wikipedia.org/wiki/Functional_Financehttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-15http://en.wikipedia.org/wiki/Richard_Nixonhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-Keyn2-16


15/22

time, many economies experienced high and rising unemployment, coupled with high

and rising inflation, contradicting the Phillips curve's prediction. Thisstagflation meant

that the simultaneous application of expansionary (anti-recession) and contractionary(anti-inflation) policies appeared to be necessary, a clear impossibility. This dilemma led

to the end of the Keynesian near-consensus of the 1960s, and the rise throughout the

1970s of ideas based upon more classical analysis, including monetarism,supply-sideeconomics[17] and new classical economics. At the same time Keynesians began during

the period to reorganize their thinking (some becoming associated withNew Keynesian

economics); one strategy, utilized also as a critique of the notably high unemploymentand potentially disappointing GNP growth rates associated with the latter two theories by

the mid-1980s, was to emphasize low unemployment and maximal economic growth at

the cost of somewhat higher inflation (its consequences kept in check by indexing and

other methods, and its overall rate kept lower and steadier by such potential policies asMartin Weitzman's share economy).[18]

Currently, multiple schools of economic thoughtexist that trace their legacy to Keynes,

notablyNeo-Keynesian economics,New Keynesian economics, and Post-Keynesianeconomics. Keynes' biographerRobert Skidelsky writes that the post-Keynesian schoolhas remained closest to the spirit of Keynes' work in following his monetary theory and

rejecting the neutrality of money.[19][20]

In the postwar era Keynesian analysis was combined with neoclassical economics toproduce what is generally termed the "neoclassical synthesis", yieldingNeo-Keynesian

economics, which dominated mainstream macroeconomic thought. Though it was widely

held that there was no strong automatic tendency to full employment, many believed that

if government policy were used to ensure it, the economy would behave as neoclassicaltheory predicted. This post-war domination by Neo-Keynesian economics was broken

during the stagflation of the 1970s. There was a lack of consensus amongmacroeconomists in the 1980s. However, the advent ofNew Keynesian economics in the1990s, modified and provided microeconomic foundations for the neo-Keynesian

theories. These modified models now dominate mainstream economics.

Post-Keynesian economistson the other hand, reject the neoclassical synthesis, and more

generally, neoclassical economics applied to the macroeconomy. Post-Keynesianeconomics is a heterodox school which holds that both Neo-Keynesian economics and

New Keynesian economics are incorrect, and a misinterpretation of Keynes's ideas. The

Post-Keynesian school encompasses a variety of perspectives, but has been far lessinfluential than the other more mainstream Keynesian schools.

[edit] Main theories

The two key theories of mainstream Keynesian economics are the IS-LM model of John

Hicks and the Phillips curve; both of these are rejected by Post-Keynesians.

It was with John Hicks that Keynesian economics produced a clearmodelwhich policy-

makers could use to attempt to understand and control economic activity. This model, the
http://en.wikipedia.org/wiki/Phillips_curvehttp://en.wikipedia.org/wiki/Phillips_curvehttp://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/Monetarismhttp://en.wikipedia.org/wiki/Supply-side_economicshttp://en.wikipedia.org/wiki/Supply-side_economicshttp://en.wikipedia.org/wiki/Supply-side_economicshttp://en.wikipedia.org/wiki/Supply-side_economicshttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-Keyn2-16http://en.wikipedia.org/wiki/Supply-side_economicshttp://en.wikipedia.org/wiki/New_classical_economicshttp://en.wikipedia.org/wiki/New_classical_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Martin_Weitzman#Researchhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-17http://en.wikipedia.org/wiki/Schools_of_economic_thoughthttp://en.wikipedia.org/wiki/Schools_of_economic_thoughthttp://en.wikipedia.org/wiki/Neo-Keynesian_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Robert_Skidelskyhttp://en.wikipedia.org/wiki/Robert_Skidelskyhttp://en.wikipedia.org/wiki/Neutrality_of_moneyhttp://en.wikipedia.org/wiki/Neutrality_of_moneyhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-18http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-19http://en.wikipedia.org/wiki/Neoclassical_synthesishttp://en.wikipedia.org/wiki/Neo-Keynesian_economicshttp://en.wikipedia.org/wiki/Neo-Keynesian_economicshttp://en.wikipedia.org/wiki/Neo-Keynesian_economicshttp://en.wikipedia.org/wiki/Mainstream_economicshttp://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Heterodox_economicshttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=11http://en.wikipedia.org/wiki/IS-LM_modelhttp://en.wikipedia.org/wiki/Phillips_curvehttp://en.wikipedia.org/wiki/John_Hickshttp://en.wikipedia.org/wiki/Model_(economics)http://en.wikipedia.org/wiki/Model_(economics)http://en.wikipedia.org/wiki/Phillips_curvehttp://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/Monetarismhttp://en.wikipedia.org/wiki/Supply-side_economicshttp://en.wikipedia.org/wiki/Supply-side_economicshttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-Keyn2-16http://en.wikipedia.org/wiki/New_classical_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Martin_Weitzman#Researchhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-17http://en.wikipedia.org/wiki/Schools_of_economic_thoughthttp://en.wikipedia.org/wiki/Neo-Keynesian_economicshttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Robert_Skidelskyhttp://en.wikipedia.org/wiki/Neutrality_of_moneyhttp://en.wikipedia.org/wiki/Keynesian_economics#cite_note-18http://en.wikipedia.org/wiki/Keynesian_economics#cite_note-19http://en.wikipedia.org/wiki/Neoclassical_synthesishttp://en.wikipedia.org/wiki/Neo-Keynesian_economicshttp://en.wikipedia.org/wiki/Neo-Keynesian_economicshttp://en.wikipedia.org/wiki/Mainstream_economicshttp://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Heterodox_economicshttp://en.wikipedia.org/w/index.php?title=Keynesian_economics&action=edit&section=11http://en.wikipedia.org/wiki/IS-LM_modelhttp://en.wikipedia.org/wiki/Phillips_curvehttp://en.wikipedia.org/wiki/John_Hickshttp://en.wikipedia.org/wiki/Model_(economics)


16/22

IS-LM model is nearly as influential as Keynes' original analysis in determining actual

policy and economics education. It relates aggregate demand and employment to three

exogenousquantities, i.e., the amount ofmoney in circulation, the government budget,and the state of business expectations. This model was very popular with economists after

World War IIbecause it could be understood in terms ofgeneral equilibrium theory. This

encouraged a much more static vision of macroeconomics than that described above.[citation

needed]

The second main part of a Keynesian policy-maker's theoretical apparatus was the

Phillips curve. This curve, which was more of an empirical observation than a theory,

indicated that increased employment, and decreased unemployment, implied increasedinflation. Keynes had only predicted that falling unemployment would cause a higher

price, not a higherinflation rate. Thus, the economist could use the IS-LM model to

predict, for example, that an increase in the money supply would raise output andemploymentand then use the Phillips curve to predict an increase in inflation.[citation needed]

[edit] Criticism

[edit] Monetarist criticism

One school began in the late 1940s with Milton Friedman. Instead of rejecting macro-

measurements and macro-models of the economy, the monetarist school embraced the

techniques of treating the entire economy as having a supply and demand equilibrium.However,

Documents

Keynesian economic1