Keynesianism

Keynesianism, an economic theory originally derived from the British economist John Maynard Keynes.In his General Theory of Employment, Interest and Money (1936), written during the Great Depression of the 1930s, Keynes challenged the orthodox view that market forces would necessarily bring about recovery. Rather, Keynes postulated that the historical evolution of capitalist economics limited the ability of private investment to stimulate renewed economic growth. Hence, public investment would be required to lift Western economies from an indefinite state of stagnation. American economists initially understood Keynes's analysis in this light.

In the climate of post–World War II prosperity, however, Keynesianism came primarily to be understood as a series of fiscal‐policy strategies: the use of government spending or tax reduction to boost a sagging economy; the introduction of government retrenchment or tax increases to cool an overheated one. Widely supported among U.S. economists, this contracyclical version of Keynesianism largely displaced the original formulation. Keynesianism thus evolved from a general theory repudiating laissez‐faire economic orthodoxy into a kit of policy tools. This revision of orthodox economic theory was dubbed the “neoclassical synthesis.”

During the 1970s, this post–World War II view of Keynesianism fell into disrepute. The simultaneous appearance of recession and inflation—labeled “stagflation”—rendered Keynesian fiscal tools ineffectual. Accordingly, the form of Keynesianism widely accepted after 1945 stood indicted as simpleminded, and younger economists by and large abandoned it. Other economists, however, worked to retrieve or develop a form of Keynesianism more in keeping with Keynes's original theoretical and policy intent: to save capitalism from a historical tendency toward long‐term stagnation and mass unemployment.
See also Business Cycle; Depressions, Economic; Economics; Monetarism; Monetary Policy, Federal; New Deal Era, The; Taxation.

Bibliography

Walter S. Salant , The Spread of Keynesian Doctrines and Practices in the United States, in The Political Power of Economic Ideas: Keynesianism across Nations, ed. Peter A. Hall, 1989, pp. 27–51.

Theodore Rosenof