Keynesianism

Keynesianism An economic theory developed by Keynes which holds that imperfections in the economy can be corrected through government policy. For example, if there is a recession, there is excess supply of goods over demand. The government can stimulate demand e.g. through welfare payments or employment schemes. As individuals thus receive higher incomes, their demand will increase. To finance these schemes, the government will have to raise more debts, which pushes up interest rates. This reduces supply because it becomes more expensive for producers to expand through loans, so that a government can increase demand and reduce supply until an equilibrium is re-established. Keynes' ideas formed the basis of economic policy in most industrialized nations after World War II, but fell out of fashion after the inability of Keynesian demand management to cope with the economic recession of the 1970s, when rising inflation coincided with rising unemployment. During the late 1970s and the 1980s, it was replaced as the dominant economic theory by monetarism. Concerns raised by the progress of globalization, however, have raised awareness about the potential costs of unbridled monetarism. They have led to demands of greater state intervention to prevent some of the possible insecurity and dislocation experienced by the losers of the market.