Keynesian economics

Definition

School of economic thought founded by the UK economist John Maynard Keynes (1883-1946) and developed by his followers. In 1936, at the height of the great depression, Keynes' landmark book 'General Theory Of Employment, Iinterest, And Money' caused a paradigm shift for the economists: it suddenly replaced their emphasis on study of the economic behavior of individuals and firms (microeconomics) to the study of the behavior of the economy as a whole (macroeconomics). The main plank of his revolutionary theory is the assertion that the aggregate demand created by households, businesses and the government—and not the dynamics of free markets—is the most important driving force in an economy. This theory further asserts that free markets (despite the assertion of 18th century Scottish economist Adam Smith and other classical economists) has no self-balancing mechanisms that lead to full employment. Keynesian economists urge and justify a government's intervention in the economy through public policies that aim to achieve full employment and price stability. Their ideas have greatly influenced governments the world-over in accepting their responsibility to provide full or near-full employment through measures (such as deficit spending) that stimulate aggregate demand. See also classical economics, neo-classical Economics, new classical economics and supply side economics.