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Keynesian economics (pronounced /ˈkeɪnziən/, also called Keynesianism and Keynesian theory) is a macroeconomic theory based on the ideas of 20th century British economist John Maynard Keynes. Keynesian economics argues that private sector decisions sometimes lead to inefficientmacroeconomic outcomes and therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.[1] The theories forming the basis of Keynesian economics were first presented 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 a mixed economy—predominantly private sector, but with a large role of government and public sector—and served as the economic model during the latter part of the Great DepressionWorld War II, and the post-war economic expansion (1945–1973), though it lost some influence following the stagflation of the 1970s. The advent of the global financial crisis in 2007 has caused a resurgence in Keynesian thought. The former British Prime Minister Gordon Brown and other world leaders have used Keynesian economics to justify government stimulus programs for their economies.[2]

According to Keynesian theory, some microeconomic-level actions – if taken collectively by a large proportion of individuals and firms – can lead to inefficient aggregate macroeconomicoutcomes, where the economy operates below its potential output and growth rate. Such a situation had previously been referred to by classical economists as a general glut. There was disagreement among classical economists (some of whom believed in Say's Law – that "supply creates its own demand"), on whether a general glut was possible. Keynes contended that a general glut would occur when aggregate demand for goods were insufficient, leading to an economic downturn with unnecessarily high unemployment and losses of potential output. In such a situation, government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation.

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 in interest 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 and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[3]
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 of general equilibrium allow for price adjustment to eventually achieve this goal. More broadly, Keynes saw his theory as a general theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.
The new classical macroeconomics movement, which began in the late 1960s and early 1970s, criticized Keynesian theories, while New Keynesian economics have sought to base Keynes's idea on more rigorous theoretical foundations.
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 war or could promote peace.[4]

 

 
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review by . May 19, 2010
I am not an economist, so take my uneducated (but researched) opinion for what it is worth.  I have been hearing the term Keynesian Economics a lot in relation to the stimulus package and decided to do some investigation.  It seems that Keynesian Economics are basic Econ 101 material that basically relates to increasing government spending during a recession (or depression) to "prime the economic pump" and get the economy rolling again.  The only problem is that it …
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