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.
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.
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.