what is keynesian economics 
the theories of john maynard keynes known as keynesian economics center around the idea that governments should play an active role in their countries economies instead of just letting the free market reign specifically keynes advocated federal spending to mitigate downturns in business cycles the most basic principle of keynesian economics is that demand not supply is the driving force of an economy at the time conventional economic wisdom held the opposite view that supply creates demand because aggregate demand the total spending for and consumption of goods and services by the private sector and the government drives supply total spending determines all economic outcomes from the production of goods to the employment rate another basic principle of keynesian economics is that the best way to pull an economy out of a recession is for the government to increase demand by infusing the economy with capital in short consumption spending is the key to economic recovery these two principles are the basis of keynes belief that demand is so important that even if a government has to go into debt to spend it should do so according to keynes the government boosting the economy in this way will stimulate consumer demand which in turn spurs production and ensures full employment criticism of keynesian economicsalthough widely adopted after world war ii keynesian economics has attracted plenty of criticism since the ideas were first introduced in the 1930s one major criticism deals with the concept of big government the expansion of federal initiatives that must occur to enable the government to participate actively in the economy rival economic theorists like those of the chicago school of economics argue that economic recessions and booms are part of the natural order of business cycles direct government intervention only worsens the recovery process and federal spending discourages private investment the most famous critic of keynesian economics was milton friedman an american economist best known for his advocacy of free market capitalism considered the most influential economist of the second half of the 20th century as keynes was the most influential economist of the first half friedman advocated monetarism which refuted important parts of keynesian economics keynes held that fiscal policy government spending and tax policies to influence economic conditions is more important than monetary policy control of the overall supply of money available to banks consumers and businesses in contrast friedman and fellow monetarists held that governments could foster economic stability by targeting the growth rate of the money supply in short friedman and monetarist economists advocate the control of money in the economy while keynesian economists advocate government expenditure for example while keynes believed that an interventionist government could moderate recessions by using fiscal policy to prop up aggregate demand spur consumption and reduce unemployment friedman criticized deficit spending and argued for a return to the free market including smaller government and deregulation in most areas of the economy supplemented by a steady increase of the money supply with its advocacy of government intervention in the economy keynesian economics is in sharp contrast to laissez faire economics which argues that the less the government is involved in economic affairs the better for business and society as a whole examples of keynesian economicsthe onset of the great depression in the 1930s significantly influenced keynes economic theories and led to the widespread adoption of several of his policies to address the crisis in the u s president franklin roosevelt enacted the new deal a series of government programs that directly reflected the keynesian principle that even a free enterprise capitalist system requires some federal oversight with the new deal the u s government intervened to stimulate the national economy on an unprecedented scale including creating several new agencies focused on providing jobs to unemployed americans and stabilizing the price of consumer goods roosevelt also adopted keynes policy of expanded deficit spending to stimulate demand including programs for public housing slum clearance railroad construction and other massive public works in response to the great recession of 2007 2009 president barack obama took several steps that reflected keynesian economic theory the federal government bailed out debt ridden companies in several industries it also took into conservatorship fannie mae and freddie mac the two major market makers and guarantors of mortgages and home loans in 2009 president obama signed the american recovery and reinvestment act an 831 billion government stimulus package designed to save existing jobs and create new ones it included tax cuts credits and unemployment benefits for families it also earmarked expenditures for healthcare infrastructure and education in the wake of the covid 19 pandemic of 2020 the u s government under president donald trump and president joseph biden offered a variety of relief loan forgiveness and loan extension programs the u s government also supplemented weekly state unemployment benefits and sent american taxpayers direct aid in the form of three separate tax free stimulus checks legacysince the 1930s the popularity of keynesian economics has risen and fallen and the theories have undergone considerable revision since keynes day however the economic school of thought he founded has left one indelible stamp on modern nations the idea that governments have a role to play in business even in capitalist economies who said keynesian economics was spending your way out of a recession it was milton friedman who attacked the central keynesian idea that consumption is the key to economic recovery as trying to spend your way out of a recession 3 unlike keynes friedman believed that government spending and racking up debt eventually leads to inflation a rise in prices that lessens the value of money and wages which can be disastrous unless accompanied by underlying economic growth the stagflation of the 1970s was a case in point it was paradoxically a period with high unemployment and low production but also high inflation and high interest rates was keynes a socialist it is difficult to pigeonhole keynes as a socialist on the one hand he showed an interest in socialist regimes and advocated the presence of government in economic affairs he emphatically did not believe in letting business cycles go through boom and bust without intervention or in letting private enterprise operate unfettered on the other hand keynes stopped short of advocating that governments actually take over and run industries he wanted central authorities to stimulate but not necessarily control methods of production there is also evidence that he was returning to more traditional free market capitalism towards the end of his life as he was considering ways to get post war britain out of an economic hole shortly before his death in 1946 he told his friend henry clay that he found himself relying more on a solution he had tried to eject from economic thinking twenty years ago adam smith s invisible hand the natural tendency of a free market economy to self correct via the laws of supply and demand 45