What is keynesian economics?

Keynesian economics is the theory that total spending in the economy drives output and jobs, and that governments should step in during downturns. When private spending falls, the state can borrow and spend more or cut taxes to boost demand. It is named after the British economist John Maynard Keynes.

Keynes developed his ideas during the Great Depression of the 1930s. He argued that economies could get stuck with high unemployment for years, because falling spending leads to falling incomes and still less spending. Waiting for markets to fix themselves could take too long. Keynes also argued that people and businesses save more in bad times, which can deepen a slump. He called this the paradox of thrift.

His answer was active policy. In a slump, governments should run deficits to support demand. In a boom, they should cool things down and repay debt. A key idea is the multiplier. Each pound of government spending can create more than a pound of output as it is spent again. Interest rate cuts can also boost demand, but Keynes doubted they always work when confidence is very low.

Keynesian thinking dominated British policy from 1945 to the 1970s. It fell from favour when high inflation and unemployment arrived together, known as stagflation. It returned in the 2008 crisis and the pandemic, when governments borrowed heavily to support jobs. Today most economists accept some role for fiscal support in deep recessions, but debate how much and for how long.

Where you've seen it

The US New Deal in the 1930s, Western economic policy from 1945 to the 1970s, and stimulus spending worldwide during the 2008 crisis and the pandemic.

In the UK today

Seen in arguments to borrow to invest in infrastructure, in pandemic support schemes like furlough, and in debates over whether cuts after 2010 slowed the recovery.