Keynesian economics

group of macroeconomic theories

Keynesian economics (or Keynesianism) is the view that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy). The theories forming the basis of Keynesian economics were first presented by the British economist John Maynard Keynes.

The Classic view of Saving & Investment.
The Keynesian view of Saving & Investment.
CONTENT: A-B - C-D - E-F - G-H - I-J - K-L - M-N - O-B -Q-R - S-T - U-V - W-X - Y-Z - See also


Sorted alphabetically by author or source


  • Following the collapse of the American investment bank Lehman Brothers, and threatening to engulf the entire banking system, the British economist John Maynard Keynes returned to center stage. In the popular press and in the writings of many economists, Keynes featured prominently as governments around the world urgently sought ways to avoid economic collapse. (...) After only a brief delay, critics of Keynes’s ideas also began to appear; but the emergence of such critics only served to emphasize the fact of his return, for only a few years earlier Keynes’s name would not even have appeared in public debate about economic policy: his ideas were seen as having so little relevance that it did not even seem necessary to mention his name when discussing the performance of the economy.
    • Roger E. Backhouse and Bradley W. Bateman, ch.1 "Keynes Returns, but Which Keynes?" Capitalist revolutionary : John Maynard Keynes (2011).
  • I find it amazing now that my first economics class, taught by Alan Sweezy, used John Maynard Keynes’s General Theory of Income and Employment as the textbook. Although this book is one of the most influential works of the twentieth century, it makes a really lousy textbook. Moreover, since I now regard Keynes’s analysis as seriously flawed, it is surprising that I enjoyed the course so much. As a student, I appreciated the simple way that the Keynesian model explained the workings and failings of the overall economy. Especially appealing were the clever policy remedies, such as increased government spending and tax cuts, that Keynes recommended to combat unemployment. Too bad that I discovered later that the model was theoretically and empirically deficient!
  • Keynesian economics—the go-to theory for those who like government at the controls of the economy—is in the forefront of the ongoing debate on fiscal-stimulus packages. For example, in true Keynesian spirit, Agriculture Secretary Tom Vilsack said recently that food stamps were an "economic stimulus" and that "every dollar of benefits generates $1.84 in the economy in terms of economic activity." Many observers may see how this idea—that one can magically get back more than one puts in—conflicts with what I will call "regular economics." What few know is that there is no meaningful theoretical or empirical support for the Keynesian position.
    • Robert J. Barro, "Keynesian Economics vs. Regular Economics" Wall Street Journal (2011).
  • Although we cannot place all the blame for the dismal condition of LDCs on Keynesian economics, it bears a heavy responsibility for much of the pain and suffering in the Third World.
    • Bruce Bartlett, "Keynesian Policy and Development Economics" in Dissent on Keynes (1992).
  • After careful research along these lines, I came to the annoying conclusion that Keynes had been 100 percent right in the 1930s. Previously, I had thought the opposite. But facts were facts and there was no denying my conclusion. It didn’t affect the argument in my book, which was only about the rise and fall of ideas. The fact that Keynesian ideas were correct as well as popular simply made my thesis stronger.
  • Keynesian economics is the economics of nominal rigidities basically, nominal rigidities everywhere. Fully anticipated money does affect output. Everybody can see that! So, it's right. The fact that it's not as theoretically tidy as Lucas's 1972 Journal of Economic Theory paper is not a reason to throw it away. That's become a minority view in this profession, unfortunately. It wouldn't have been in the '60s.
  • For a period of roughly 35 years, Keynesian theory provided a central paradigm for macroeconomists, and considerable progress was made on several empirical fronts. It was widely recognized that some of the ingredients of Keynesian economics (e.g. money illusion and/or nominal wage rigidity) rested on slender to non-existent microtheoretic foundations; and there were always dissenters. But, thought of as a collection of empirical regularities that fit together into a coherent whole, the theory worked tolerably well. In the 1970s, however, the Keynesian paradigm was rejected by a great many academic economists, especially in the United States, in favour of what we now call new classical economics. By about 1980, it was hard to find an American academic macroeconomist under the age of 40 who professed to be a Keynesian. That was an astonishing intellectual turnabout in less than a decade, an intellectual revolution for sure.
    • Alan S. Blinder, "The fall and rise of Keynesian economics", Economic Record (1988).
  • The word ‘Keynesian’ means many things to many people. Decades ago, it was a carelessly applied label for economic liberals and interventionists in general. For a while in the late 1970s and early 1980s it became a pejorative term more or less synonymous with old-fashioned.
    • Alan S. Blinder, "The fall and rise of Keynesian economics", Economic Record (1988).
  • First and foremost, Keynesian economics is a theory of aggregate demand and of the effects of aggregate demand on real output and inflation.
    • Alan S. Blinder, "The fall and rise of Keynesian economics", Economic Record (1988).
  • I have chosen my title, “Keynesian Follies,” carefully. Folly is defined as (1) lack of good sense or of normal prudence, (2) inability or refusal to accept existing reality or to foresee inevitable consequences. Both of these definitions convey something of the policy stance that I associate with the term Keynesian. I have put “follies” plurally in my title in order to suggest that several separate but related elements are involved, and, also, to hint that, to an extent, the whole historical episode has theatrical aspects of its own.


  • Gore Vidal, the American writer, once described the American economic system as ‘free enterprise for the poor and socialism for the rich’. Macroeconomic policy on the global scale is a bit like that. It is Keynesianism for the rich countries and monetarism for the poor.
    • Ha-Joon Chang Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (2008) Ch. 7, Keynesianism for the rich, monetarism for the poor, p. 142.
  • In reading the economics journals and talking with newly-minted PhDs, it is as if Keynesian economics never existed.
    • David Colander, “Functional Finance, New Classical Economics and Great Great Grandsons” (2002).
  • Keynes is dead; dynamic programming; Keynes is still dead. That’s the way Stanford graduate economics students recently summed up what they had learned in their core graduate macroeconomics course.
    • David Colander, "The Keynesian Method, Complexity, and the Training of Economists" (2009)


  • Perhaps the most direct effect of Keynesian thinking has been to retard the process of capital formation.
    • Martin Feldstein, "The Retreat from Keynesian Economics", The Public Interest (1981).
  • The legacy of Keynesian economics — the misdiagnosis of unemployment, the fear of saving, and the unjustified faith in government intervention — affected the fundamental ideas of policy makers for a generation and altered such basic institutions of our economy as the tax laws, the social insurance programs and the financial system. Changing these deeply ingrained aspects of economic life can happen only slowly. But the economics profession has undoubtedly begun to re-examine and re-evaluate the Keynesian notions that have been so dominant for the past 35 years. There is a return to older and more basic economic truths and an attempt to adapt these ideas to the changing conditions of technology and affluence. From this is emerging a new view of unemployment, of saving, and of the role of government.
    • Martin Feldstein, "The Retreat from Keynesian Economics", The Public Interest (1981).
  • Unfortunately, several decades of Keynesian instruction on the virtues of budget deficits have left the public and our political leaders confused about the costs of running persistent deficits. [...] Keynes has been that influential defunct scribbler for the past generation. But who would ever have thought that the politician hearing Keynes's voice in the air might be Ronald Reagan
  • Thanks to the work of John Maynard Keynes and of Milton Friedman, we now have a better understanding of how governments can (at least in principle) reduce the severity of major economic downturns. Keynesian economics taught us that government spending can raise GDP and reduce unemployment.
    • Martin Feldstein, "Economic Conditions and U.S. National Security in the 1930s and Today" (2009).
  • But further analysis and experience soon raised doubts about the efficacy of these new tools. Empirical research indicated that the Keynesian multiplier was much smaller than earlier analyses had assumed, reduced by a crowding out of interest-sensitive spending caused by an induced increase in the demand for money and by the effect of the larger national debt on long-term interest rates. The leakage of demand through imports and the effect of the fiscal expansion on the exchange rate further reduced the multiplier.
  • We're all Keynesians now.
    • Milton Friedman, in the cover story of TIME (31 December 1965)
    • Time published a letter from Friedman (4 February 1966) saying: Sir: You quote me as saying: “We are all Keynesians now.” The quotation is correct, but taken out of context. As best I can recall it, the context was: “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.” The second half is at least as important as the first.
    • Often misattributed to President Richard Nixon.


  • From the late 1940s until the early 1960s, events seemed to prove the Keynesians correct. Then, beginning in the 1960s, several distinguished economists began to challenge Keynesian ideas. Their counterrevolutionary views, which in many ways mirrored those of the classical economists, were strengthened by events in the 1970s, when the economy’s behavior began to contradict some Keynesian ideas. But in 2008 and 2009, as the economy sank into the most serious worldwide recession since the Great Depression, Keynesian ideas were once again at the center of a heated debate about the causes of the problem and the appropriate remedies.



  • Inflation and Employment in capitalist countries, in my own view, the change is the other way around: the constraints on the pressure of demand tend to be excessive, with the result that unemployment is much greater than can be justified by the needs of resource-allocation, and the rate of economic growth is appreciably less than it could be.
    The main reason for this is that the distribution of power and, ultimately, the distribution of incomes, changes in favor of labor the faster the economy grows and the nearer it is to full employment, and over a longer period it changes in favor of capital the greater the volume of unemployment. This is the real reason why the continuance of Keynesian policies after the war led to a recrudescence of long-discredited ideas that go by the name of “monetarism.” The main attraction of monetarism was not its intellectual simplicity— inflation is a matter of the money supply, period— but that it elevated the fear of inflation to the unique position which could not be justified by the experience of numerous countries who habitually suffer from it.
  • If you look at the statistics of the Japanese economy around 1995–1997, it had a couple of years of 2–3 percent growth. That was the Keynesian influence of the then-head of the Economic Planning Agency. He was a good Japanese exponent of Keynesianism. Japan built beautiful bridges and other infrastructure, but abandoned these sorts of projects because its debt is so big, and its deficit is so big, that it will not do them anymore. … I think Japan could stand a really good Keynesian sustained stimulus.
    • Lawrence Klein, "Keynsianism Again: Interview with Lawrence Klein", Challenge (May-June 2001).
  • Over the past 70 years The General Theory has shaped the views even of those who haven’t heard of it, or who believe they disagree with it. A businessman who warns that falling confidence poses risks for the economy is a Keynesian, whether he knows it or not. A politician who promises that his tax cuts will create jobs by putting spending money in peoples’ pockets is a Keynesian, even if he claims to abhor the doctrine. Even self-proclaimed supply-side economists, who claim to have refuted Keynes, fall back on unmistakably Keynesian stories to explain why the economy turned down in a given year.
    • Paul Krugman, Introduction to The General Theory of Employment, Interest, and Money (2006).
  • In the beginning was Keynesian economics, which was ad hoc in the sense that on some important issues it relied on observed stylized facts rather than trying to deduce everything from first principles. Notably, it just assumed that nominal wages are sticky, because they evidently are. [...] In the 1960s a number of economists started trying to provide “microfoundations”, deriving wage and price stickiness from some kind of maximizing behavior. This early work had a big payoff: the Friedman/Phelps prediction that sustained inflation would get “built in”, and that the historical tradeoff between inflation and unemployment would vanish.
  • One response to the failure of the Lucas project was the rise of New Keynesian economics. This basically went back to ad hoc assumptions about wages and prices, with a bit of hand-waving about menu costs and bounded rationality. The difference from old Keynesian economics was the effort to use as much maximizing logic as possible to interpret spending decisions. I find NK economics useful, if only as a way to check my logic, although it’s not really clear if it’s any better than old-fashioned Keynesianism.
  • In fact, it looks a lot like what Keynes described, and old-Keynesian models work very well, thank you, both at explaining it and in making predictions about such things as interest rates and the effects of fiscal austerity. But the descendants of the Lucas project know that Keynes was wrong — it’s what their teachers and their teachers’ teachers have been saying all these years. They cannot accept anything resembling a Keynesian explanation without devaluing everything they’ve done with their intellectual lives.
  • The Keynesian Revolution was, in the form in which it succeeded in the United States, a revolution in method. This was not Keynes’s intent, nor is it the view of all of his most eminent followers. Yet if one does not view the revolution in this way, it is impossible to account for some of its most important features.
  • A key element in all Keynesian models is a ‘trade-off between inflation and real output: the higher is the inflation rate; the higher is output (or equivalently, the lower is the rate of unemployment).
  • For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, non-economists.
  • The main development I want to discuss has already occurred: Keynesian economics is dead [maybe ‘disappeared’ is a better term]. I don’t know exactly when this happened but it is true today and it wasn’t true two years ago. This is a sociological not an economic observation, so the evidence for it is sociological. For example, you cannot find a good, under 40 economist who identifies himself and his work as ‘Keynesian’. Indeed, people even take offense if referred to in this way. At research seminars, people don’t take Keynesian theorizing seriously any more—the audience starts to whisper and giggle to one another. Leading journals aren’t getting Keynesian papers submitted any more.
    • Robert E. Lucas, "The Death of Keynesian Economics", in Issues and Ideas (Winter 1980).


  • Today, Keynesian theorizing does not inspire whispers and giggles from the audience. There are many economists under the age of forty who do not take offense when their work is called ‘Keynesian’, and I count myself as one of them. If Keynesian economics was dead in 1980, then today it has been reincarnated.
    • N. Gregory Mankiw, "The reincarnation of Keynesian economics", European Economic Review (1992).
  • It is too early to say there is a consensus about how all these topics fit together. Yet one can say that the new classical challenge has been met: Keynesian economics has been reincarnated into a body with firm microeconomic muscle.
    • N. Gregory Mankiw, "The reincarnation of Keynesian economics", European Economic Review (1992).
  • If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront.
    • N. Gregory Mankiw, "What Would Keynes Have Done?" in New York Times (November 28, 2008).
  • Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.
  • Although Keynes’s General Theory provides the foundation for much of our current understanding of economic fluctuations, it is important to remember that classical economics provides the right answers to many fundamental questions.
  • There is no doubt that the American public is moving away from the Keynesian notions and slogans. Their prestige is dwindling. Only a few years ago politicians were naively discussing the extent of national income in dollars without taking into account the changes which government-made inflation had brought about in the dollar’s purchasing power. Demagogues specified the level to which they wanted to bring the national (dollar) income. Today this form of reasoning is no longer popular. At last the “common man” has learned that increasing the quantity of dollars does not make America richer. Professor Harris still praises the Roosevelt Administration for having raised dollar incomes. But such Keynesian consistency is found today only in classrooms.
  • Along with the advent of Keynesian economics, the case for stabilizing fiscal policy was first made in the Great Depression. Seen against the background of a stagnant economy, deficit finance offered the most effective means to raise aggregate demand and consumption. With monetary policy caught in a liquidity trap, deficit spending seemed the available remedy to restore full employment. It would do so not only as a short run device over the cycle, but also to deal with a longer run prospect of declining population growth and creeping stagnation.
    • Richard Musgrave, "The Speed of Adjustment" (2001).
  • Fascism entirely agrees with Mr. Maynard Keynes, despite the latter's prominent position as a Liberal. In fact, Mr. Keynes' excellent little book, The End of Laissez-Faire (1926) might, so far as it goes, serve as a useful introduction to fascist economics. There is scarcely anything to object to in it and there is much to applaud.
    • Benito Mussolini, as quoted by James Strachey Barnes (1929), Universal Aspects of Fascism, Williams and Norgate, London: UK, pp. 113-114.




  • It is commonly agreed that Keynes came up with the idea that public works are the best way to help the economy during a recession.
    As a result, Keynesian economists seem to have developed a blind faith in the government in general, and in the system of public works in particular.
    I do not share the same faith in the government.
    I do not share the same faith in public works.

    And this may help explain why.

  • The Second World War supplied the occasion for the spending, and Keynesian economics supplied the rationale. But Keynesian fiscal policy had political appeal even before the war demonstrated its economic success. For unlike the various proposals for structural reform, such as vigorous antitrust action or national economic planning, Keynesian economics offered a way for the government to control the economy without having to choose among controversial views of the good society. Where earlier reformers had sought economic arrangements that would cultivate, citizens of a certain kind, Keynesians undertook no formative mis­sion; they proposed simply to accept existing consumer preferences and to regulate the economy by manipulating aggregate demand.
    • Michael J. Sandel, Public Philosophy (2005), 1. America's Search for a Public Philosophy
  • The advent of the new political economy marked a decisive moment in the demise of the republican strand of American politics and the rise of contemporary liberalism. According to this liberalism, gov­ernment should be neutral as to conceptions of the good life, in or­der to respect persons as free and independent selves, capable of choosing their own ends. Keynesian fiscal policy both reflected this liberalism and deepened its hold on American public life. Although those who practiced Keynesian economics did not defend it in precisely these terms, the new political economy displayed two features of the liberalism that defines the procedural republic.
    • Michael J. Sandel, Public Philosophy (2005), 1. America's Search for a Public Philosophy
  • That austerity is a counterproductive economic policy in a situation of economic recession can be seen, rightly, as a “Keynesian critique.” Keynes did argue—and persuasively—that to cut public expenditure when an economy has unused productive capacity as well as unemployment owing to a deficiency of effective demand would tend to have the effect of slowing down the economy further and increasing—rather than decreasing—unemployment. Keynes certainly deserves much credit for making that rather basic point clear even to policymakers, irrespective of their politics, and he also provided what I would call a sketch of a theory of explaining how all this can be nicely captured within a general understanding of economic interdependences between different activities... I am certainly supportive of this Keynesian argument, and also of Paul Krugman’s efforts in cogently developing and propagating this important perspective, and in questioning the policy of massive austerity in Europe.
    But I would also argue that the unsuitability of the policy of austerity is only partly due to Keynesian reasons. Where we have to go well beyond Keynes is in asking what public expenditure is for—other than for just strengthening effective demand, no matter what its content. As it happens, European resistance to savage cuts in public services and to indiscriminate austerity is not based only, or primarily, on Keynesian reasoning. The resistance is based also on a constructive point about the importance of public services—a perspective that is of great economic as well as political interest in Europe.
    • Amartya Sen, "What Happened to Europe?", New Republic (August 2, 2012)
  • I think that today Keynesian economists primarily distinguish themselves from other economists through their belief that you cannot understand the behavior of our economy on the assumption that it is always at or near a full, or Walrasian, equilibrium, and that you cannot account for the movements that you see in output and employment on the assumption that everything you see is at the intersection of traditional supply and demand curves, and that the movements are only accounted for by shifts in those curves
    People who think of themselves as Keynesian economists can be divided as to what they would put in place of Walrasian equilibrium. Some of them think that what we observe in the world is a disequilibrium. If the economy is moving toward Walrasian equilibrium, it is doing so very slowly. Another group of Keynesian economists, who are in some ways closer to Keynes, believe that the economy is characterized by multiple equilibria; a modern capitalist economy is capable perhaps of producing a good Walrasian equilibrium, but also a bad equilibrium, that is, a situation with bad welfare properties and without forces that move the economy away from such a situation.
    I find myself halfway between those two schools of thought. I used to think that the correct analysis would emphasize disequilibrium. Now I have some doubts about that. Either of these approaches is a Keynesian alternative to the idea that the economy should be regarded as being in a Walrasian equilibrium.
  • Economics is a difficult subject, because we cannot conduct controlled experiments. There are not two or three Argentina's, one following the experiment that I described above, and another adopting the policies that I prefer. But we do have a wealth of experience from which to draw inferences. This wealth of experience all points in one direction: Keynes's teachings are still very much alive, and Argentina today would be in far better shape if his lessons had been taken to heart.
  • The hostility between these alternative schools was so strong that when I studied and taught in Cambridge, in the mid and late 60s, Keynes’ disciples’ “secret seminar” was still an ongoing institution—a seminar from which Robertson and his followers were deliberately excluded.
    • Joseph E. Stiglitz and Bruce Greewald, Toward a New Paradigm in Monetary Economics (2003), Chapter III. The Ideal Banking System.
  • After all, in today’s context, the pursuit of Keynesian policies looks even more profitable than the pursuit of market fundamentalism!
    • Joseph E. Stiglitz, "The Triumphant Return of John Maynard Keynes", Project Syndicate (2008).
  • I started as a Keynesian, and I am still one—which is not to say that I have not learned. The crude, as we sometimes say, hydraulic Keynesianism of the early postwar period certainly needed improvement. And I’ll even say how and where. The foundation of what we think of as Keynesian economics— and you understand that I’m not at all concerned with what Keynes really meant, I am talking about American Keynesianism—was built on the observation that, over the business cycle, prices are slow variables and quantities are fast variables. If you pick up any elementary text, if the market is in disequilibrium, the reflex reaction is that when demand is in excess, prices will rise and that will eliminate the excess demand. And if there is excess supply, prices will fall and that will eliminate the excess supply as consumers buy more. Then you go on to ask what kinds of institutions—monopoly, regulation, cartelism, whatever—will prevent that adjustment from taking place. But the first thing you think of is prices.
    • Robert Solow, in "Three Nobel Laureates on the State of Economics", Challenge (2000).
  • Keynesian economics offered not only an economic explanation of changes in aggregate output and employment, but also a rationale for government intervention to restore an economy mired in depression. Rather than wait for the market to adjust and restore full employment on its own, Keynes argued that government spending could produce the same result faster and with fewer painful side-effects. While Keynes and his followers recognized that government spending entailed the risk of inflation, especially when “full employment” became an official policy, it was a risk they found acceptable and manageable, given the alternative of unemployment on the scale seen during the Great Depression.
    • Thomas Sowell, Basic Economics, 4th ed. (2010), Ch. 25. The History of Economics
  • When Professor Milton Friedman of the University of Chicago won a Nobel Prize in economics in 1976, it marked a growing recognition of non-Keynesian and anti-Keynesian economists, such as those of the Chicago School. By the last decade of the twentieth century, a disproportionate share of the Nobel Prizes in economics were going to economists of the Chicago School, whether located on the University of Chicago campus or at other institutions. The Keynesian contribution did not vanish, however, for many of the concepts and insights of John Maynard Keynes had now become part of the stock in trade of economists in all schools of thought. When John Maynard Keynes’ picture appeared on the cover of the December 31, 1965 issue of Time magazine, it was the first time that someone no longer living was honored this way.
    • Thomas Sowell, Basic Economics, 4th ed. (2010), Ch. 25. The History of Economics
  • Monetarism—both of the older Friedman version stressing adherence to money stock targets and of the newer rational expectations variety—has been badly discredited. The stage has been set for recovery in the popularity of Keynesian diagnoses and remedies. I do not mean to imply, of course, that there is some Keynesian truth, vintage 1936 or 1961, to which economists and policymakers will or should now return, ignoring the lessons of economic events and of developments in economics itself over these last turbulent fifteen years. I do mean that in the new intellectual synthesis which I hope and expect will emerge to replace the divisive controversies and chaotic debates on macroeconomic policies, Keynesian ideas will have a prominent place.
    • James Tobin, "Keynes' Policies in Theory and Practice", Challenge (1983).
  • Keynesian economics at a minimum provides a licence for welfare state measures and other government efforts towards redistribution of wealth. The license is the faith that macroeconomic stabilization and prosperity are compatible with a wide range of social policies, that modern capitalism and democracy are robust enough to prosper and progress while being humane and equitable. That faith conflicts with the visions of extreme Right and Left, which agree that extremes of wealth and poverty, of security and insecurity, are indispensable to the functioning of capitalism. Keynesian policies helped to confound those dismal prophecies in the past; I think they will do so again.
    • James Tobin, "Keynes' Policies in Theory and Practice", Challenge (1983).
  • Keynesian economics was, in the context of those times, essentially conservative. The message was that capitalism was not doomed; its major failing, chronic large-scale unemployment, could be remedied fairly easily, by intelligent use of the fiscal and monetary instruments governments already had at their disposal. This message was not welcome news to Marxists committed to the view that the system was no longer structurally capable of prosperity and progress.
    • James Tobin, "A Revolution Remembered", Challenge (1988).




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