Keynesian economics

Keynesian economics
An approach to economic theory and policy derived from the influential writings of the English economist John Maynard Keynes (1883-1946). Prior to Keynes, governments tended to be guided by the argument of laissez-faire economics that an unregulated economy would tend to move towards full employment, and thence equilibrium . Keynes argued (in The General Theory of Employment, Interest and Money, 1936) that equilibrium could be established before that point was reached, and therefore that governments wishing to achieve full employment had actively to intervene in the economy by stimulating aggregate demand; and, conversely, that if full employment resulted in inflation they should act to reduce aggregate demand, in both cases by using the devices of tax (fiscal) policy, government expenditure, and monetary policy (changes in interest rates and the supply of credit). Keynesianism, though forming the basis of economic policy in most Western societies for three decades after the Second World War, was itself challenged by the appearance of stagflation (simultaneous recession and inflation) in the 1970s, and consequently by the economic theories of monetarism . The dispute between these two approaches currently forms the major axis of disagreement within modern economics.

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