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Keynesian Economics

This is an economic theory based on the idea that demand, or consumption of goods and services, drives the economy. (Supply-side economics focuses on supply.) It is named after John Maynard Keynes, a British economist who lived from 1883 to 1946. He put forth his school of thought as a way to explain recessions and depressions, and how governments could enact policies to encourage economic growth.

Keynes said that in normal economic times, money flows in a circular way: One consumer’s spending (or demand) becomes another’s earnings. In an economic slump, consumers save money instead of spending it. To encourage spending (and thus demand), Keynes said, the government should step up to the plate by putting more money into circulation. It can do this either by changing Federal Reserve policies that would put more money into circulation (monetary policy) or by spending government money itself (fiscal policy) or by cutting taxes.

Keynesian theory is that governments should manage demand, pumping more money into the economy in a recession or depression and spending less in an economic boom. Keynes’ theory, which came to be called the Keynesian Revolution, was a response to classical economics. He focused on short-term solutions to economic problems. “In the long run we are all dead,” is an oft-quoted Keynes phrase.