Keynesian economics
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{{Nofootnotes|article|date=February 2008}}
The theories forming the basis of Keynesian economics were first presented in ''[[The General Theory of Employment, Interest and Money]]'', published in 1936.
Keynes argued that the solution to depression was to stimulate the economy ("inducement to invest") through some combination of two approaches :
* a reduction in interest rates.
* Government investment in infrastructure - the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.<ref>{{cite web
| last = Blinder
| first = Alan S.
| title = Keynesian Economics
| publisher = The Concise Encyclopedia of Economics
| date = 2002
| url = http://www.econlib.org/library/Enc/KeynesianEconomics.html
| accessdate = 2008-04-09}}</ref>
The New Classical Macroeconomics movement, which began in the late 1960s and early 1970s, criticized Keynesian theories, while "New Keynesian" economics have sought to base Keynes's idea on more rigorous theoretical foundations.
More broadly, Keynes saw his as a ''general'' theory, in which utilization of resources could be high or low, whereas previous economics focused on the ''particular'' case of full utilization.
== Historical background ==
Keynes' experience with the [[Treaty of Versailles]] pushed him to break with previous theories. His ''[[The Economic Consequences of the Peace]]'' (1920) not only recounted the general economics, as he saw them, of the Treaty, but the individuals involved in making it. The book established Keynes as an economist who had the practical political skills to influence policy. In the 1920s, Keynes published a series of books and articles which focused on the effects of state power and large economic trends, developing the idea of [[monetary policy]] as something separate from merely maintaining currency against a fixed peg. He increasingly believed that economic systems would not automatically right themselves to attain "the optimal level of production." This is expressed in his famous quote, "In the long run, we are all dead," implying that it does not matter that optimal production levels are attained in the long run, because it would be a very long run indeed.
In the late 1920s, the [[world economy|world economic system]] began to break down, after the shaky recovery that followed [[World War I]]. With the global drop in production, critics of the gold standard, market self-correction, and production-driven paradigms of economics moved to the fore. Dozens of different schools contended for influence. Further, some pointed to the [[Soviet Union]] as a supposedly successful [[planned economy]] which had avoided the disasters of the capitalist world and argued for a move toward [[socialism]]. Others pointed to the success of [[fascism]] in [[Benito Mussolini|Mussolini]]'s [[Italy]].
Into this tumult stepped Keynes, promising not to institute revolution but to save capitalism. He circulated a simple thesis: there were more factories and transportation networks than could be used at the current ability of individuals to pay, ie that the problem was on the demand side.
But many economists insisted that business confidence, not lack of demand, was the root of the problem, and that the correct course was to slash government expenditures and to cut wages to raise business confidence and willingness to hire unemployed workers. Yet others simply argued that "nature would make its course," solving the Depression automatically by "shaking out" unneeded productive capacity.
==Keynes and the Classics==
Keynes sought to distinguish his theories from "classical economics," by which he meant the economic theories of David Ricardo and his followers, including John Stuart Mill, Alfred Marshall, F.Y. Edgeworth, and A. Cecil Pigou. A central tenet of the classical view, known as [[Say's law]], states that “supply creates its own demand.” Say's Law can be interpreted in two ways. First, the claim that the total value of output is equal to the sum of income earned in production is a result of a national income accounting identity, and is therefore indisputable. A second and stronger claim, however, that the "''costs'' of output are always covered in the aggregate by the sale-proceeds resulting from demand" depends on how consumption and saving are linked to production and investment. In particular, Keynes argued that the second, strong form of Say's Law only holds if increases in individual savings exactly match an increase in aggregate investment. (cf. ''General Theory'', Ch.1,2)
Keynes sought to develop a theory that would explain determinants of savings, consumption, investment and production. In that theory, the interaction of aggregate demand and aggregate supply determines the level of output and employment in the economy.
Because of what he considered the failure of the “Classical Theory” in the 1930s, Keynes firmly objects its main theory--adjustments in prices would automatically make demand tend to the full employment level.
Neo-classical theory supports that the two main costs that shift demand and supply are labor and money. Through the distribution of the monetary policy, demand and supply can be adjusted. If there were more labor than demand for it, wages would fall until hiring began again. If there was too much saving, and not enough consumption, then interest rates would fall until people either cut their savings rate or started borrowing.
=== Wages and spending ===
During the Great Depression, the classical theory defined economic collapse as simply a lost incentive to produce. Mass [[unemployment#Classical unemployment|unemployment]] was caused only by high and rigid real wages.
To Keynes, the determination of wages is more complicated. First, he argued that it is not [[real vs. nominal in economics|''real'' but ''nominal'']] wages that are set in negotiations between employers and workers, as opposed to a [[barter (economics)|barter]] relationship. First, nominal wage cuts would be difficult to put into effect because of laws and wage contracts. Even classical economists admitted that these exist; unlike Keynes, they advocated abolishing minimum wages, unions, and long-term contracts, increasing labor-market flexibility. However, to Keynes, people will resist nominal wage reductions, even without unions, until they see other wages falling and a general fall of prices.
He also argued that to boost employment, ''real'' wages had to go down: nominal wages would have to fall ''more than'' prices. However, doing so would reduce [[consumption (economics)|consumer demand]], so that the [[aggregate demand]] for goods would drop. This would in turn reduce business sales revenues and expected profits. Investment in new plants and equipment—perhaps already discouraged by previous excesses—would then become more risky, less likely. Instead of raising business expectations, wage cuts could make matters much worse.
Further, if wages and prices were falling, people would start to expect them to fall. This could make the economy spiral downward as those who had money would simply wait as falling prices made it more valuable—rather than spending. As [[Irving Fisher]] argued in 1933, in his ''Debt-Deflation Theory of Great Depressions'', [[deflation (economics)|deflation]] (falling prices) can make a depression deeper as falling prices and wages made pre-existing nominal debts more valuable in real terms.
=== Excessive saving ===
<div style="float:right;margin:0 0 0 0.5em;text-align:center;">[[Image:CLASSIX.png|Right|Classics on Saving and Investment.]]</div>To Keynes, excessive saving, i.e. saving beyond planned investment, was a serious problem, encouraging [[recession]] or even [[depression (economics)|depression]]. Excessive saving results if investment falls, perhaps due to falling consumer demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step.
The [[classical economics|classical economists]] argued that interest rates would fall due to the excess supply of "loanable funds." The first diagram, adapted from the only graph in ''The General Theory'', shows this process. (For simplicity, other sources of the demand for or supply of funds are ignored here.) Assume that fixed investment in capital goods falls from "'''old I'''" to "'''new I'''" (step '''a'''). Second (step '''b'''), the resulting excess of saving causes interest-rate cuts, abolishing the excess supply: so again we have saving ('''S''') equal to investment. The interest-rate fall prevents that of production and employment.
Keynes had a complex argument against this ''[[laissez-faire]]'' response. The graph below summarizes his argument, assuming again that fixed investment falls (step '''A'''). ''First'', saving does not fall much as interest rates fall, since the [[income effect|income]] and [[substitution effect]]s of falling rates go in conflicting directions. ''Second'', since planned [[fixed investment]] in plant and equipment is mostly based on long-term expectations of future profitability, that spending does not rise much as interest rates fall. So '''S''' and '''I''' are drawn as steep (inelastic) in the graph. Given the [[elasticity (economics)|inelasticity]] of both demand and supply, a ''large'' interest-rate fall is needed to close the saving/investment gap. As drawn, this requires a ''negative'' interest rate at equilibrium (where the '''new I''' line would intersect the '''old S''' line). However, this negative interest rate is not necessary to Keynes's argument.
<div style="float:left;margin:0 0.5em 0 0;text-align:center;">[[Image:KEYNES.png|Keynes on Saving and Investment.]]</div>''Third'', Keynes argued that saving and investment are not the main determinants of interest rates, especially in the short run. Instead, the supply of and the demand for the stock of ''[[money]]'' determine interest rates in the short run. (This is not drawn in the graph.) Neither change quickly in response to excessive saving to allow fast interest-rate adjustment.
Finally, because of fear of capital losses on assets besides money, Keynes suggested that there may be a "[[liquidity trap]]" setting a floor under which interest rates cannot fall. (In this trap, bond-holders, fearing rises in interest rates (because rates are so low), fear capital losses on their bonds and thus try to sell them to attain money (liquidity).) Even economists who reject this liquidity trap now realize that [[real vs. nominal in economics|nominal interest rates]] cannot fall below zero (or slightly higher). In the diagram, the equilibrium suggested by the '''new I''' line and the '''old S''' line cannot be reached, so that excess saving persists. Some (such as [[Zero interest rate policy|Paul Krugman]]) see this latter kind of liquidity trap as prevailing in [[Japan]] in the 1990s.
Even if this "trap" does not exist, there is a ''fourth'' element to Keynes's critique (perhaps the most important part). Saving involves not spending all of one's income. It thus means insufficient demand for business output, unless it is balanced by other sources of demand, such as fixed investment. Thus, ''excessive'' saving corresponds to an unwanted accumulation of inventories, or what classical economists called a [[general glut]][http://cepa.newschool.edu/het/essays/classic/glut.htm]. This pile-up of unsold goods and materials encourages businesses to decrease both production and employment. This in turn lowers people's incomes—and saving, causing a leftward shift in the '''S''' line in the diagram (step '''B'''). For Keynes, the fall in income did most of the job ending excessive saving and allowing the loanable funds market to attain equilibrium. Instead of interest-rate adjustment solving the problem, a [[recession]] does so. Thus in the diagram, the interest-rate change is small.
Whereas the classical economists assumed that the level of output and income was constant and given at any one time (except for short-lived deviations), Keynes saw this as the key variable that adjusted to equate saving and investment.
''Finally'', a recession undermines the business incentive to engage in [[fixed investment]]. With falling incomes and demand for products, the desired demand for factories and equipment (not to mention housing) will fall. This [[accelerator effect]] would shift the '''I''' line to the left again, a change not shown in the diagram above. This recreates the problem of excessive saving and encourages the recession to continue.
In sum, to Keynes there is interaction between excess supplies in different markets, as [[unemployment]] in labor markets encourages excessive saving—and ''vice-versa''. Rather than prices adjusting to attain equilibrium, the main story is one of [[quantity adjustment]] allowing recessions and possible attainment of [[underemployment equilibrium]].
=== Active fiscal policy ===
As noted, the classicals wanted to balance the government budget. To Keynes, this would exacerbate the underlying problem: following either policy would ''raise saving'' (broadly defined) and thus lower the demand for both products and labor. For example, Keynesians see [[Herbert Hoover]]'s June 1932 tax increase as making the Depression ''worse'' {{Fact|date=January 2008}}.
Keynes's ideas influenced [[Franklin D. Roosevelt]]'s view that insufficient buying-power caused the Depression. During his presidency, Roosevelt adopted some aspects of Keynesian economics, especially after 1937, when, in the depths of the Depression, the United States suffered from recession yet again following fiscal contraction. Something similar to Keynesian expansionary policies had been applied earlier by both [[social democracy|social-democratic]] [[Sweden]], and [[Nazi Germany]] {{Fact|date=January 2008}}. But to many the true success of Keynesian policy can be seen at the onset of [[World War II]], which provided a kick to the world economy, removed uncertainty, and forced the rebuilding of destroyed capital. Keynesian ideas became almost official in [[social democracy|social-democratic]] Europe after the war and in the U.S. in the 1960s.
Keynes's theory suggested that active government policy could be effective in managing the economy. Rather than seeing unbalanced government budgets as wrong, Keynes advocated what has been called [[countercyclical]] fiscal policies, that is policies which acted against the tide of the [[business cycle]]: [[deficit spending]] when a nation's economy suffers from [[recession]] or when recovery is long-delayed and unemployment is persistently high—and the suppression of inflation in boom times by either increasing taxes or cutting back on government outlays. He argued that governments should solve problems in the short run rather than waiting for market forces to do it in the long run, because "in the long run, we are all dead." <ref>{{cite book | last = Keynes | first = John Maynard | title = A Tract on Monetary Reform | date = 1924 | chapter = The Theory of Money and the Foreign Exchanges}}</ref>
This contrasted with the [[classical economics|classical]] and [[neoclassical economics|neoclassical]] economic analysis of fiscal policy. Fiscal stimulus ([[deficit spending]]) could actuate production. But to these schools, there was no reason to believe that this stimulation would outrun the side-effects that "[[Crowding out (economics)|crowd out]]" private investment: first, it would increase the demand for labor and raise wages, hurting [[rate of profit|profitability]]; Second, a government deficit increases the stock of government bonds, reducing their market price and encouraging high [[interest rate]]s, making it more expensive for business to finance [[fixed investment]]. Thus, efforts to stimulate the economy would be self-defeating.
The Keynesian response is that such fiscal policy is only appropriate when unemployment is persistently high, above what is now termed the Non-Accelerating Inflation Rate of Unemployment, or "[[NAIRU]]". In that case, crowding out is minimal. Further, private investment can be "crowded in": fiscal stimulus raises the market for business output, raising cash flow and profitability, spurring business optimism. To Keynes, this [[accelerator effect]] meant that government and business could be ''[[complement good|complements]]'' rather than [[substitute good|substitutes]] in this situation. Second, as the stimulus occurs, [[gross domestic product]] rises, raising the amount of [[saving]], helping to finance the increase in fixed investment. Finally, government outlays need not always be wasteful: government investment in [[public goods]] that will not be provided by profit-seekers will encourage the private sector's growth. That is, government spending on such things as basic research, public health, education, and [[infrastructure]] could help the long-term growth of [[potential output]].
Invoking [[public choice theory]], classical and neoclassical economists doubt that the government will ever be this beneficial and suggest that its policies will typically be dominated by [[special interest|special interest groups]], including the government [[bureaucracy]]. Thus, they use their political theory to reject Keynes' economic theory.
A Keynesian economist might point out that classical and neoclassical theory does not explain why firms acting as "special interests" to influence government policy are assumed to produce a negative outcome, while those same firms acting with the same motivations outside of the government are supposed to produce positive outcomes.
In Keynes' theory, there must be significant [[unemployment#Cyclical unemployment|slack in the labor market]] before [[deficit spending|fiscal expansion]] is justified. Both conservative and some [[neoliberalism|neoliberal]] economists question this assumption, unless labor unions or the government "meddle" in the [[free market]], creating persistent supply-side or [[unemployment#Classical unemployment|classical unemployment]]. Their solution is to increase labor-market flexibility, e.g., by cutting wages, busting unions, and deregulating business.
[[Deficit spending]] is not Keynesianism. Governments had long used deficits to finance wars. Keynesianism recommends counter-cyclical policies to smooth out fluctuations in the [[business cycle]]. For example, raising taxes to cool the economy and to prevent inflation when there is abundant demand-side growth, and engaging in deficit spending on labor-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns. Classical economics, on the other hand, argues that one should ''cut'' taxes when there are budget surpluses, and cut spending—or, less likely, increase taxes—during economic downturns. Keynesian economists believe that adding to profits and incomes during boom cycles through tax cuts, and removing income and profits from the economy through cuts in spending and/or increased taxes during downturns, tends to exacerbate the negative effects of the business cycle.
=== "Multiplier effect" and interest rates ===
{{Main|Multiplier (economics)}}
Two aspects of Keynes's model had implications for policy:
First, there is the "Keynesian [[Multiplier (economics)|multiplier]]", first developed by [[Richard Ferdinand Kahn|Richard F. Kahn]] in 1931. [[Exogenous]] increases in spending, such as an increase in government outlays, increases total spending by a multiple of that increase. A government could stimulate a great deal of new production with a modest outlay if:
#The people who receive this money then spend most on consumption goods and save the rest.
#This extra spending allows businesses to hire more people and pay them, which in turn allows a further increase consumer spending.
This process continues. At each step, the increase in spending is smaller than in the previous step, so that the multiplier process tapers off and allows the attainment of an equilibrium. This story is modified and moderated if we move beyond a "closed economy" and bring in the role of taxation: the rise in imports and tax payments at each step reduces the amount of induced consumer spending and the size of the multiplier effect.
Second, Keynes re-analyzed the effect of the interest rate on investment. In the classical model, the supply of funds (saving) determined the amount of fixed business investment. That is, since all savings was placed in banks, and all business investors in need of borrowed funds went to banks, the amount of savings determined the amount that was available to invest. To Keynes, the amount of investment was determined independently by long-term profit expectations and, to a lesser extent, the interest rate. The latter opens the possibility of regulating the economy through [[money supply]] changes, via [[monetary policy]]. Under conditions such as the [[Great Depression]], Keynes argued that this approach would be relatively ineffective compared to fiscal policy. But during more "normal" times, monetary expansion can stimulate the economy, mostly by encouraging construction of new housing.
=== Keynes and redistribution ===
Keynesians and redistributionists tend to associate with each other. Keynes, in the twenties, wrote about a hydro-electric project. In his opinion it would have been better if the rewards of the project had gone to the worker-builders rather than to the investors who had financed the project.{{Fact|date=February 2007}}
Keynesians believe that fiscal policy should be directed towards the lower-income segment of the population, because that segment is more likely to spend the money, contributing to demand, than to save it.
== Postwar Keynesianism ==
After Keynes, Keynesian analysis was combined with neoclassical economics to produce what is generally termed the "[[neoclassical synthesis]]" which dominates mainstream macroeconomic thought. Though it was widely held that there was no strong automatic tendency to full employment, many believed that if government policy were used to ensure it, the economy would behave as classical or neoclassical theory predicted.
In the post-[[World War II|WWII]] years, Keynes's policy ideas were widely accepted. For the first time, governments prepared good quality economic statistics on an ongoing basis and had a theory that told them what to do. In this era of [[new liberalism]] and [[social democracy]], most western [[capitalism|capitalist]] countries enjoyed low, stable unemployment and modest inflation.
It was with [[John Hicks]] that Keynesian economics produced a clear [[model (economics)|model]] which policy-makers could use to attempt to understand and control economic activity. This model, the '''[[IS-LM model|IS-LM]]''' model is nearly as influential as Keynes' original analysis in determining actual policy and economics education. It relates aggregate demand and employment to three [[exogenous]] quantities, i.e., the amount of [[money]] in circulation, the government budget, and the state of business expectations. This model was very popular with economists after [[World War II]] because it could be understood in terms of [[general equilibrium]] theory. This encouraged a much more static vision of macroeconomics than that described above.{{Fact|date=February 2007}}
The second main part of a Keynesian policy-maker's theoretical apparatus was the [[Phillips curve]]. This curve, which was more of an empirical observation than a theory, indicated that increased employment, and decreased [[unemployment]], implied increased [[inflation]]. Keynes had only predicted that falling unemployment would cause a higher price, not a higher [[inflation rate]]. Thus, the economist could use the '''IS'''-'''LM''' model to predict, for example, that an increase in the money supply would raise output and employment—and then use the Phillips curve to predict an increase in inflation. {{Fact|date=February 2007}}
Through the 1950s, moderate degrees of government demand leading industrial development, and use of fiscal and monetary counter-cyclical policies continued, and reached a peak in the "go go" 1960s, where it seemed to many Keynesians that prosperity was now permanent. However, with the oil shock of 1973, and the economic problems of the 1970s, modern liberal economics began to fall out of favor. During this time, many economies experienced high and rising unemployment, coupled with high and rising inflation, contradicting the [[Phillips curve]]'s prediction. This [[stagflation]] meant that both expansionary (anti-recession) and contractionary (anti-inflation) policies had to be applied simultaneously, a clear impossibility. This dilemma led to the rise of ideas based upon more classical analysis, including [[monetarism]], [[supply-side economics]]{{Fact|date=October 2007}} and [[new classical economics]]. This produced a "policy bind" and the collapse of the Keynesian consensus on the economy.{{Fact|date=February 2007}}
== Criticism ==
The impact of Keynesianism can be seen by the wave of economists who have based their analysis on a criticism of Keynesianism.
One school began in the late 1940s with [[Milton Friedman]]. Instead of rejecting macro-measurements and macro-models of the economy, the [[monetarism|monetarist school]] embraced the techniques of treating the entire economy as having a supply and demand equilibrium. However, they regarded [[inflation]] as solely being due to the variations in the [[money supply]], rather than as being a consequence of [[aggregate demand]]. They argued that the "crowding out" effects discussed above would hobble or deprive fiscal policy of its positive effect. Instead, the focus should be on [[monetary policy]], which was largely ignored by early Keynesians.
Monetarism had an ideological as well as a practical appeal: monetary policy does not, at least on the surface, imply as much government intervention in the economy as other measures. The monetarist critique pushed Keynesians toward a more balanced view of monetary policy, and inspired a wave of revisions to Keynesian theory.
Another influential school of thought was based on the [[Lucas critique]] of Keynesian economics. This called for greater consistency with [[microeconomic]] theory and rationality, and particularly emphasized the idea of [[rational expectations]]. Lucas and others argued that Keynesian economics required remarkably foolish and short-sighted behavior from people, which totally contradicted the economic understanding of their behavior at a micro level. [[New classical economics]] introduced a set of macroeconomic theories which were based on optimising [[microfoundations|microeconomic]] behavior, for instance [[real business cycles]].
Keynesian ideas were criticized by free market economist and philosopher [[Friedrich Hayek]]. Hayek's most famous work ''[[The Road to Serfdom]],'' was written in 1944. Hayek taught at the [[London School of Economics]] from 1931 to 1950. Hayek criticized Keynesian economic policies for what he called their fundamentally collectivist approach, arguing that such theories, no matter their presumptively utilitarian intentions, require centralized planning, which Hayek argued leads to totalitarian abuses. Keynes seems to have noted this concern, since, in the foreword to the German version of the 'The General Theory of Employment Interest and Money', he declared that "the theory of aggregated production, which is the point of ['The General Theory of Employment Interest and Money'], nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire." <ref> Keynes, John Maynard. Foreword to the General Theory. Foreword to the German Edition/Vorwort Zur Deutschen Ausgabe [http://tmh.floonet.net/articles/foregt.html] </ref>
Another criticism leveled by Hayek against Keynes was that the study of the economy by the relations between aggregates is fallacious, and that recessions are caused by micro-economic factors. Hayek claimed that what start as temporary governmental fixes usually become permanent and expanding government programs, which stifle the private sector and civil society. Keynes himself described the critique as "deeply moving", which was quoted on the cover of the Road to Serfdom.
===Methodological Disagreement and Different Results that Emerge===
Beginning in the late 1950s New Classical Macroeconomists began to disagree with the methodology employed by Keynes and his successors. Keynesians emphasized the dependence of consumption on disposable income and, also, of investment on current profits and current cash flow. In addition Keynes posited a [[Phillips curve]] that tied nominal wage inflation to unemployment rate. To buttress these theories Keynesians typically traced the logical foundations of their model (using introspection) and buttressed their assumptions with statistical evidence.<ref name="Akerloff2007">{{cite journal |last=Akerlof |first=George A. |authorlink=George Akerlof |coauthors= |year=2007 |month= |title=The Missing Motivation in Macroeconomics |journal=American Economic Review |volume=97 |issue=1 |pages=5–36 |doi=10.1257/aer.97.1.5 |url= |accessdate= |quote= }}</ref> New Classical theorists demanded that Macroeconomic be grounded on the same foundations as Microeconomic theory, profit-maximizing firms and utility maximizing consumers.<ref name="Akerloff2007" />
The result of this shift in methodology produced several important divergences from Keynesian Macro economics:<ref name="Akerloff2007" />
# Independence of Consumption and current Income (life-cycle [[permanent income hypothesis]])
# Irrelevance of Current Profits to Investment ([[Modigliani-Miller theorem]])
# Long run independence of inflation and unemployment ([[natural rate of unemployment]])
# The inability of monetary policy to stabilize output ([[rational expectations]])
# Irrelevance of Taxes and Budget Deficits to Consumption ([[Ricardian Equivalence]])
==Keynesian responses to the critics==
The heart of the [[new Keynesian economics|'new Keynesian']] view rests on microeconomic models that indicate that nominal wages and prices are "sticky," i.e., do not change easily or quickly with changes in supply and demand, so that [[quantity adjustment]] prevails. This is a practice which, according to economist [[Paul Krugman]] "never works in theory, but works beautifully in practice."{{Fact|date=February 2007}} This integration is further spurred by the work of other economists which questions rational decision-making in a perfect information environment as a necessity for micro-economic theory. Imperfect decision making such as that investigated by [[Joseph Stiglitz]] underlines the importance of management of risk in the economy.
Over time, many macroeconomists have returned to the '''[[IS-LM model|IS-LM]]''' model and the [[Phillips Curve]] as a first approximation of how an economy works. New versions of the Phillips Curve, such as the "[[Inflation#Neo-Keynesian Theory|Triangle Model]]", allow for stagflation, since the curve can ''shift'' due to [[supply shock]]s or changes in [[built-in inflation]]. In the 1990s, the original ideas of "full employment" had been modified by the [[NAIRU]] doctrine, sometimes called the "natural rate of unemployment." NAIRU advocates suggest restraint in combating unemployment, in case accelerating [[inflation]] should result. However, it is unclear exactly what the value of the NAIRU should be—or whether it even exists.
==See also==
*[[Keynesian formula]]
*[[Microfoundations]]
*[[Military Keynesianism]]
*[[New Keynesian economics]]
*[[Post Keynesian economics]]
*[[State Capitalism]]
*[[Underconsumption]]
==References==
{{reflist|2}}
==Further reading==
*{{cite encyclopedia |last=Blinder |first=Alan |author= |authorlink= |coauthors= |editor= |encyclopedia=Concise Encyclopedia of Economics |title=Keynesian Economics |url=http://www.econlib.org/library/Enc/KeynesianEconomics.html |accessdate= |accessyear= |accessmonth= |edition= |date= |year= |month= |publisher= |volume= |location= |id= |isbn= |doi= |pages= |quote= }}
*{{cite book |title=The Economic Consequences of the Peace |last=Keynes |first=John Maynard |authorlink= |coauthors= |year=2004 |origyear=1919 |publisher=Transaction Publishers |location=New Brunswick |isbn=0765805294 |pages= |url=http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/keynes/peace.htm }}
*{{cite news |first=John Maynard |last=Keynes |authorlink= |coauthors= |title=An Open Letter to President Roosevelt |url=http://newdeal.feri.org/misc/keynes2.htm |work=New York Times |publisher= |date=1933-12-31 |accessdate= }}
*{{cite book |title=The General Theory of Employment, Interest and Money |last=Keynes |first=John Maynard |authorlink= |coauthors= |year=2007 |origyear=1936 |publisher=Palgrave Macmillan |location=Basingstoke, Hampshire |isbn=0230004768 |pages= |url=http://cepa.newschool.edu/het/essays/keynes/keynescont.htm }}
*{{cite journal |last=Lindahl |first=Erik |authorlink= |coauthors= |year=1954 |month= |title=On Keynes' economic system |journal=Economic Record |volume=30 |issue= |pages=19-32, 159-171 |id= |url= |accessdate= |quote= }} Especially up to p. 26.
*{{cite book |title=Monetarist, Keynesian & New classical economics |last=Stein |first=Jerome L. |authorlink= |coauthors= |year=1982 |publisher=Blackwell |location=Oxford |isbn=0631129081 |pages= }}
*{{cite journal |last=Gordon |first=Robert J. |authorlink= |coauthors= |year=1990 |month= |title=What Is New-Keynesian Economics? |journal=Journal of Economic Literature |volume=28 |issue=3 |pages=1115–1171 |doi=10.2307/2727103 |url= |accessdate= |quote= }}
*{{cite book |title=The Failure of the ‘New Economics’. An Analysis of the Keynesian Fallacies |last=Hazlitt |first=Henry |authorlink=Henry Hazlitt |coauthors= |year=1959 |publisher=Van Nostrand |location=Princeton, NJ |isbn= |pages= |url=http://www.mises.org/books/failureofneweconomics.pdf }}
==External links==
*{{gutenberg author|id=John_Maynard_Keynes|name=John Maynard Keynes}}
*{{cite web |url=http://cepa.newschool.edu/het/essays/keynes/keynesrev.htm |title=The Keynesian Revolution |accessdate=2008-06-30 |last=Fonseca |first=Gonçalo L. |coauthors= |date= |work= |publisher=}}
*[http://business.timesonline.co.uk/article/0,,16849-1823177,00.html Alan Greenspan Speech] [[Alan Greenspan]] blames Keynesian economics for debilitating the U.S. economy prior to the [[Presidency of Ronald Reagan]].
*{{cite web |url=http://www.southerndomains.com/SouthernBanks/p5.htm |title=Theories on the Great Depression: Harris, Sklar and Carlo: Secular Stagnation, Disaccumulation, Monopolies-Overproduction and the Long Waves |accessdate= |last=Norman |first=Reuben L., Jr. |coauthors= |date= |work= |publisher=}}
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[[ca:Keynesianisme]]
[[cs:Keynesiánství]]
[[de:Keynesianismus]]
[[et:Keinsism]]
[[es:Keynesianismo]]
[[fr:Keynésianisme]]
[[ko:케인즈 경제학]]
[[id:Keynesianisme]]
[[it:Economia keynesiana]]
[[he:כלכלה קיינסיאנית]]
[[ka:კეინსიანიზმი]]
[[la:Placita Keynesiana]]
[[lv:Keinsisms]]
[[hu:Keynesianizmus]]
[[nl:Keynesianisme]]
[[ja:ケインズ経済学]]
[[no:Keynesianisme]]
[[nn:Keynesianisme]]
[[pl:Keynesizm]]
[[pt:Escola keynesiana]]
[[ru:Кейнсианство]]
[[sk:Keynesianizmus]]
[[fi:Keynesiläinen taloustiede]]
[[sv:Keynesianism]]
[[vi:Kinh tế học Keynes]]
[[uk:Кейнсіанство]]
[[zh:凯恩斯主义]]