Definition
Keynesian economics is a body of macroeconomic theory, originating with John Maynard Keynes in the 1930s, that places aggregate demand — the total spending in an economy — at the center of explaining output and employment in the short run.
Its core claim is that economies do not always self-correct quickly. Because wages and prices are slow to adjust, a shortfall in demand can leave the economy stuck below full employment for an extended period, which justifies active government intervention.
Why it matters
How it works
In the Keynesian view, total spending — by households, firms, government, and foreigners — determines how much an economy produces in the short run. If spending falls, firms cut production and lay off workers, those workers spend less, and the contraction feeds on itself. Because prices and wages are sticky, this can settle into a lasting underemployment equilibrium rather than bouncing back. The policy implication is that the government can fill the demand gap with its own spending or with tax cuts, and the multiplier means even modest action can have an outsized effect. Critics counter that timing is hard and persistent deficits carry costs.