What is “Keynesian” Economics?


I have come across Keynesian economics while doing some research, but the Wikipedia explanation didn’t really shed any light on the concept. Could someone help me out, possibly with some hypothetical examples.

In: Economics

I’m no expert mind, but the way I understand it. Keynesian economics was about redefining how the state acts in a market economy to mitigate its boom and bust cycles as a reaction to the great depression. Theres a strong emphasis on regulation of money and monetary policy.

Keynesian economists believe the economy reaches the long run very slowly, so monetary policy is necessary to balance things out in the short run.
Conversely, classical economists believe the economy adjusts to the long run rather quickly, so monetary policy isn’t necessary in the short run. These economists are more likely to take a non-activist approach.

Say the economy is good. Businesses grow, they hire more people, people spend more money, etc. This is called a boom. But say the economy grows too fast. Suddenly there are 4 coffeeshops in a neighborhood that only needs 3. Companies go out of business, people get laid off, demand drops. This is called a bust. But then suddenly there only 2 shops in a neighborhood that needs 3. So the economy starts to grow again. This idea is called classical economics. The economy has a boom-bust cycle and self-corrects.

But now it’s the Great Depression. This bust is the worst in human history. Bankers are jumping out of buildings. Farmers are starving to death. It’s really bad.

Enter John Maynard Keynes. He studies this problem and comes up with Keynesian economics. He said that the economy was not necessarily self-correcting. People invest and buy goods based on fear and predictions about the future, not what is immediately practical. So if you think the economy is really bad, you’ll try to save money when it’s actually better to spend money. So even though the neighborhood needs 3 coffee shops, no one wants to open a new one after seeing the previous ones fail.

Keynes said that the government can help fix this problem. The government can basically spend more money when the economy is bad. So if people are out of work, the government can hire them to dig ditches. The workers feel like they have money so they spend it on food, cars, houses, etc. Then cooks, carmakers, and constructions workers feel like they have money too, so they spend it on things they need. The government just buys up a ton of coffee and dumps it in the trash. That makes coffee shops a better investment and someone opens up that third shop. This is supposed to be offset by saving more money when times are good.

This counter cyclical approach (spend more when times are bad, and save more when times are good) became incredibly popular. It was the same approach used to deal with the Great Recession 10 years ago. Of course, since then many Nobel Prize winning economists like Milton Friedman came along and pointed out the flaws in Keynesian thinking. And recently Nobel Prize winning behavioral economists came on to the scene and started rethinking about how people make economic decisions. But Keynes is still a giant in the field. He would have easily won a Nobel too, but he lived before the prize was even created.

Today, classical economics and Keynesian economics are the two orthodox views on economics. This means they are the ones accepted by mainstream academic economists. Since then, there are some more unorthodox views that have come up (Austrian economics on the right, and modern monetary theory on the left).

Traditionally, Keynes is more popular on the left and classical economics is more popular on the right, but this isn’t a hard and fast rule. For example, George W. Bush used a Keynesian approach when dealing with the Great Recession and Barack Obama continued it. (The joke at the time was there are no atheists in foxholes and there are no classical economists in a depression.)

My personal take on it is that both classical economics and Keynesian economics are good. (Meanwhile, behavioral economics is the great new innovation, and the unorthodox theories are garbage). Which approach you favor depends on whether you like to rip the band-aid off fast or slow. Classical economics is best in the long term. It involves ripping the band-aid off. Maximum pain in the short term (many people lose their jobs), but the economy corrects itself faster. Keynesian economics is like slowly removing the band-aid. It takes longer, but it doesn’t hurt as much (people are protected from the brunt of a recession). It’s worse in the long term (you can still see the effects of the Great Recession today), but as Keynes put it, who cares? In the long term we’re all dead.

Edit 1: As long as I’m throwing in a couple personal views here, I’ll point out that politicians tend to spend when the economy is bad, but also when the economy is good. This applies to left wing politicians for sure, but also right wing ones who claim they aren’t spending. For example, though we are no longer in a recession, Donald Trump has continued to spend. That makes the already great economy soar even more, but it sets the US up for an even worse crash in the near future. The same can be said for Bush and other recent Republican presidents.

Edit 2: As a last point, the impact of a president’s economic decisions isn’t generally seen for a decade or two. Furthermore, when a Republican president is in charge, there is often a Democratic congress or vice versa. That means it’s very hard to distinguish whose policies are helping or hurting the economy. Presidents are generally blamed when the economy is bad, even though it’s not their fault. But they often take credit when the economy is good, even though they have nothing to do with it. So make of it what you will.