Keynesian Revolution - Summary

Summary

The revolution was primarily a change in mainstream economic views and in providing a unified framework – many of the ideas and policy prescriptions advocated by Keynes had ad hoc precursors in the underconsumptionist school of 19th century economics, and some forms of government stimulus were practiced in 1930s United States without the intellectual framework of Keynesianism.

The central policy change was the proposition that government action could change the level of unemployment, via deficit spending (fiscal stimulus) such as by public works or tax cuts, and changes in interest rates and money supply (monetary policy) – the prevailing orthodoxy prior to that point was the Treasury view that government action could not change the level of unemployment.

The driving force was the economic crisis of the Great Depression and the 1936 publication of The General Theory of Employment, Interest and Money by John Maynard Keynes, which was then reworked into a neoclassical framework by John Hicks, particularly the IS/LM model of 1936/37. This synthesis was then popularized in American academia in the very influential textbook Economics by Paul Samuelson from 1948 onward, and came to dominate post-World War II economic thinking in the United States. The term "Keynesian Revolution" itself was used in the 1947 text The Keynesian Revolution by American economist Lawrence Klein. In the United States, the Keynesian Revolution was initially actively fought by conservatives during the Second Red Scare (McCarthyism) and accused of Communism, but ultimately a form of Keynesian economics became mainstream; see textbooks of the Keynesian revolution.

The Keynesian revolution has been criticized on a number of grounds: some, particularly the freshwater school and Austrian school, argue that the revolution was misguided and incorrect; by contrast, other schools of Keynesian economics, notably Post-Keynesian economics, argue that the "Keynesian" revolution ignored or distorted many of Keynes's fundamental insights, and did not go far enough.

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