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Keynesian Economic Theory

Keynesian economic theory is based on the ideas of British economist John Maynard Keynes (1883–1946). These were presented in The General Theory of Employment, Interest and Money (1936),which set out his solutions for the economic problems that led to unemployment and depression. During the Great Depression, orthodox economic remedies, such as maintaining balanced budgets and raising tariffs on imported goods, failed to solve the economic problems that generated high unemployment, social conflict and political unrest. Keynes argued that, during economic downturns, governments should focus on maintaining a strong economy and high employment by stimulating demand through tax cuts, deficit spending and investment in public works. When the economy recovered, governments should pay off any debts created by tax cuts and deficit spending by increasing taxes and running budget surpluses. Keynesian economic theory became very popular in the Western world because it made social programs a form of counter-cyclical spending rather than a socialist intrusion into a free market. Unfortunately, Keynesian economic theory failed to solve the problems of simultaneous high inflation and unemployment in the 1970s, leading governments to turn away from it and cut spending on social programs in the 1980s.

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    Date Created: March 31, 2010 | Last Updated: April 21, 2010