History of Economic Thought by Harry H. Landreth

The term 'Keynesian Revolution' itself was used in the 1947 text The Keynesian Revolution by American economist Lawrence Klein. This synthesis was then popularized in American academia in the influential textbook Economics by Paul Samuelson from 1948 onward, and came to dominate post-World War II economic thinking in the United States. 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. 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 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 process of mixing these schools is referred to as the neoclassical synthesis, and Neo-Keynesian economics may be summarized as 'Keynesian in macroeconomics, neoclassical in microeconomics'.

With Keynes unable to take much part in theoretical debate after 1937, a process swiftly got underway to reconcile his work with the old system to form neo-Keynesian economics, a mixture of neoclassical economics and Keynesian economics. This provided Keynes and his supporters with a theoretical basis to argue that governments should intervene to alleviate severe unemployment.

It saw the neoclassical understanding of employment replaced with Keynes' view that demand, and not supply, is the driving factor determining levels of employment. The early stage of the Keynesian Revolution took place in the years following the publication of John Maynard Keynes' General Theory in 1936. The revolution was set against the then orthodox economic framework, namely neoclassical economics. The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy.

History of Economic Thought by Harry H. Landreth