Keynesian ascendancy 1939–79[edit]
Main article:
Keynesian Revolution
From the end of the Great Depression to the mid-1970s, Keynes provided the main inspiration for economic policy makers in Europe, America and much of the rest of the world.
[55] While economists and policy makers had become increasingly won over to Keynes's way of thinking in the mid and late 1930s, it was only after the outbreak of World War II that governments started to borrow money for spending on a scale sufficient to eliminate unemployment. According to the economist
John Kenneth Galbraith (then a US government official charged with controlling inflation), in the rebound of the economy from wartime spending, "one could not have had a better demonstration of the Keynesian ideas."
[67]
The
Keynesian Revolution was associated with the rise of
modern liberalism in the West during the post-war period.
[68] Keynesian ideas became so popular that some scholars point to Keynes as representing the ideals of modern liberalism, as Adam Smith represented the ideals of
classical liberalism.
[69] After the war,
Winston Churchill attempted to check the rise of Keynesian policy-making in the United Kingdom and used rhetoric critical of the
mixed economy in his
1945 election campaign. Despite his popularity as a war hero, Churchill suffered a landslide defeat to
Clement Attlee whose government's economic policy continued to be influenced by Keynes's ideas.
[67]
Neo-Keynesian IS–LM model is used to analyse the effect of
demand shocks on the economy
In the late 1930s and 1940s, economists (notably
John Hicks,
Franco Modigliani, and
Paul Samuelson) attempted to interpret and formalise Keynes's writings in terms of formal
mathematical models. In what had become known as the
neoclassical synthesis, they combined Keynesian analysis with
neoclassical economics to produce
neo-Keynesian economics, which came to dominate
mainstream macroeconomic thought for the next 40 years.
By the 1950s, Keynesian policies were adopted by almost the entire developed world and similar measures for a
mixed economy were used by many developing nations. By then, Keynes's views on the economy had become mainstream in the world's universities. Throughout the 1950s and 1960s, the developed and emerging free capitalist economies enjoyed exceptionally high growth and low unemployment.
[70][71]Professor Gordon Fletcher has written that the 1950s and 1960s, when Keynes's influence was at its peak, appear in retrospect as a
golden age of capitalism.
[55]
In late 1965
Time magazine ran a cover article with a title comment from
Milton Friedman (later echoed by U.S. President
Richard Nixon), "
We are all Keynesians now". The article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government." The article also states that Keynes was one of the three most important economists who ever lived, and that his
General Theory was more influential than the
magna opera of other famous economists, like
Adam Smith's
The Wealth of Nations.
[72]
Keynesian economics out of favour 1979–2007[edit]
Main article:
Post-war displacement of Keynesianism
Keynesian economics were officially discarded by the British Government in 1979,
