In 1936, John Maynard Keynes published The General Theory of Employment, Interest, and Money — the most influential economics book of the twentieth century, and the founding document of macroeconomics as a distinct field. The central claim was that aggregate demand could persistently fall short of full employment, that classical economics had no mechanism to fix the shortfall, and that government spending could pull an economy out of depression because each dollar spent would cascade into multiple dollars of additional economic activity. One dollar spent is three dollars remembered. The doctrine ended the Great Depression's intellectual orthodoxy and structured economic policy for the next eighty years.
The multiplier effect rests on a simple chain: government spends a dollar, the recipient spends most of it, the next recipient spends most of that, and so on. The mathematical sum is 1 / (1 - MPC), where MPC is the marginal propensity to consume — typically estimated at 0.6 to 0.9 for most economies, giving multipliers between 2.5 and 10 in the simple model. The empirical multipliers are much lower (recent estimates: 0.5 to 1.5 in normal times, possibly higher in deep recessions when monetary policy is at the zero lower bound and there is significant slack). The Keynesian framework was institutionalized in the postwar period through fiscal-policy management, the Phillips curve tradeoff between inflation and unemployment, and the broader practice of demand management. The 1970s' stagflation — simultaneous high inflation and high unemployment — broke the simple Phillips relationship and drove a monetarist counter-revolution led by Milton Friedman; the Keynesian framework went into eclipse for two decades. The 2008 financial crisis brought it back: massive fiscal and monetary intervention, justified in essentially Keynesian terms, prevented a second Great Depression. The 2020 COVID response was the largest peacetime fiscal stimulus in history, and the post-COVID inflation of 2021–2024 will be the test case studied for decades.
Modern Modern Monetary Theory (MMT) is a heterodox extension of Keynesian thinking that has acquired political influence on the American left; neo-Keynesian and post-Keynesian schools dominate most of academic macroeconomics; the austerity vs. stimulus debate is fundamentally a Keynesian-multiplier debate. The current debt-sustainability concern in the United States and Europe — debt-to-GDP at historic peacetime highs, interest costs rising — is reopening questions about the long-run limits of fiscal stimulus that Keynesian models traditionally finessed. Whether the next major recession is fought with Keynesian tools or runs into a fiscal constraint that didn't exist in 2008 is one of the open questions of macroeconomic policy.