A sweet young lady asked me today 'What was Keynesian Theory?' I responded with the old adage that if you don't know what boxing gloves are, you don't know Boxing. I've decided this was probably a rude response, though I still would suggest the lady keep her Day job as a Surgical Nurse. Still, there exists the compulsion to explain this major element of Economics.
Keynes witnessed the huge loss of economic activity from the Great Depression, and proposed Government restart economic activity by deficit spending. Well and Good, that is simple enough. But the Truth states that it isn't. Keynes was never satisfied with this Solution, then or for the rest of his life. Politicians and Business leaders took the Concept and ran with it, without bothering for deep research; this because the Theory meant Votes and Profits for themselves.
No one understood except Keynes, and possibly only this Author, that deficit Government spending to spur economic activity was a Special Case Scenario. Deficit Spending had beneficial effect if and only if there was sharply reduced economic activity, with utilization of economic resources below a level of Say: 70% utilization. At economic resource utilization above this reduced baseline, the Government would be in direct competition with the Private Sector for economic resources: an automatic Inflation generator.
Inflation from this activity could only be stunted by reduced Government Spending, or by raising Tax Rates to bring Government Budgets in balance. The Government Deficit creates an additional Inflation factor as Government bonds begin to imitate Money, but funds whose value has already been spent once by Government, but has draft again by the Private Sector. This artificial Money Supply forestalls a retreat from inflationary pricing until such time as the Private Sector has eradicated the false Draft on resources by Consumption or alternate Investment.
Tax Cuts which produce Government Deficits do not generate economic activity above baseline utilization of economic resources, they only produce longterm Inflation. It is the reason why there has been no Deflation since the Great Depression, not the extension of Consumer Credit--though the later does generate Inflation. lgl