Keynesian theory sought to explain the Great Depression. I explain his thoughts most simply here. Even Keynes' critics call him the greatest and most influential economist of the 20th century. For this reason, he is known as "the father of modern economics."

When the Great Depression hit worldwide, economists were called upon to explain it and devise a cure. Most couldn't. Keynes, however, could and explained economic slumps very simply.

Keynes said in a normal economy, there is a high level of employment, and everyone is spending their income as usual, mostly on consumption but some was saved and, through financial intermediaries, all their savings were invested in real productive capacity. All people's expenditure became all people's income. That is how the economy worked and grew.

There is a circular flow of money in the economy, all people's spending on consumption and real investment becomes all people's income in the next period. Say's law was said to apply. But what happens if consumer confidence in the economy is shaken and decreases, said Keynes. There are many possible reasons this might occur, but we need not discuss them here. Worried, people save more money in anticipation of future hardship than can be invested in productive capacity at the time. But this soon reduces people's income. The decisions of everyone to hoard more money than is usual and can be invested, reduces everyone's income next period. As people's incomes fall they then hoard even more. And so a vicious circle emerges: people hoard money in difficult times, but times become more difficult when people hoard more money.

The cure for this, Keynes said, was for the central bank to act so as to expand the money supply. By putting more money in people's hands, consumer confidence would return, people would spend more, and the full circular flow of money could be reestablished. But this was too simple for most policy makers who did not then understand it, but came to later.

But did this cure for recessions work for depressions? Keynes said no. Liquidity preferences become so great in depressions that no matter how much money within reason is shoved into their hands people will hoard all the additional money and not spend it -- that is, liquidity preferences were so high, they had fallen into a "liquidity trap." A liquidity trap is when people hoard money and refuse to spend no matter how much the government tries to expand the money supply. In these dire circumstances, Keynes believed that the government should do what people were not, namely spend the the amount of money they were hoarding. Keynes called this "priming the pump" of the economy, a final and governmental effort to re-establish the circular flow of money in the economy.

Keynes' advice on ending the Great Depression to President Roosevelt was rejected. Roosevelt tried countless other approaches, all of which failed. Most economists agree that World War II cured the Great Depression because the U.S. finally began massive public spending as Keynes called for, in this instance, on defense. Wars are an economic boon and a counter to slumps in part because governments always resort to Keynesian spending during them. Of course, such spending need not be directed only towards war -- social programs are much more preferable. But republicans fight the change.

In seven short years, under massive Keynesian spending, the U.S. went from the greatest depression it has ever known to the greatest economic boom it has ever known. The success of Keynesian economics was so resounding that almost all capitalist governments around the world have adopted its policies, even China. And the result seems to be nothing less than the extinction of the economic depressions in the US. Before World War II, eight U.S. recessions worsened into depressions (as happened in 1807, 1837, 1873, 1882, 1893, 1920, 1933, and 1937). Since World War II, under Keynesian policies, there have been eleven recessions (1945-46, 1949, 1953, 1958, 1960-61, 1970, 1973-75, 1980-83, 1990-92, 2000-01, 2008- 10) and not one has turned into a depression.

The success of Keynesian economics is such that even Milton Friedman once declared, " In some ways, we are all Keynesians now."