Which theory suggests that economies based on capitalism have microeconomic instability requiring government intervention?

Keynesian economic theory posits that economies can experience periods of microeconomic instability, characterized by fluctuations in demand and employment levels. According to this theory, capitalist economies do not always self-correct effectively, particularly during recessions or periods of low demand. As a result, government intervention is deemed necessary to stimulate demand through fiscal policies, such as increased government spending and tax cuts, to help stabilize the economy.

This perspective was notably derived from the ideas of John Maynard Keynes, who argued that in times of economic downturn, consumer confidence decreases, leading to reduced spending, which further deepens economic slumps. Therefore, active government policies are advocated to counteract these inefficiencies and restore economic stability.

In contrast, supply-side economics primarily focuses on boosting economic growth by increasing the supply of goods through lower taxes and less regulation, rather than addressing demand fluctuations. Classical economics highlights the role of free markets and the tendency toward self-adjustment without government intervention, while monetarism emphasizes the control of money supply as the key determinant of economic stability, often underestimating the need for direct government intervention in managing economic cycles.