John Maynard Keynes

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John Maynard Keynes (5 June 1883 - 21 April 1946) was a British economist and one of the most influential intellectuals of the 20th century.

Keynes was a founding father of modern theoretical macroeconomics. Breaking with the neoclassical orthodoxy of his era, Keynes argued that macroeconomic relationships differ from their microeconomic counterparts. He went on to advocate government intervention into markets and proposed a demand-driven model for money. His theories formed the basis of what came to be known as Keynesian economics.

Keynes rejected socialism--he did not want government to own or even control industry, but rather he wanted the government to optimize the economy though its "fiscal policies," that is, taxes and spending. He was a lifelong member of the British Liberal Party, which held few seats in Parliament after 1920.

Keynes was, with Milton Friedman one of the two most influential economists of the 20th century. Keynes, based at Cambridge University, influenced the economics profession in many ways and was surrounded by students and disciples. He was a major adviser to the Treasury during World War II and helped design the postwar "Bretton Woods" international monetary system.

Keynes' most influential work was in Macroeconomics, where his model of the nation economy emphasized fiscal policy (government spending and taxation) as more useful than regulation or monetary policy. He thus offered a non-socialist solution to the Great Depression. The Keynesian solutions were not accepted for many years, then they were widely adopted in the 1950s in Britain and the United States. Their popularity peaked in the 1960s, just as they came under heavy criticism from Milton Friedman and other conservatives for their theoretical weaknesses, and their inability in practice to deal with the economic crises of the 1970s in which high unemployment, high inflation, and slow growth coexisted.

Keynes' ideas on dealing with an economy in deep recession or depression attracted increased attention in 2008-9, as the worldwide Recession of 2008 proved increasingly resistant to solutions.

"When the facts change, I change my mind. What do you do, sir?" [1]

Biography

Keynes, the son of a professor, was born in Cambridge, and went on to attend Eton College where he excelled in mathematics, classics, and history. In 1902 he entered King's College, Cambridge to read for a degree in mathematics, however, due to his interest in politics he found himself increasingly drawn toward economics. It was at Cambridge that he found himself under the tutelage of Alfred Marshall and A.C. Pigou. Keynes accepted an economics lectureship at Cambridge funded personally by Marshall. Soon thereafter he took a leave of absence to work for the British Treasury, an institution in which his expertise was frequently called upon during the First World War. Indeed, at the end of the war, Keynes was selected to be the Treasury's principal representative at the Paris Peace Conference of 1919. The subsequent Treaty of Versailles precipitated Keynes' resignation from the Treasury, as he felt it was draconian in its treatment of Germany.

He returned to Cambridge. His The Economic Consequences of Peace in 1920 was a highly influential slashing attack on the economic disasters that he said would be caused by the Versailles Treaty. He furthered these ideas in 1922 with A Revision of the Treaty, in which he argued that the reparations that Germany was being forced to pay would lead to the collapse of the German economy. In 1923, the German economy entered a period of hyperinflation, which Keynes had not predicted. Keynes found himself becoming increasingly involved in the political process. First supporting the Liberal Party's 1929 "Election Manifesto", and later as an adviser to Ramsay MacDonald's Labour government.

Keynes' magnum opus appeared in 1936, The General Theory of Employment, Interest, and Money. Largely a reaction to the high unemployment that had characterised post-war Britain, the book was among the most revolutionary works of modern economics, signaling a paradigm shift within modern economic thought. As the era went on his prestige and celebrity grew, in 1942 he was made a lord. During the war he advised the Treasury and was Britain's lead representative at the 1944 Bretton Woods Conference. He died of a heart attack in 1946.

Keynesian Economics

Keynesianism centres around the concept of total spending within an economy, what Keynes terms aggregate demand and its effect upon output and inflation. In the eyes of Keynesians, the free market does not necessarily tend toward full employment. Periods such as this were witnessed in the 1930's during the Great Depression, and in the eyes of Keynes could only be solved by increasing the level of expenditure within the economy. In order to do this Keynes advocated increasing government expenditure, frequently in the form of deficit spending, in order to extricate the economy from recession. At the same time Keynes argued that if expenditure within the economy was too high and the economy was at full employment then this would inevitably lead to inflation, as such in periods such as this Keynes advocated tax increases, and a reduction in government expenditure in order to "deflate" the economy.

As is evident, Keynesian thinking went on to influence the fiscal policy of many governments, as well as influencing a generation of economists. "We are all Keynesians now," said President Richard Nixon in 1969.

Keynesianism became the dominant policy in the U.S., Britain and Canada, and a few smaller countries, after 1945. The economic disciples were themselves too young to take much credit--not until the 1960s would they be top government advisers. However Keynesianism suited the needs of many key players. To politicians it gave a formula that demonstrated they were doing something to avoid another Great Depression. Liberals and labor welcomed the high government spending. Businessmen were relieved that Keynesianism a barrier to nationalization of industry or government ownership and socialism. Indeed the Keynesians paid little attention to control or regulation of specific industries; that was unnecessary said the Keynesian model, because tax rates and government deficits or surpluses were paramount.

Criticism of Keynes and Keynesian Economics

By the 1970s Keynesianism had run out of steam, and its theoretical model could not account for "stagflation" -- the simultaneous case of high inflation and slow growth that dragged on in the 1970s.

New models from the Chicago School of Economics (led by Milton Friedman), were fresher and more appealing. Margaret thatcher in Britain and Ronald Reagan in the U.S. explicitly disavowed Keynesianism in favor of Chicago models.

Even in the 1930s Keynes was not without his critics, most notably Friedrich von Hayek, whose critiques of Keynesian theory went on to form the basis of the Supply-side, monetarist, and Austrian School's objections to Keynesianism.

Although Keynes was not a socialist, he poked fun at businessmen and was criticized by conservatives both during the Bretton Woods Conference and afterward for his pro big government stance. His policies about expanded government intervention were criticized for infringing on free markets. Libertarian opponents to Keynes argue that in the long run the invisible hand of the markets would correct any problem that would arise. Keynes responded by noting, "In the long run, we are all dead."

External Links

John Maynard Keynes Biography from The Concise Encyclopedia of Economics
J.M. Keynes, The Economic Consequences of Peace
J.M. Keynes The General Theory of Employment, Interest, and Money

John Maynard Keynes

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Contents

Biography

Keynesian Economics

Criticism of Keynes and Keynesian Economics

Further reading

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