John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of
macroeconomics and the
economic policies
The economy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the e ...
of governments. Originally trained in mathematics, he built on and greatly refined earlier work on the causes of
business cycle
Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examin ...
s. One of the most influential economists of the 20th century,
he produced writings that are the basis for the
school of thought
A school of thought, or intellectual tradition, is the perspective of a group of people who share common characteristics of opinion or outlook of a philosophy, discipline, belief, social movement, economics, cultural movement, or art movement.
...
known as
Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output a ...
, and its various offshoots. His ideas, reformulated as
New Keynesianism, are fundamental to
mainstream macroeconomics.
Keynes's intellect was evident early in life; in 1902, he gained admittance to the competitive mathematics program at
King's College at the
University of Cambridge
The University of Cambridge is a public collegiate research university in Cambridge, England. Founded in 1209 and granted a royal charter by Henry III in 1231, Cambridge is the world's third oldest surviving university and one of its most pr ...
.
During the
Great Depression of the 1930s, Keynes spearheaded
a revolution in economic thinking, challenging the ideas of
neoclassical economics
Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
that held that
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ot ...
s would, in the short to medium term, automatically provide full employment, as long as workers were flexible in their wage demands. He argued that
aggregate demand (total spending in the economy) determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment, and since wages and labour costs are
rigid downwards the economy will not automatically rebound to full employment.
Keynes advocated the use of
fiscal
Fiscal usually refers to government finance. In this context, it may refer to:
Economics
* Fiscal policy, use of government expenditure to influence economic development
* Fiscal policy debate
* Fiscal adjustment, a reduction in the government ...
and
monetary policies
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
to mitigate the adverse effects of economic
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
s and
depressions. He detailed these ideas in his magnum opus, ''
The General Theory of Employment, Interest and Money
''The General Theory of Employment, Interest and Money'' is a book by English economist John Maynard Keynes published in February 1936. It caused a profound shift in economic thought, giving macroeconomics a central place in economic theory and ...
'', published in late 1936. By the late 1930s, leading Western economies had begun adopting Keynes's policy recommendations. Almost all
capitalist
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, priva ...
governments had done so by the end of the two decades following Keynes's death in 1946. As a leader of the British delegation, Keynes participated in the design of the international economic institutions established after the end of
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposing ...
but was overruled by the American delegation on several aspects.
Keynes's influence started to wane in the 1970s, partly as a result of the
stagflation
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actio ...
that plagued the
Anglo
Anglo is a prefix indicating a relation to, or descent from, the Angles, England, English culture, the English people or the English language, such as in the term ''Anglosphere''. It is often used alone, somewhat loosely, to refer to peopl ...
-
American economies during that decade, and partly because of criticism of Keynesian policies by
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and other
monetarists, who disputed the ability of government to favourably regulate the business cycle with
fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variab ...
. However, the advent of the global
financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
sparked a
resurgence in Keynesian thought. Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the financial crisis of 2007–2008 by President
Barack Obama
Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the ...
of the United States, Prime Minister
Gordon Brown
James Gordon Brown (born 20 February 1951) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 to 2010. He previously served as Chancellor of the Exchequer in Tony B ...
of the United Kingdom, and other heads of governments.
When ''
Time
Time is the continued sequence of existence and events that occurs in an apparently irreversible succession from the past, through the present, into the future. It is a component quantity of various measurements used to sequence events, ...
'' magazine included Keynes among its
Most Important People of the Century in 1999, it reported that "his radical idea that governments should spend money they don't have may have saved capitalism." ''
The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Eco ...
'' has described Keynes as "Britain's most famous 20th-century economist." In addition to being an economist, Keynes was also a
civil servant, a director of the
Bank of England, and a part of the
Bloomsbury Group of intellectuals.
Early life and education
John Maynard Keynes was born in
Cambridge
Cambridge ( ) is a College town, university city and the county town in Cambridgeshire, England. It is located on the River Cam approximately north of London. As of the 2021 United Kingdom census, the population of Cambridge was 145,700. Cam ...
, England, to an upper-middle-class family. His father,
John Neville Keynes
John Neville Keynes ( ; 31 August 1852 – 15 November 1949) was a British economist and father of John Maynard Keynes.
Biography
Born in Salisbury, Wiltshire, Keynes was the child of John Keynes (1805–1878) and his wife Anna Maynard Neville ...
, was an economist and a lecturer in
moral science
Human science (or human sciences in the plural), also known as humanistic social science and moral science (or moral sciences), studies the philosophical, biological, social, and cultural aspects of human life. Human science aims to expand our u ...
s at the University of Cambridge and his mother,
Florence Ada Keynes, a local social reformer. Keynes was the first born, and was followed by two more children
Margaret Neville Keynes in 1885 and
Geoffrey Keynes
Sir Geoffrey Langdon Keynes ( ; 25 March 1887, Cambridge – 5 July 1982, Cambridge) was a British surgeon and author. He began his career as a physician in World War I, before becoming a doctor at St Bartholomew's Hospital in London, where h ...
in 1887. Geoffrey became a surgeon and Margaret married the Nobel Prize-winning physiologist
Archibald Hill
Archibald Vivian Hill (26 September 1886 – 3 June 1977), known as A. V. Hill, was a British physiologist, one of the founders of the diverse disciplines of biophysics and operations research. He shared the 1922 Nobel Prize in Physiology or ...
, although she had many affairs with women, notably
Eglantyne Jebb
Eglantyne Jebb (25 August 1876 – 17 December 1928) was a British social reformer who founded the Save the Children organisation at the end of the First World War to relieve the effects of famine in Austria-Hungary and Germany. She drafted th ...
.
According to the
economic historian
Economic history is the academic learning of economies or economic events of the past. Research is conducted using a combination of historical methods, statistical methods and the application of economic theory to historical situations and ins ...
and biographer
Robert Skidelsky
Robert Jacob Alexander, Baron Skidelsky, (born 25 April 1939) is a British economic historian. He is the author of a three-volume award-winning biography of British economist John Maynard Keynes (1883–1946). Skidelsky read history at Jesus ...
, Keynes's parents were loving and attentive. They attended a Congregational Church and remained in the same house throughout their lives, where the children were always welcome to return. Keynes received considerable support from his father, including expert coaching to help him pass his scholarship exams and financial help both as a young man and when his assets were nearly wiped out at the onset of
Great Depression in 1929. Keynes's mother made her children's interests her own, and according to Skidelsky, "because she could grow up with her children, they never outgrew home".
[
]
In January 1889, at the age of five and a half, Keynes started at the kindergarten of the
Perse School for Girls
The Stephen Perse Foundation is a family of independent schools in Cambridge and Saffron Walden for students aged 1 to 18.
The Foundation is made up of 3 nurseries (2 in Cambridge and 1 in Saffron Walden, Essex) for ages 1–5, 2 Junior Schoo ...
for five mornings a week. He quickly showed a talent for arithmetic, but his health was poor leading to several long absences. He was tutored at home by a governess, Beatrice Mackintosh, and his mother. In January 1892, at eight and a half, he started as a day pupil at
St Faith's preparatory school. By 1894, Keynes was top of his class and excelling at mathematics. In 1896, St Faith's headmaster, Ralph Goodchild, wrote that Keynes was "head and shoulders above all the other boys in the school" and was confident that Keynes could get a scholarship to Eton.
In 1897, Keynes won a King's Scholarship to
Eton College
Eton College () is a public school in Eton, Berkshire, England. It was founded in 1440 by Henry VI under the name ''Kynge's College of Our Ladye of Eton besyde Windesore'',Nevill, p. 3 ff. intended as a sister institution to King's College, ...
, where he displayed talent in a wide range of subjects, particularly mathematics,
classics and history: in 1901, he was awarded the
Tomline Prize for mathematics. At Eton, Keynes experienced the first "love of his life" in Dan Macmillan, older brother of the future Prime Minister
Harold Macmillan.
[
] Despite his middle-class background, Keynes mixed easily with upper-class pupils.
In 1902, Keynes left Eton for
King's College, Cambridge
King's College is a constituent college of the University of Cambridge. Formally The King's College of Our Lady and Saint Nicholas in Cambridge, the college lies beside the River Cam and faces out onto King's Parade in the centre of the cit ...
, after receiving a scholarship for this also to read mathematics.
Alfred Marshall begged Keynes to become an economist, although Keynes's own inclinations drew him towards philosophy, especially the ethical system of
G. E. Moore
George Edward Moore (4 November 1873 – 24 October 1958) was an English philosopher, who with Bertrand Russell, Ludwig Wittgenstein and earlier Gottlob Frege was among the founders of analytic philosophy. He and Russell led the turn from ideal ...
. Keynes was elected to the
University Pitt Club and was an active member of the semi-secretive
Cambridge Apostles
The Cambridge Apostles (also known as ''Conversazione Society'') is an intellectual society at the University of Cambridge founded in 1820 by George Tomlinson, a Cambridge student who became the first Bishop of Gibraltar.W. C. Lubenow, ''The Ca ...
society, a debating club largely reserved for the brightest students. Like many members, Keynes retained a bond to the club after graduating and continued to attend occasional meetings throughout his life. Before leaving Cambridge, Keynes became the President of the
Cambridge Union Society
The Cambridge Union Society, also known as the Cambridge Union, is a debating and free speech society in Cambridge, England, and the largest society in the University of Cambridge. Founded in 1815, it is the oldest continuously running debati ...
and
Cambridge University Liberal Club
Cambridge University Liberal Association (CULA) is the student branch of the Liberal Democrats for students at Cambridge University.
It is the successor to the Cambridge Student Liberal Democrats, which in turn was formed from the merger of Cam ...
. He was said to be an atheist.
In May 1904, he received a first-class
BA in mathematics. Aside from a few months spent on holidays with family and friends, Keynes continued to involve himself with the university over the next two years. He took part in debates, further studied philosophy and attended economics lectures informally as a graduate student for one term, which constituted his only formal education in the subject. He took civil service exams in 1906.
The economist
Harry Johnson wrote that the optimism imparted by Keynes's early life is a key to understanding his later thinking.
Keynes was always confident he could find a solution to whatever problem he turned his attention to and retained a lasting faith in the ability of government officials to do good.
Keynes's optimism was also cultural, in two senses: he was of the last generation raised by
an empire still at the height of its power and was also of the last generation who felt entitled to govern by culture, rather than by expertise. According to
Skidelsky, the sense of cultural unity current in Britain from the 19th century to the end of
World War I
World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, the United States, and the Ottoman Empire, with fightin ...
provided a framework with which the well-educated could set various spheres of knowledge in relation to each other and life, enabling them to confidently draw from different fields when addressing practical problems.
Career
In October 1906 Keynes began his
Civil Service career as a clerk in the
India Office. He enjoyed his work at first, but by 1908 had become bored and resigned his position to return to Cambridge and work on
probability theory
Probability theory is the branch of mathematics concerned with probability. Although there are several different probability interpretations, probability theory treats the concept in a rigorous mathematical manner by expressing it through a set ...
, through a lectureship in economics at first funded personally by economists
Alfred Marshall and
Arthur Pigou; he became a fellow of
King's College in 1909.
By 1909 Keynes had also published his first professional economics article in ''
The Economic Journal
''The Economic Journal'' is a peer-reviewed academic journal of economics published on behalf of the Royal Economic Society by Oxford University Press. The journal was established in 1891 and publishes papers from all areas of economics.The edito ...
'', about the effect of a recent global economic downturn on India. He founded the
Political Economy Club, a weekly discussion group. Keynes's earnings rose further as he began to take on pupils for private tuition.
In 1911 Keynes was made the editor of ''The Economic Journal''. By 1913 he had published his first book, ''Indian Currency and Finance''. He was then appointed to the
Royal Commission on Indian Currency and Financethe same topic as his bookwhere Keynes showed considerable talent at applying economic theory to practical problems. His written work was published under the name "J M Keynes", though to his family and friends he was known as Maynard. (His father, John Neville Keynes, was also always known by his middle name).
First World War
The British Government called on Keynes's expertise during the
First World War
World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, the United States, and the Ottoman Empire, with fightin ...
. While he did not formally re-join the civil service in 1914, Keynes travelled to London at the government's request a few days before hostilities started. Bankers had been pushing for the suspension of
specie
Specie may refer to:
* Coins or other metal money in mass circulation
* Bullion coins
* Hard money (policy)
* Commodity money
Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects ...
paymentsthe gold equivalent of
banknotes
A banknote—also called a bill (North American English), paper money, or simply a note—is a type of negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand.
Banknotes were originally issued ...
but with Keynes's help the
Chancellor of the Exchequer (then
Lloyd George) was persuaded that this would be a bad idea, as it would hurt the future reputation of the city if payments were suspended before it was necessary.
In January 1915 Keynes took up an official government position at the
Treasury
A treasury is either
*A government department related to finance and taxation, a finance ministry.
*A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or i ...
. Among his responsibilities were the design of terms of credit between Britain and its continental allies during the war and the acquisition of scarce currencies. According to economist
Robert Lekachman, Keynes's "nerve and mastery became legendary" because of his performance of these duties, as in the case where he managed to assemblewith difficultya small supply of
Spanish peseta
The peseta (, ),
* ca, pesseta, was the currency of Spain between 1868 and 2002. Along with the French franc, it was also a ''de facto'' currency used in Andorra (which had no national currency with legal tender).
Etymology
The name of th ...
s.
The secretary of the Treasury was delighted to hear Keynes had amassed enough to provide a temporary solution for the British Government. But Keynes did not hand the pesetas over, choosing instead to sell them all to break the market: his boldness paid off, as pesetas then became much less scarce and expensive.
On the introduction of
military conscription
Conscription (also called the draft in the United States) is the state-mandated enlistment of people in a national service, mainly a military service. Conscription dates back to antiquity and it continues in some countries to the present day und ...
in 1916, he applied for exemption as a
conscientious objector, which was effectively granted conditional upon continuing his government work.
In the 1917 King's
Birthday Honours
The Birthday Honours, in some Commonwealth realms, mark the reigning British monarch's official birthday by granting various individuals appointment into national or dynastic orders or the award of decorations and medals. The honours are prese ...
, Keynes was appointed Companion of the
Order of the Bath
The Most Honourable Order of the Bath is a British order of chivalry founded by George I of Great Britain, George I on 18 May 1725. The name derives from the elaborate medieval ceremony for appointing a knight, which involved Bathing#Medieval ...
for his wartime work, and his success led to the appointment that had a huge effect on Keynes's life and career; Keynes was appointed financial representative for the Treasury to the 1919
Versailles peace conference
The Palace of Versailles ( ; french: Château de Versailles ) is a former royal residence built by King Louis XIV located in Versailles, about west of Paris, France. The palace is owned by the French Republic and since 1995 has been managed, u ...
. He was also appointed Officer of the Belgian
Order of Leopold.
Versailles peace conference
Keynes's experience at
Versailles
The Palace of Versailles ( ; french: Château de Versailles ) is a former royal residence built by King Louis XIV located in Versailles, about west of Paris, France. The palace is owned by the French Republic and since 1995 has been managed, ...
was influential in shaping his future outlook, yet it was not a successful one. Keynes's main interest had been in trying to prevent
Germany's compensation payments being set so high it would traumatise innocent German people, damage the nation's ability to pay and sharply limit its ability to buy exports from other countriesthus hurting not just Germany's economy but that of the wider world.
Unfortunately for Keynes, conservative powers in the coalition that emerged from the
1918 coupon election were able to ensure that both Keynes himself and the Treasury were largely excluded from formal high-level talks concerning reparations. Their place was taken by the
Heavenly Twinsthe judge
Lord Sumner and the banker
Lord Cunliffe, whose nickname derived from the "astronomically" high war compensation they wanted to demand from Germany. Keynes was forced to try to exert influence mostly from behind the scenes.
The three principal players at Versailles were Britain's Lloyd George, France's
Clemenceau and America's
President Wilson
Thomas Woodrow Wilson (December 28, 1856February 3, 1924) was an American politician and academic who served as the 28th president of the United States from 1913 to 1921. A member of the History of the Democratic Party (United States), Demo ...
.
[
]
It was only Lloyd George to whom Keynes had much direct access; until the 1918 election he had some sympathy with Keynes's view but while campaigning had found his speeches were well received by the public only if he promised to harshly punish Germany, and had therefore committed his delegation to extracting high payments.
Lloyd George did, however, win some loyalty from Keynes with his actions at the Paris conference by intervening against the French to ensure the dispatch of much-needed food supplies to German civilians. Clemenceau also pushed for substantial reparations, though not as high as those proposed by the British, while on security grounds, France argued for an even more severe settlement than Britain.
Wilson initially favoured relatively lenient treatment of Germanyhe feared too harsh conditions could foment the rise of extremism and wanted Germany to be left sufficient capital to pay for imports. To Keynes's dismay, Lloyd George and Clemenceau were able to pressure Wilson to agree to include pensions in the reparations bill.
Towards the end of the conference, Keynes came up with a plan that he argued would not only help Germany and other impoverished central European powers but also be good for the world economy as a whole. It involved the radical writing down of war debts, which would have had the possible effect of increasing international trade all round, but at the same time thrown over two-thirds of the cost of European reconstruction on the United States.
Lloyd George agreed it might be acceptable to the British electorate. However, America was against the plan; the US was then the largest creditor, and by this time Wilson had started to believe in the merits of a harsh peace and thought that his country had already made excessive sacrifices. Hence despite his best efforts, the result of the conference was a treaty which disgusted Keynes both on moral and economic grounds and led to his resignation from the Treasury.
[
]
In June 1919 he turned down an offer to become chairman of the
British Bank of Northern Commerce The British Bank of Northern Commerce was founded in February 1912 by Knut Agathon Wallenberg of the Stockholms Enskilda Bank and Emil Glückstadt of Landmandsbanken (Copenhagen), together with several other banks including Centralbanken for Nor ...
, a job that promised a salary of £2000 in return for a morning per week of work.
Keynes's analysis on the predicted damaging effects of the treaty appeared in the highly influential book, ''
The Economic Consequences of the Peace'', published in 1919. This work has been described as Keynes's best book, where he was able to bring all his gifts to bearhis passion as well as his skill as an economist. In addition to economic analysis, the book contained appeals to the reader's sense of
compassion:
Also present was striking imagery such as "year by year Germany must be kept impoverished and her children starved and crippled" along with bold predictions which were later justified by events:
Keynes's followers assert that his predictions of disaster were borne out when the German economy suffered the
hyperinflation of 1923, and again by the collapse of the
Weimar Republic
The Weimar Republic (german: link=no, Weimarer Republik ), officially named the German Reich, was the government of Germany from 1918 to 1933, during which it was a constitutional federal republic for the first time in history; hence it is ...
and the outbreak of the Second World War. However, historian
Ruth Henig
Ruth Beatrice Henig, Baroness Henig CBE, DL (born Ruth Beatrice Munzer on 10 November 1943) is a British academic historian and Labour Party politician.
Family
Her parents were Kurt and Elfrieda Munzer, Jewish refugees who came to the Unite ...
claims that "most historians of the Paris peace conference now take the view that, in economic terms, the treaty was not unduly harsh on Germany and that, while obligations and damages were inevitably much stressed in the debates at Paris to satisfy electors reading the daily newspapers, the intention was quietly to give Germany substantial help towards paying her bills, and to meet many of the German objections by amendments to the way the reparations schedule was in practice carried out".
Only a small fraction of reparations was ever paid. In fact, historian
Stephen A. Schuker demonstrates in ''American 'Reparations' to Germany, 1919–33'', that the capital inflow from American loans substantially exceeded German out payments so that, on a net basis, Germany received support equal to four times the amount of the post-Second World War
Marshall Plan
The Marshall Plan (officially the European Recovery Program, ERP) was an American initiative enacted in 1948 to provide foreign aid to Western Europe. The United States transferred over $13 billion (equivalent of about $ in ) in economic re ...
.
Schuker also shows that, in the years after Versailles, Keynes became an informal reparations adviser to the German government, wrote one of the major German reparation notes, and supported the hyperinflation on political grounds. Nevertheless, ''The Economic Consequences of the Peace'' gained Keynes international fame, even though it also caused him to be regarded as anti-establishmentit was not until after the outbreak of the Second World War that Keynes was offered a directorship of a major British Bank, or an acceptable offer to return to government with a formal job. However, Keynes was still able to influence government policy making through his network of contacts, his published works and by serving on government committees; this included attending high-level policy meetings as a consultant.
In the 1920s
Keynes had completed his ''
A Treatise on Probability'' before the war but published it in 1921.
The work was a notable contribution to the philosophical and mathematical underpinnings of
probability theory
Probability theory is the branch of mathematics concerned with probability. Although there are several different probability interpretations, probability theory treats the concept in a rigorous mathematical manner by expressing it through a set ...
, championing the important view that ''probabilities'' were no more or less than
truth value
In logic and mathematics, a truth value, sometimes called a logical value, is a value indicating the relation of a proposition to truth, which in classical logic has only two possible values ('' true'' or '' false'').
Computing
In some pro ...
s intermediate between simple truth and falsity. Keynes developed the first upper-lower probabilistic
interval approach to probability in chapters 15 and 17 of this book, as well as having developed the first decision weight approach with his conventional coefficient of risk and weight, ''c'', in chapter 26. In addition to his academic work, the 1920s saw Keynes active as a journalist selling his work internationally and working in London as a financial consultant. In 1924 Keynes wrote an obituary for his former tutor
Alfred Marshall which
Joseph Schumpeter
Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian-born political economist. He served briefly as Finance Minister of German-Austria in 1919. In 1932, he emigrated to the United States to become a professor at H ...
called "the most brilliant life of a man of science I have ever read."
Mary Paley Marshall was "entranced" by the memorial, while
Lytton Strachey
Giles Lytton Strachey (; 1 March 1880 – 21 January 1932) was an English writer and critic. A founding member of the Bloomsbury Group and author of '' Eminent Victorians'', he established a new form of biography in which psychological insight ...
rated it as one of Keynes's "best works".
In 1922 Keynes continued to advocate reduction of German reparations with ''A Revision of the Treaty''.
He attacked the post-World War I deflation policies with ''
A Tract on Monetary Reform
''A Tract on Monetary Reform'' is a book by John Maynard Keynes
John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics ...
'' in 1923
a trenchant argument that countries should target stability of domestic prices, avoiding deflation even at the cost of allowing their currency to depreciate. Britain suffered from high unemployment through most of the 1920s, leading Keynes to recommend the depreciation of
sterling to boost jobs by making British exports more affordable. From 1924 he was also advocating a fiscal response, where the government could create jobs by spending on public works.
During the 1920s Keynes's pro stimulus views had only limited effect on policy makers and mainstream academic opinionaccording to
Hyman Minsky
Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research at ...
one reason was that at this time his theoretical justification was "muddled".
The ''Tract'' had also called for an end to the gold standard. Keynes advised it was no longer a net benefit for countries such as Britain to participate in the
gold standard
A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the l ...
, as it ran counter to the need for domestic policy autonomy. It could force countries to pursue deflationary policies at exactly the time when expansionary measures were called for to address rising unemployment. The Treasury and Bank of England were still in favour of the gold standard and in 1925 they were able to convince the then Chancellor
Winston Churchill
Sir Winston Leonard Spencer Churchill (30 November 187424 January 1965) was a British statesman, soldier, and writer who served as Prime Minister of the United Kingdom twice, from 1940 to 1945 during the Second World War, and again from ...
to re-establish it, which had a depressing effect on British industry. Keynes responded by writing ''The Economic Consequences of Mr. Churchill'' and continued to argue against the gold standard until Britain finally abandoned it in 1931.
During the Great Depression
Keynes had begun a theoretical work to examine the relationship between unemployment, money and prices back in the 1920s.
The work, ''
Treatise on Money'', was published in 1930 in two volumes. A central idea of the work was that if the amount of money being saved exceeds the amount being investedwhich can happen if interest rates are too highthen unemployment will rise. This is in part a result of people not wanting to spend too high a proportion of what employers pay out, making it difficult, in aggregate, for employers to make a profit. Another key theme of the book is the unreliability of financial
indices for representing an accurateor indeed meaningfulindication of general shifts in purchasing power of currencies over time. In particular, he criticised the justification of Britain's return to the
gold standard
A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the l ...
in 1925 at pre-war valuation by reference to the
wholesale price index
The Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods. Some countries (like the Philippines) use WPI changes as a central measure of inflation. But now India has adopted new CPI to measure inflation. However, ...
. He argued that the index understated the effects of changes in the costs of services and labour.
Keynes was deeply critical of the British government's austerity measures during the
Great Depression. He believed that budget deficits during
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
s were a good thing and a natural product of an economic slump. He wrote, "For Government borrowing of one kind or another is nature's remedy, so to speak, for preventing business losses from being, in so severe a slump as the present one, so great as to bring production altogether to a standstill."
At the height of the Great Depression, in 1933, Keynes published ''The Means to Prosperity'', which contained specific policy recommendations for tackling unemployment in a global recession, chiefly counter-cyclical public spending. ''The Means to Prosperity'' contains one of the first mentions of the
multiplier effect
In macroeconomics, a multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable.
For example, suppose variable ''x''
changes by ''k'' units, which causes an ...
. While it was addressed chiefly to the British Government, it also contained advice for other nations affected by the global recession. A copy was sent to the newly elected President
Franklin D. Roosevelt
Franklin Delano Roosevelt (; ; January 30, 1882April 12, 1945), often referred to by his initials FDR, was an American politician and attorney who served as the 32nd president of the United States from 1933 until his death in 1945. As the ...
and other world leaders. The work was taken seriously by both the American and British governments, and according to
Robert Skidelsky
Robert Jacob Alexander, Baron Skidelsky, (born 25 April 1939) is a British economic historian. He is the author of a three-volume award-winning biography of British economist John Maynard Keynes (1883–1946). Skidelsky read history at Jesus ...
, helped pave the way for the later acceptance of Keynesian ideas, though it had little immediate practical influence. In the 1933
London Economic Conference
The London Economic Conference was a meeting of representatives of 66 nations from June 12 to July 27, 1933 at the Geological Museum in London. Its purpose was to win agreement on measures to fight the Great Depression, revive international trade, ...
opinions remained too diverse for a unified course of action to be agreed upon.
[
]
Keynesian-like policies were adopted by Sweden and Germany, but Sweden was seen as too small to command much attention, and Keynes was deliberately silent about the
successful efforts of Germany as he was dismayed by its imperialist ambitions and its treatment of Jews.
Apart from Great Britain, Keynes's attention was primarily focused on the United States. In 1931, he received considerable support for his views on counter-cyclical public spending in Chicago, then America's foremost center for economic views alternative to the mainstream.
However, orthodox economic opinion remained generally hostile regarding fiscal intervention to mitigate the
depression, until just before the
outbreak of war.
In late 1933 Keynes was persuaded by
Felix Frankfurter
Felix Frankfurter (November 15, 1882 – February 22, 1965) was an Austrian-American jurist who served as an Associate Justice of the Supreme Court of the United States from 1939 until 1962, during which period he was a noted advocate of judic ...
to address President Roosevelt directly, which he did by letters and face to face in 1934, after which the two men spoke highly of each other.
However, according to Skidelsky, the consensus is that Keynes's efforts began to have a more than marginal influence on US economic policy only after 1939.
Keynes's ''
magnum opus
A masterpiece, ''magnum opus'' (), or ''chef-d’œuvre'' (; ; ) in modern use is a creation that has been given much critical praise, especially one that is considered the greatest work of a person's career or a work of outstanding creativity, ...
'', ''
The General Theory of Employment, Interest and Money
''The General Theory of Employment, Interest and Money'' is a book by English economist John Maynard Keynes published in February 1936. It caused a profound shift in economic thought, giving macroeconomics a central place in economic theory and ...
'' was published in 1936.
It was researched and indexed by one of Keynes's favourite students, later the economist
David Bensusan-Butt
David Miles Bensusan-Butt (24 July 1914, Colchester – 25 March 1994, London) was an English economist who spent much of his career in Australia. Known as David, he published his work as D. M. Bensusan-Butt.
Background and education
A nephew of ...
. The work served as a theoretical justification for the
interventionist policies Keynes favoured for tackling a recession. Although Keynes stated in his preface that his General Theory was only secondarily concerned with the "applications of this theory to practice," the circumstances of its publication were such that his suggestions shaped the course of the 1930s. In addition, Keynes introduced the world to a new interpretation of taxation: since the legal tender is now defined by the state, inflation becomes "taxation by currency depreciation". This hidden tax meant a) that the standard of value should be governed by deliberate decision; and (b) that it was possible to maintain a middle course between deflation and inflation. This novel interpretation was inspired by the desperate search for control over the economy which permeated the academic world after the Depression. The ''General Theory'' challenged the earlier
neoclassical economic paradigm, which had held that provided it was unfettered by government interference, the market would naturally establish
full employment equilibrium. In doing so Keynes was partly setting himself against his former teachers Marshall and Pigou. Keynes believed the classical theory was a "special case" that applied only to the particular conditions present in the 19th century, his theory being the general one. Classical economists had believed in
Say's law
In classical economics, Say's law, or the law of markets, is the claim that the production of a product creates demand for another product by providing something of value which can be exchanged for that other product. So, production is the source ...
, which, simply put, states that "
supply creates its demand", and that in a free market workers would always be willing to lower their wages to a level where employers could profitably offer them jobs.
An innovation from Keynes was the concept of
price stickinessthe recognition that in reality workers often refuse to lower their wage demands even in cases where a classical economist might argue that it is rational for them to do so. Due in part to price stickiness, it was established that the interaction of "
aggregate demand" and "
aggregate supply
In economics, aggregate supply (AS) or domestic final supply (DFS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms ...
" may lead to stable unemployment equilibriaand in those cases, it is on the state, not the market, that economies must depend for their salvation. In contrast, Keynes argued that demand is what creates supply and not the other way around. He questioned Say's Law by asking what would happen if the money that is being given to individuals is not finding its way back into the economy and is saved instead? He suggested the result would be a recession. To tackle the fear of a recession Say's Law suggests government intervention. This government intervention can be used to prevent any further increase in savings in the form of a decreased interest rate. Decreasing the interest rate will encourage people to start spending and investing again, or so it is stated by Say's Law. The reason behind this is that when there is little investing, savings start to accumulate and reach a stopping point in the flow of money. During the normal economic activity, it would be justified to have savings because they can be given out as loans but in this case, there is little demand for them, so they are doing no good for the economy. The supply of savings then exceeds the demand for loans and the result is lower prices or lower interest rates. Thus, the idea is that the money that was once saved is now re-invested or spent, assuming lower interest rates appeal to consumers. To Keynes, however, this was not always the case, and it couldn't be assumed that lower interest rates would automatically encourage investment and spending again since there is no proven link between the two.
![Keynes caricature Low 1934](https://upload.wikimedia.org/wikipedia/commons/f/f8/Keynes_caricature_Low_1934.jpg)
The ''General Theory'' argues that demand, not supply, is the key variable governing the overall level of economic activity. Aggregate demand, which equals total un-hoarded income in a society, is defined by the sum of consumption and investment. In a state of unemployment and unused production capacity, one can enhance employment and total income ''only'' by ''first'' increasing expenditures for either consumption or investment. Without government intervention to increase expenditure, an economy can remain trapped in a low-employment equilibrium. The demonstration of this possibility has been described as the revolutionary formal achievement of the work.
[
]
The book advocated activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on
public works
Public works are a broad category of infrastructure projects, financed and constructed by the government, for recreational, employment, and health and safety uses in the greater community. They include public buildings ( municipal buildings, sc ...
. "Let us be up and doing, using our idle resources to increase our wealth," he wrote in 1928. "With men and plants unemployed, it is ridiculous to say that we cannot afford these new developments. It is precisely with these plants and these men that we shall afford them."
The ''General Theory'' is often viewed as the foundation of modern
macroeconomics. Few senior American economists agreed with Keynes through most of the 1930s.
[
]
Yet his ideas were soon to achieve widespread acceptance, with eminent American professors such as
Alvin Hansen
Alvin Harvey Hansen (August 23, 1887 – June 6, 1975) was an American economist who taught at the University of Minnesota and was later a chair professor of economics at Harvard University. Often referred to as "the American Keynes", he was a w ...
agreeing with the ''General Theory'' before the outbreak of World War II.
[
]
Keynes himself had only limited participation in the theoretical debates that followed the publication of the ''General Theory'' as he suffered a heart attack in 1937, requiring him to take long periods of rest. Among others,
Hyman Minsky
Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research at ...
and
Post-Keynesian
Post-Keynesian economics is a school of economic thought with its origins in '' The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney ...
economists have argued that as result, Keynes's ideas were diluted by those keen to compromise with classical economists or to render his concepts with mathematical models like the
IS–LM model
IS–LM model, or Hicks–Hansen model, is a two-dimensional macroeconomic tool that shows the relationship between interest rates and assets market (also known as real output in goods and services market plus money market). The intersection of ...
(which, they argue, distort Keynes's ideas).
Keynes began to recover in 1939, but for the rest of his life his professional energies were directed largely towards the practical side of economics: the problems of ensuring optimum allocation of resources for the war efforts, post-war negotiations with America, and the new international financial order that was presented at the
Bretton Woods Conference
The Bretton Woods Conference, formally known as the United Nations Monetary and Financial Conference, was the gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel, situated in Bretton Woods, New Hampshire, Unite ...
.
In the ''General Theory'' and later, Keynes responded to the socialists who argued, especially during the Great Depression of the 1930s, that capitalism caused war. He argued that if capitalism were managed domestically and internationally (with coordinated international Keynesian policies, an international monetary system that did not pit the interests of countries against one another, and a high degree of freedom of trade), then this system of managed capitalism could promote peace rather than conflict between countries. His plans during World War II for post-war international economic institutions and policies (which contributed to the creation at Bretton Woods of the
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
and the
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
, and later to the creation of the
General Agreement on Tariffs and Trade and eventually the
World Trade Organization
The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade. With effective cooperation
in the United Nations System, governments use the organization to establish, revise, and ...
) were aimed to give effect to this vision.
Although Keynes has been widely criticisedespecially by members of the
Chicago school of economicsfor advocating irresponsible government spending financed by borrowing, in fact he was a firm believer in balanced budgets and regarded the proposals for programs of public works during the Great Depression as an exceptional measure to meet the needs of exceptional circumstances.
[''Universal Man'' Richard Davenport-Hines Collins 2015]
Second World War
During the
Second World War
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposi ...
, Keynes argued in ''
How to Pay for the War'', published in 1940, that the war effort should be largely financed by higher taxation and especially by compulsory saving (essentially workers lending money to the government), rather than
deficit spending
Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
, to avoid inflation. Compulsory saving would act to dampen domestic demand, assist in channelling additional output towards the war efforts, would be fairer than punitive taxation and would have the advantage of helping to avoid a post-war slump by boosting demand once workers were allowed to withdraw their savings. In September 1941 he was proposed to fill a vacancy in the Court of Directors of the
Bank of England, and subsequently carried out a full term from the following April. In June 1942, Keynes was rewarded for his service with a
hereditary peerage in the King's Birthday Honours.
On 7 July his title was
gazetted
A gazette is an official journal, a newspaper of record, or simply a newspaper.
In English and French speaking countries, newspaper publishers have applied the name ''Gazette'' since the 17th century; today, numerous weekly and daily newspapers ...
as "Baron Keynes, of Tilton, in the County of
Sussex" and he took his seat in the
House of Lords
The House of Lords, also known as the House of Peers, is the upper house of the Parliament of the United Kingdom. Membership is by appointment, heredity or official function. Like the House of Commons, it meets in the Palace of Westminste ...
on the
Liberal Party
The Liberal Party is any of many political parties around the world. The meaning of ''liberal'' varies around the world, ranging from liberal conservatism on the right to social liberalism on the left.
__TOC__ Active liberal parties
This is a li ...
benches.
By contrast, in his capacity as advisor on the
Indian Financial and Monetary Affairs for the British Government, there is evidence that Keynes advocated "profit inflation" in order to finance war spending by the Allied forces in
Bengal
Bengal ( ; bn, বাংলা/বঙ্গ, translit=Bānglā/Bôngô, ) is a geopolitical, cultural and historical region in South Asia, specifically in the eastern part of the Indian subcontinent at the apex of the Bay of Bengal, predom ...
. This deliberate inflationary policy, which caused a sixfold increase in the price of rice, contributed to the
1943 Bengal famine.
As the
Allied victory began to look certain, Keynes was heavily involved, as leader of the British delegation and chairman of the
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
commission, in the mid-1944 negotiations that established the
Bretton Woods system. The Keynes plan, concerning an international clearing-union, argued for a radical system for the management of currencies. He proposed the creation of a common world unit of currency, the
bancor
The bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940–1942 and which the United Kingdom proposed to introduce after World War II. The name was inspired by the French ''banque ...
and new global institutionsa world
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central b ...
and the
International Clearing Union
The International Clearing Union (ICU) was one of the institutions proposed to be set up at the 1944 United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, in the United States, by British economist John Maynard Keynes. ...
. Keynes envisaged these institutions managing an international trade and payments system with strong incentives for countries to avoid substantial trade deficits or surpluses. The USA's greater negotiating strength, however, meant that the outcomes accorded more closely to the more conservative plans of
Harry Dexter White
Harry Dexter White (October 29, 1892 – August 16, 1948) was a senior U.S. Treasury department official. Working closely with the Secretary of the Treasury Henry Morgenthau Jr., he helped set American financial policy toward the Allies of World ...
. According to US economist
J. Bradford DeLong
James Bradford "Brad" DeLong (born June 24, 1960) is an economic historian who is a professor of economics at the University of California, Berkeley. DeLong served as Deputy Assistant Secretary of the U.S. Department of the Treasury in the Clinto ...
, on almost every point where he was overruled by the Americans, Keynes was later proven correct by events.
The two new institutions, later known as the World Bank and the
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
(IMF), were founded as a compromise that primarily reflected the American vision. There would be no incentives for states to avoid a large
trade surplus
The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance ...
; instead, the burden for correcting a trade imbalance would continue to fall only on the
deficit countries, which Keynes had argued were least able to address the problem without inflicting economic hardship on their populations. Yet, Keynes was still pleased when accepting the final agreement, saying that if the institutions stayed true to their founding principles, "the brotherhood of man will have become more than a phrase."
Postwar
After the war, Keynes continued to represent the United Kingdom in international negotiations despite his deteriorating health. He succeeded in obtaining preferential terms from the United States
for new and outstanding debts to facilitate the rebuilding of the British economy.
Just before his death in 1946, Keynes told Henry Clay, a professor of social economics and advisor to the
Bank of England, of his hopes that
Adam Smith's "
invisible hand
The invisible hand is a metaphor used by the British moral philosopher Adam Smith that describes the unintended greater social benefits and public good brought about by individuals acting in their own self-interests. Smith originally mention ...
" could help Britain out of the economic hole it was in: "I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago."
Influence and legacy
Keynesian ascendancy 1939–79
From the end of the Great Depression to the mid-1970s, Keynes provided the main inspiration for economic policymakers in Europe, America and much of the rest of the world.
While economists and policymakers had become increasingly won over to Keynes's way of thinking in the mid and late 1930s, it was only after the outbreak of World War II that governments started to borrow money for spending on a scale sufficient to eliminate unemployment. According to the economist
John Kenneth Galbraith
John Kenneth Galbraith (October 15, 1908 – April 29, 2006), also known as Ken Galbraith, was a Canadian-American economist, diplomat, public official, and intellectual. His books on economic topics were bestsellers from the 1950s through t ...
(then a US government official charged with controlling inflation), in the rebound of the economy from wartime spending, "one could not have had a better demonstration of the Keynesian ideas."
[
]
The
Keynesian Revolution was associated with the rise of
modern liberalism in the West during the post-war period. Keynesian ideas became so popular that some scholars point to Keynes as representing the ideals of modern liberalism, as Adam Smith represented the ideals of
classical liberalism
Classical liberalism is a political tradition and a branch of liberalism that advocates free market and laissez-faire economics; civil liberties under the rule of law with especial emphasis on individual autonomy, limited government, econo ...
. After the war,
Winston Churchill
Sir Winston Leonard Spencer Churchill (30 November 187424 January 1965) was a British statesman, soldier, and writer who served as Prime Minister of the United Kingdom twice, from 1940 to 1945 during the Second World War, and again from ...
attempted to check the rise of Keynesian policy-making in the United Kingdom and used rhetoric critical of the
mixed economy
A mixed economy is variously defined as an economic system blending elements of a market economy with elements of a planned economy, markets with state interventionism, or private enterprise with public enterprise. Common to all mixed economie ...
in his
1945 election campaign. Despite his popularity as a war hero, Churchill suffered a landslide defeat to
Clement Attlee, whose government's economic policy continued to be influenced by Keynes's ideas.
Neo-Keynesian economics
In the late 1930s and 1940s, economists (notably
John Hicks
Sir John Richards Hicks (8 April 1904 – 20 May 1989) was a British economist. He is considered one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economi ...
,
Franco Modigliani
Franco Modigliani (18 June 1918 – 25 September 2003) was an Italian-American economist and the recipient of the 1985 Nobel Memorial Prize in Economics. He was a professor at University of Illinois at Urbana–Champaign, Carnegie Mellon Un ...
and
Paul Samuelson
Paul Anthony Samuelson (May 15, 1915 – December 13, 2009) was an American economist who was the first American to win the Nobel Memorial Prize in Economic Sciences. When awarding the prize in 1970, the Swedish Royal Academies stated that he " ...
) attempted to interpret and formalise Keynes's writings in terms of formal
mathematical models. In what had become known as the
neoclassical synthesis, they combined Keynesian analysis with
neoclassical economics
Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
to produce
neo-Keynesian economics
The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a neoclassical economics academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Key ...
, which came to dominate
mainstream macroeconomic thought for the next 40 years.
By the 1950s, Keynesian policies were adopted by almost the entire developed world and similar measures for a
mixed economy
A mixed economy is variously defined as an economic system blending elements of a market economy with elements of a planned economy, markets with state interventionism, or private enterprise with public enterprise. Common to all mixed economie ...
were used by many developing nations. By then, Keynes's views on the economy had become mainstream in the world's universities. Throughout the 1950s and 1960s, the developed and emerging free capitalist economies enjoyed exceptionally high growth and low unemployment.
Professor Gordon Fletcher has written that the 1950s and 1960s, when Keynes's influence was at its peak, appear in retrospect as a
golden age of capitalism
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private pr ...
.
In late 1965 ''
Time
Time is the continued sequence of existence and events that occurs in an apparently irreversible succession from the past, through the present, into the future. It is a component quantity of various measurements used to sequence events, ...
'' magazine ran a cover article with a title comment from
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
(later echoed by US President
Richard Nixon
Richard Milhous Nixon (January 9, 1913April 22, 1994) was the 37th president of the United States, serving from 1969 to 1974. A member of the Republican Party, he previously served as a representative and senator from California and was ...
), "
We are all Keynesians now
"We are all Keynesians now" is a famous phrase attributed to Milton Friedman and later rephrased by President of the United States, U.S. president Richard Nixon. It is popularly associated with the reluctant embrace in a time of financial crisis of ...
". The article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government." The article also states that Keynes was one of the three most important economists who ever lived, and that his ''
General Theory'' was more influential than the ''magna opera'' of other famous economists, like
Adam Smith's ''
The Wealth of Nations
''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the '' magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in ...
''.
Multiplier
The concept of multiplier was first developed by R. F. Kahn in his article "The relation of home investment to unemployment" In the economic journal of June 1931. Kahn multiplier was the employment multiplier while as Keynes took the idea from Kahn and formulated the investment multiplier.
Keynesian economics out of favour 1979–2007
Keynesian economics were officially discarded by the British Government in 1979, but forces had begun to gather against Keynes's ideas over 30 years earlier.
Friedrich Hayek
Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Haye ...
had formed the
Mont Pelerin Society
The Mont Pelerin Society (MPS) is an international organization composed of economists, philosophers, historians, intellectuals and business leaders.Michael Novak, 'The Moral Imperative of a Free Economy', in '' The 4% Solution: Unleashing the E ...
in 1947, with the explicit intention of nurturing intellectual currents to one day displace Keynesianism and other similar influences. Its members included the
Austrian School
The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian schoo ...
economist
Ludwig von Mises
Ludwig Heinrich Edler von Mises (; 29 September 1881 – 10 October 1973) was an Austrian School economist, historian, logician, and Sociology, sociologist. Mises wrote and lectured extensively on the societal contributions of classical liberali ...
along with the then young Milton Friedman. Initially the society had little impact on the wider worldaccording to Hayek it was as if Keynes had been raised to sainthood after his death and that people refused to allow his work to be questioned.
Friedman however began to emerge as a formidable critic of Keynesian economics from the mid-1950s, and especially after his 1963 publication of ''
A Monetary History of the United States
''A Monetary History of the United States, 1867–1960'' is a book written in 1963 by Nobel Prize–winning economist Milton Friedman and Anna J. Schwartz. It uses historical time series and economic analysis to argue the then-novel proposition ...
''.
On the practical side of economic life, "
big government" had appeared to be firmly entrenched in the 1950s, but the balance began to shift towards the power of private interests in the 1960s. Keynes had written against the folly of allowing "decadent and selfish" speculators and financiers the kind of influence they had enjoyed after World War I. For two decades after World War II the public opinion was strongly against private speculators, the disparaging label "
Gnomes of Zürich" being typical of how they were described during this period. International speculation was severely restricted by the capital controls in place after Bretton Woods. According to the journalists
Larry Elliott
Larry Elliott is an English journalist and author who focuses on economic issues. He is the economics editor at ''The Guardian'', and has published seven books on related issues, six of them in partnership with Dan Atkinson.
Early life
Elliott ...
and
Dan Atkinson
Dan Atkinson (born 1961 in Brighton) is a British journalist and author.
Atkinson has been an independent writer and commentator on financial and economic affairs since 2017 after he had been financial editor of Sticky Content since 2013. Befo ...
, 1968 was the pivotal year when power shifted in favour of private agents such as currency speculators. As the key 1968 event Elliott and Atkinson picked out America's suspension of the conversion of the dollar into gold except on request of foreign governments, which they identified as the beginning of the breakdown of the Bretton Woods system.
[
]
Criticisms of Keynes's ideas had begun to gain significant acceptance by the early 1970s, as they were then able to make a credible case that Keynesian models no longer reflected economic reality. Keynes himself included few formulas and no explicit mathematical models in his ''General Theory''. For economists such as
Hyman Minsky
Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research at ...
, Keynes's limited use of mathematics was partly the result of his scepticism about whether phenomena as inherently uncertain as economic activity could ever be adequately captured by mathematical models. Nevertheless, many models were developed by Keynesian economists, with a famous example being the
Phillips curve
The Phillips curve is an economic model, named after William Phillips hypothesizing a correlation between reduction in unemployment and increased rates of wage rises within an economy. While Phillips himself did not state a linked relationship ...
which predicted an inverse relationship between unemployment and inflation. It implied that unemployment could be reduced by government stimulus with a calculable cost to inflation. In 1968, Milton Friedman published a paper arguing that the fixed relationship implied by the Philips curve did not exist.
Friedman suggested that sustained Keynesian policies could lead to both unemployment and inflation rising at oncea phenomenon that soon became known as
stagflation
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actio ...
. In the early 1970s stagflation appeared in both the US and Britain just as Friedman had predicted, with economic conditions deteriorating further after the
1973 oil crisis. Aided by the prestige gained from his successful forecast, Friedman led increasingly successful criticisms against the Keynesian consensus, convincing not only academics and politicians but also much of the general public with his radio and television broadcasts. The academic credibility of Keynesian economics was further undermined by additional criticism from other
monetarists trained in the
Chicago school of economics, by the
Lucas critique
The Lucas critique, named for American economist Robert Lucas's work on macroeconomic policymaking, argues that it is naive to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historica ...
and by criticisms from Hayek's Austrian School.
So successful were these criticisms that by 1980
Robert Lucas claimed economists would often take offence if described as Keynesians.
Keynesian principles fared increasingly poorly on the practical side of economicsby 1979 they had been displaced by monetarism as the primary influence on Anglo-American economic policy.
However, many officials on both sides of the Atlantic retained a preference for Keynes, and in 1984 the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
officially discarded monetarism, after which Keynesian principles made a partial comeback as an influence on policy making.
Not all academics accepted the criticism against KeynesMinsky has argued that Keynesian economics had been debased by excessive mixing with neoclassical ideas from the 1950s, and that it was unfortunate that this branch of economics had even continued to be called "Keynesian".
Writing in ''
The American Prospect
''The American Prospect'' is a daily online and bimonthly print American political and public policy magazine dedicated to American modern liberalism and progressivism. Based in Washington, D.C., ''The American Prospect'' says it "is devoted t ...
'',
Robert Kuttner
Robert L. Kuttner (; born April 17, 1943) is an American journalist and writer whose works present a liberal/progressive point of view. Kuttner is the co-founder and current co-editor of ''The American Prospect'', which was created in 1990 as a ...
argued it was not so much excessive Keynesian activism that caused the economic problems of the 1970s but the breakdown of the Bretton Woods system of
capital control
Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measure ...
s, which allowed
capital flight
Capital flight, in economics, occurs when assets or money rapidly flow out of a country, due to an event of economic consequence or as the result of a political event such as regime change or economic globalization. Such events could be an increa ...
from regulated economies into unregulated economies in a fashion similar to
Gresham's law
In economics, Gresham's law is a monetary principle stating that "bad money drives out good". For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable com ...
phenomenon (where weak currencies undermine strong currencies).
Historian
Peter Pugh
Peter Pugh is a British author. He was educated at Oundle and Churchill College, Cambridge, where he read history. After graduating he held several marketing positions with such companies as Gillette Industries.
In 1984 he used his knowledge of ...
has stated that a key cause of the economic problems afflicting America in the 1970s was the refusal to raise taxes to finance the
Vietnam War
The Vietnam War (also known by other names) was a conflict in Vietnam, Laos, and Cambodia from 1 November 1955 to the fall of Saigon on 30 April 1975. It was the second of the Indochina Wars and was officially fought between North Vietnam a ...
, which was against Keynesian advice.
[
]
A more typical response was to accept some elements of the criticisms while refining Keynesian economic theories to defend them against arguments that would invalidate the whole Keynesian frameworkthe resulting body of work largely composing
New Keynesian economics
New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroec ...
. In 1992
Alan Blinder
Alan Stuart Blinder (, born October 14, 1945) is an American economics professor at Princeton University and is listed among the most influential economists in the world according to IDEAS/RePEc. He is a leading macroeconomist, politically liber ...
wrote about a "Keynesian Restoration", as work based on Keynes's ideas had to some extent become fashionable once again in academia, though in the mainstream it was highly synthesised with monetarism and other neoclassical thinking. In the world of policy making,
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ot ...
influences broadly sympathetic to monetarism have remained very strong at government levelin powerful normative institutions like the
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
, the
IMF and
US Treasury
The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and ...
, and in prominent opinion-forming media such as the ''
Financial Times
The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Ni ...
'' and ''
The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Eco ...
''.
Keynesian resurgence 2008–09
The global
financial crisis of 2007–08
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
led to public skepticism about the free market consensus even from some on the economic right. In March 2008,
Martin Wolf
Martin Harry Wolf (born 16 August 1946 in London) is a British journalist of Austrian-Dutch descent who focuses on economics. He is the associate editor and chief economics commentator at the ''Financial Times''.
Early life
Wolf was born in ...
, chief economics commentator at the ''Financial Times'', announced the death of the dream of global free-market capitalism. In the same month macroeconomist
James K. Galbraith
James Kenneth Galbraith (born January 29, 1952) is an American economist. He is currently a professor at the Lyndon B. Johnson School of Public Affairs and at the Department of Government, University of Texas at Austin. He is also a Senior Schol ...
used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack against the consensus for monetarist economics and argued that Keynesian economics were far more relevant for tackling the emerging crises.
Economist
Robert J. Shiller
Robert James Shiller (born March 29, 1946) is an American economist, academic, and author. As of 2019, he serves as a Sterling Professor of Economics at Yale University and is a fellow at the Yale School of Management's International Center for ...
had begun advocating robust government intervention to tackle the financial crises, specifically citing Keynes.
Nobel laureate Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was ...
also actively argued the case for vigorous Keynesian intervention in the economy in his columns for ''
The New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid d ...
''.
Other prominent economic commentators who have argued for Keynesian government intervention to mitigate the financial crisis include
George Akerlof
George Arthur Akerlof (born June 17, 1940) is an American economist and a university professor at the McCourt School of Public Policy at Georgetown University and Koshland Professor of Economics Emeritus at the University of California, Berkeley. ...
,
J. Bradford DeLong
James Bradford "Brad" DeLong (born June 24, 1960) is an economic historian who is a professor of economics at the University of California, Berkeley. DeLong served as Deputy Assistant Secretary of the U.S. Department of the Treasury in the Clinto ...
,
Robert Reich
Robert Bernard Reich (; born June 24, 1946) is an American professor, author, lawyer, and political commentator. He worked in the administrations of Presidents Gerald Ford and Jimmy Carter, and served as Secretary of Labor from 1993 to 1997 in ...
and
Joseph Stiglitz.
Newspapers and other media have also cited work relating to Keynes by
Hyman Minsky
Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research at ...
,
Robert Skidelsky
Robert Jacob Alexander, Baron Skidelsky, (born 25 April 1939) is a British economic historian. He is the author of a three-volume award-winning biography of British economist John Maynard Keynes (1883–1946). Skidelsky read history at Jesus ...
,
Donald Markwell
Donald John Markwell (born 19 April 1959) is an Australian social scientist, who has been described as a "renowned Australian educational reformer". He was appointed Head of St Mark's College, Adelaide, from November 2019. He was Senior Adviser ...
and
Axel Leijonhufvud
Axel Leijonhufvud (6 September 1933 – 2 May 2022)
of the original. was a Swedi ...
.
A series of major
bailout
A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy.
A bailout differs from the term ''bail-in'' (coined in 2010) under which the bondholders or depositors of global sys ...
s were pursued during the financial crisis, starting on 7 September with the announcement that the US Government was to nationalise the two
government-sponsored enterprise
A government-sponsored enterprise (GSE) is a type of financial services corporation created by the United States Congress. Their intended function is to enhance the flow of credit to targeted sectors of the economy, to make those segments of th ...
s which oversaw most of the US subprime mortgage market
Fannie Mae
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...
and
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.[Alistair Darling
Alistair Maclean Darling, Baron Darling of Roulanish, (born 28 November 1953) is a British politician who served as Chancellor of the Exchequer under Prime Minister Gordon Brown from 2007 to 2010. A member of the Labour Party, he was a Member ...]
, the British
Chancellor of the Exchequer, referred to Keynes as he announced plans for substantial
fiscal stimulus
In economics, stimulus refers to attempts to use monetary policy or fiscal policy (or stabilization policy in general) to stimulate the economy. Stimulus can also refer to monetary policies such as lowering interest rates and quantitative easi ...
to head off the worst effects of recession, in accordance with Keynesian economic thought.
Similar policies have been adopted by other governments worldwide.
This is in stark contrast to the action imposed on
Indonesia
Indonesia, officially the Republic of Indonesia, is a country in Southeast Asia and Oceania between the Indian and Pacific oceans. It consists of over 17,000 islands, including Sumatra, Java, Sulawesi, and parts of Borneo and New Guine ...
during the
Asian financial crisis
The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion. However, the recovery in 1998– ...
of 1997, when it was forced by the IMF to close 16 banks at the same time, prompting a
bank run.
Much of the post-crisis discussion reflected Keynes's advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the IMF and the World Bank, which many had argued should be reformed as a "new Bretton Woods", and should have been even before the crises broke out.
[
]
The IMF and United Nations economists advocated a coordinated international approach to fiscal stimulus.
Donald Markwell
Donald John Markwell (born 19 April 1959) is an Australian social scientist, who has been described as a "renowned Australian educational reformer". He was appointed Head of St Mark's College, Adelaide, from November 2019. He was Senior Adviser ...
argued that in the absence of such an international approach, there would be a risk of worsening international relations and possibly even world war arising from economic factors similar to those present during the depression of the 1930s.
By the end of December 2008, the ''Financial Times'' reported that "the sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades."
In December 2008, Paul Krugman released his book ''
The Return of Depression Economics and the Crisis of 2008'', arguing that economic conditions similar to those that existed during the earlier part of the 20th century had returned, making Keynesian policy prescriptions more relevant than ever. In February 2009
Robert J. Shiller
Robert James Shiller (born March 29, 1946) is an American economist, academic, and author. As of 2019, he serves as a Sterling Professor of Economics at Yale University and is a fellow at the Yale School of Management's International Center for ...
and
George Akerlof
George Arthur Akerlof (born June 17, 1940) is an American economist and a university professor at the McCourt School of Public Policy at Georgetown University and Koshland Professor of Economics Emeritus at the University of California, Berkeley. ...
published ''
Animal Spirits'', a book where they argue the current US stimulus package is too small as it does not take into account Keynes's insight on the importance of confidence and expectations in determining the future behaviour of
businesspeople
A businessperson, businessman, or businesswoman is an individual who has founded, owns, or holds shares in (including as an angel investor) a private-sector company. A businessperson undertakes activities (commercial or industrial) for the ...
and other economic agents.
In the March 2009 speech entitled ''Reform the International Monetary System'',
Zhou Xiaochuan
Zhou Xiaochuan () (born 29 January 1948) is a retired Chinese economist, banker, reformist and bureaucrat. Zhou served as the Governor of the People's Bank of China from 2002 to 2018. In 2001, his policies led to a stock crash, forcing him to re ...
, the governor of the
People's Bank of China
The People's Bank of China (officially PBC or informally PBOC; ) is the central bank of the People's Republic of China, responsible for carrying out monetary policy and regulation of financial institutions in mainland China, as determined by ...
, came out in favour of Keynes's idea of a centrally managed global reserve currency. Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's
bancor
The bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940–1942 and which the United Kingdom proposed to introduce after World War II. The name was inspired by the French ''banque ...
. Zhou proposed a gradual move towards increased use of IMF
special drawing rights
Special drawing rights (SDRs, code ) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). SDRs are units of account for the IMF, and not a currency ''per se''. They represent a claim ...
(SDRs).
Although Zhou's ideas had not been broadly accepted, leaders meeting in April at the
2009 G-20 London summit
The 2009 G20 London Summit was the second meeting of the G20 heads of government/heads of state, which was held in London on 2 April 2009 at the ExCeL Exhibition Centre to discuss financial markets and the world economy. It followed the first ...
agreed to allow $250 billion of special drawing rights to be created by the IMF, to be distributed globally. Stimulus plans were credited for contributing to a better than expected economic outlook by both the
OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
and the IMF, in reports published in June and July 2009. Both organisations warned global leaders that recovery was likely to be slow, so counter recessionary measures ought not be rolled back too early.
While the need for stimulus measures was broadly accepted among policy makers, there had been much debate over how to fund the spending. Some leaders and institutions, such as
Angela Merkel
Angela Dorothea Merkel (; ; born 17 July 1954) is a German former politician and scientist who served as Chancellor of Germany from 2005 to 2021. A member of the Christian Democratic Union (CDU), she previously served as Leader of the Opp ...
and the
European Central Bank
The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centr ...
,
expressed concern over the potential impact on inflation, national debt and the risk that a too large stimulus will create an unsustainable recovery.
Among professional economists the revival of Keynesian economics has been even more divisive. Although many economists, such as George Akerlof, Paul Krugman, Robert Shiller and Joseph Stiglitz, supported Keynesian stimulus, others did not believe higher government spending would help the United States economy recover from the
Great Recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
. Some economists, such as
Robert Lucas, questioned the theoretical basis for stimulus packages. Others, like
Robert Barro
Robert Joseph Barro (born September 28, 1944) is an American macroeconomist and the Paul M. Warburg Professor of Economics at Harvard University. Barro is considered one of the founders of new classical macroeconomics, along with Robert Lucas, J ...
and
Gary Becker
Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of ...
, say that
empirical evidence
Empirical evidence for a proposition is evidence, i.e. what supports or counters this proposition, that is constituted by or accessible to sense experience or experimental procedure. Empirical evidence is of central importance to the sciences ...
for beneficial effects from Keynesian stimulus does not exist. However, there is a growing academic literature that shows that fiscal expansion helps an economy grow in the near term, and that certain types of fiscal stimulus are particularly effective.
New Keynesian economics
New Keynesian economics developed in the 1990s and early 2000s as a response to the critique that macroeconomics lacked
microeconomic foundations. New Keynesianism developed models to provide microfoundations for Keynesian economics. It incorporated parts of
new classical macroeconomics
New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous founda ...
to develop the
new neoclassical synthesis
The new neoclassical synthesis (NNS), which is now generally referred to as New Keynesian economics, and occasionally as the New Consensus, is the fusion of the major, modern macroeconomic schools of thought – new classical macroeconomics/ real ...
, which forms the basis for
mainstream macroeconomics today.
Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have
rational expectations
In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency i ...
. However, the two schools differ in that New Keynesian analysis usually assumes a variety of
market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indi ...
s. In particular, New Keynesians assume that there is
imperfect competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition will cause market inefficiency when it hap ...
in price and wage setting to help explain why prices and wages can become "
sticky
Sticky may refer to:
People
*Sticky (musician), alias of UK garage producer Richard Forbes
* Sticky Fingaz or Sticky (born 1973), nickname of the US rapper and actor Kirk Jones
Adhesion
*Adhesion
Adhesion is the tendency of dissimilar ...
", which means they do not adjust instantaneously to changes in economic conditions.
Wage and price stickiness, and the other market failures present in New Keynesian
models
A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16th-century English, and derived via French and Italian ultimately from Latin ''modulus'', a measure.
Models c ...
, imply that the economy may fail to attain
full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using
fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variab ...
) and the
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central b ...
(using
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
) can lead to a more
efficient macroeconomic outcome than a ''
laissez faire
''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system in which transactions between private groups of people are free from any form of economic interventionism (such as subsidies) deriving from special interest groups. ...
'' policy would.
Overall views
Praise
On a personal level, Keynes's charm was such that he was generally well received wherever he wenteven those who found themselves on the wrong side of his occasionally sharp tongue rarely bore a grudge. Keynes's speech at the closing of the Bretton Woods negotiations was received with a lasting standing ovation, rare in international relations, as the delegates acknowledged the scale of his achievements made despite poor health.
Austrian School economist
Friedrich Hayek
Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Haye ...
was Keynes's most prominent contemporary critic, with sharply opposing views on the economy.
Yet after Keynes's death, he wrote: "He was the one really great man I ever knew, and for whom I had unbounded admiration. The world will be a very much poorer place without him."
A colleague Nicholas Davenport recalled, "There were deep emotional forces about Maynard ... One could sense his humanity. There was nothing of the cold intellectual about him."
Lionel Robbins
Lionel Charles Robbins, Baron Robbins, (22 November 1898 – 15 May 1984) was a British economist, and prominent member of the economics department at the London School of Economics (LSE). He is known for his leadership at LSE, his proposed def ...
, former head of the economics department at the
London School of Economics
The London School of Economics and Political Science (LSE) is a public university, public research university located in London, England and a constituent college of the federal University of London. Founded in 1895 by Fabian Society members Sidn ...
, who engaged in many heated debates with Keynes in the 1930s, had this to say after observing Keynes in early negotiations with the Americans while drawing up plans for Bretton Woods:
Douglas LePan
Douglas Valentine LePan (25 May 1914 – 27 November 1998) was a Canadian diplomat, poet, novelist and professor of literature.
Life
Born in Toronto, Ontario, LePan was educated at the University of Toronto, at Harvard (where he also tau ...
,
an official from the
Canadian High Commission, wrote:
Bertrand Russell
Bertrand Arthur William Russell, 3rd Earl Russell, (18 May 1872 – 2 February 1970) was a British mathematician, philosopher, logician, and public intellectual. He had a considerable influence on mathematics, logic, set theory, linguistics, ...
named Keynes one of the most intelligent people he had ever known, commenting:
Keynes's obituary in ''
The Times
''The Times'' is a British daily national newspaper based in London. It began in 1785 under the title ''The Daily Universal Register'', adopting its current name on 1 January 1788. ''The Times'' and its sister paper '' The Sunday Times'' (f ...
'' included the comment: "There is the man himselfradiant, brilliant, effervescent, gay, full of impish jokes ... He was a humane man genuinely devoted to the cause of the common good."
Critiques
As a man of the centre described by some as having the greatest impact of any 20th-century economist,
Keynes attracted considerable criticism from both sides of the political spectrum. In the 1920s, Keynes was seen as anti-establishment and was mainly attacked from the right. In the "red 1930s", many young economists favoured
Marxist views, even in Cambridge,
and while Keynes was engaging principally with the right to try to persuade them of the merits of more progressive policy, the most vociferous criticism against him came from the left, who saw him as a supporter of capitalism. From the 1950s and onwards, most of the attacks against Keynes have again been from the right.
![Friedrich Hayek portrait](https://upload.wikimedia.org/wikipedia/commons/7/7f/Friedrich_Hayek_portrait.jpg)
In 1931
Friedrich Hayek
Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Haye ...
extensively critiqued Keynes's 1930 ''Treatise on Money''. After reading Hayek's ''
The Road to Serfdom
''The Road to Serfdom'' ( German: ''Der Weg zur Knechtschaft'') is a book written between 1940 and 1943 by Austrian-British economist and philosopher Friedrich Hayek. Since its publication in 1944, ''The Road to Serfdom'' has been popular among ...
'', Keynes wrote to Hayek "Morally and philosophically I find myself in agreement with virtually the whole of it", but concluded the letter with the recommendation: On the pressing issue of the time, whether deficit spending could lift a country from depression, Keynes replied to Hayek's criticism in the following way:
Asked why Keynes expressed "moral and philosophical" agreement with Hayek's ''Road to Serfdom'', Hayek stated:
According to some observers, Hayek felt that the post-World War II "Keynesian orthodoxy" gave too much power to the state, and that such policies would lead toward socialism.
While
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
described ''The General Theory'' as "a great book", he argues that its implicit separation of
nominal from real magnitudes is neither possible nor desirable. Macroeconomic policy, Friedman argues, can reliably influence only the nominal.
He and other monetarists have consequently argued that
Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output a ...
can result in
stagflation
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actio ...
, the combination of low growth and high inflation that developed economies suffered in the early 1970s. More to Friedman's taste was the ''Tract on Monetary Reform'' (1923), which he regarded as Keynes's best work because of its focus on maintaining domestic price stability.
Joseph Schumpeter
Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian-born political economist. He served briefly as Finance Minister of German-Austria in 1919. In 1932, he emigrated to the United States to become a professor at H ...
was an economist of the same age as Keynes and one of his main rivals. He was among the first reviewers to argue that Keynes's ''General Theory'' was not a general theory, but a special case.
He said the work expressed "the attitude of a decaying civilisation". After Keynes's death Schumpeter wrote a brief biographical piece ''Keynes the Economist''on a personal level he was very positive about Keynes as a man, praising his pleasant nature, courtesy and kindness. He assessed some of Keynes's biographical and editorial work as among the best he'd ever seen. Yet Schumpeter remained critical about Keynes's economics, linking Keynes's childlessness to what Schumpeter saw as an essentially short-term view. He considered Keynes to have a kind of unconscious patriotism that caused him to fail to understand the problems of other nations. For Schumpeter "Practical Keynesianism is a seedling which cannot be transplanted into foreign soil: it dies there and becomes poisonous as it dies."
"Schumpeter admired and envied Keynes, but when Keynes died in 1946, Schumpeter's obituary gave Keynes this same off-key, perfunctory treatment he would later give
Adam Smith in the ''History of Economic Analysis'', the "discredit of not adding a single innovation to the techniques of economic analysis".
President
Harry S. Truman
Harry S. Truman (May 8, 1884December 26, 1972) was the 33rd president of the United States, serving from 1945 to 1953. A leader of the Democratic Party, he previously served as the 34th vice president from January to April 1945 under Franklin ...
was sceptical of Keynesian theorizing: "Nobody can ever convince me that government can spend a dollar that it's not got," he told
Leon Keyserling, a Keynesian economist who chaired Truman's
Council of Economic Advisers.
Views on race
Some critics have sought to show that Keynes had sympathies towards
Nazism
Nazism ( ; german: Nazismus), the common name in English for National Socialism (german: Nationalsozialismus, ), is the far-right totalitarian political ideology and practices associated with Adolf Hitler and the Nazi Party (NSDAP) i ...
, and a number of writers have described him as
antisemitic. Keynes's private letters contain portraits and descriptions, some of which can be characterised as antisemitic, while others as
philosemitic.
Scholars have suggested that these reflect clichés current at the time that he accepted uncritically, rather than any racism.
On several occasions Keynes used his influence to help his Jewish friends, most notably when he successfully lobbied for
Ludwig Wittgenstein
Ludwig Josef Johann Wittgenstein ( ; ; 26 April 1889 – 29 April 1951) was an Austrian-British philosopher who worked primarily in logic, the philosophy of mathematics, the philosophy of mind, and the philosophy of language. He is con ...
to be allowed residency in the United Kingdom, explicitly to rescue him from being deported to
Nazi-occupied Austria. Keynes was a supporter of
Zionism
Zionism ( he, צִיּוֹנוּת ''Tsiyyonut'' after '' Zion'') is a nationalist movement that espouses the establishment of, and support for a homeland for the Jewish people centered in the area roughly corresponding to what is known in Je ...
, serving on committees supporting the cause.
Allegations that he was racist or had totalitarian beliefs have been rejected by
Robert Skidelsky
Robert Jacob Alexander, Baron Skidelsky, (born 25 April 1939) is a British economic historian. He is the author of a three-volume award-winning biography of British economist John Maynard Keynes (1883–1946). Skidelsky read history at Jesus ...
and other biographers.
Professor Gordon Fletcher wrote that "the suggestion of a link between Keynes and any support of totalitarianism cannot be sustained".
Once the aggressive tendencies of the Nazis towards Jews and other minorities had become apparent, Keynes made clear his loathing of Nazism. As a lifelong pacifist he had initially favoured peaceful containment of
Nazi Germany
Nazi Germany (lit. "National Socialist State"), ' (lit. "Nazi State") for short; also ' (lit. "National Socialist Germany") (officially known as the German Reich from 1933 until 1943, and the Greater German Reich from 1943 to 1945) was ...
, yet he began to advocate a forceful resolution while many conservatives were still arguing for appeasement. After the war started, he roundly criticised the Left for losing their nerve to confront
Adolf Hitler
Adolf Hitler (; 20 April 188930 April 1945) was an Austrian-born German politician who was dictator of Nazi Germany, Germany from 1933 until Death of Adolf Hitler, his death in 1945. Adolf Hitler's rise to power, He rose to power as the le ...
, saying:
Views on inflation
Keynes has been characterised as being indifferent or even positive about mild inflation.
He had indeed expressed a preference for inflation over
deflation
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...
, saying that if one has to choose between the two evils, it is "better to disappoint the rentier" than to inflict pain on working class families. Keynes was also aware of the dangers of inflation.
In ''
The Economic Consequences of the Peace'', he wrote:
Views on free trade and protectionism
The turning point of the Great Depression
At the beginning of his career, Keynes was an economist close to
Alfred Marshall, deeply convinced of the benefits of free trade. From the crisis of 1929 onwards, noting the commitment of the British authorities to defend the gold parity of the pound sterling and the rigidity of nominal wages, he gradually adhered to protectionist measures.
On 5 November 1929, when heard by the Macmillan Committee to bring the British economy out of the crisis, Keynes indicated that the introduction of tariffs on imports would help to rebalance the trade balance. The committee's report states in a section entitled "import control and export aid", that in an economy where there is not full employment, the introduction of tariffs can improve production and employment. Thus the reduction of the trade deficit favours the country's growth.
In January 1930, in the Economic Advisory Council, Keynes proposed the introduction of a system of protection to reduce imports. In the autumn of 1930, he proposed a uniform tariff of 10% on all imports and subsidies of the same rate for all exports.
In the ''Treatise on Money'', published in the autumn of 1930, he took up the idea of tariffs or other trade restrictions with the aim of reducing the volume of imports and rebalancing the balance of trade.
On 7 March 1931, in the ''New Statesman and Nation'', he wrote an article entitled ''Proposal for a Tariff Revenue''. He pointed out that the reduction of wages led to a reduction in national demand which constrained markets. Instead, he proposes the idea of an expansionary policy combined with a tariff system to neutralise the effects on the balance of trade. The application of customs tariffs seemed to him "unavoidable, whoever the Chancellor of the Exchequer might be". Thus, for Keynes, an economic recovery policy is only fully effective if the trade deficit is eliminated. He proposed a 15% tax on manufactured and semi-manufactured goods and 5% on certain foodstuffs and raw materials, with others needed for exports exempted (wool, cotton).
In 1932, in an article entitled ''The Pro- and Anti-Tariffs'', published in ''The Listener (magazine), The Listener'', he envisaged the protection of farmers and certain sectors such as the automobile and iron and steel industries, considering them indispensable to Britain.
The critique of the theory of comparative advantage
In the post-crisis situation of 1929, Keynes judged the assumptions of the free trade model unrealistic. He criticised, for example, the neoclassical assumption of wage adjustment.
As early as 1930, in a note to the Economic Advisory Council, he doubted the intensity of the gain from specialisation in the case of manufactured goods. While participating in the MacMillan Committee, he admitted that he no longer "believed in a very high degree of national specialisation" and refused to "abandon any industry which is unable, for the moment, to survive". He also criticised the static dimension of the theory of comparative advantage, which, in his view, by fixing comparative advantages definitively, led in practice to a waste of national resources.
In the ''Daily Mail'' of 13 March 1931, he called the assumption of perfect sectoral labour mobility "nonsense" since it states that a person made unemployed contributes to a reduction in the wage rate until he finds a job. But for Keynes, this change of job may involve costs (job search, training) and is not always possible. Generally speaking, for Keynes, the assumptions of full employment and automatic return to equilibrium discredit the theory of comparative advantage.
In July 1933, he published an article in the ''New Statesman and Nation'' entitled ''National Self-Sufficiency'', in which he criticised the argument of the specialisation of economies, which is the basis of free trade. He thus proposed the search for a certain degree of self-sufficiency. Instead of the specialisation of economies advocated by the Ricardian theory of comparative advantage, he prefers the maintenance of a diversity of activities for nations.
In it he refutes the principle of peacemaking trade. His vision of trade became that of a system where foreign capitalists compete for new markets. He defends the idea of producing on national soil when possible and reasonable and expresses sympathy for the advocates of protectionism.
He notes in ''National Self-Sufficiency'':
He also writes in ''National Self-Sufficiency'':
Later, Keynes had a written correspondence with James Meade centred on the issue of import restrictions. Keynes and Meade discussed the best choice between quota and tariff. In March 1944 Keynes began a discussion with Marcus Fleming after the latter had written an article entitled ''Quotas versus depreciation''. On this occasion, we see that he has definitely taken a protectionist stance after the
Great Depression. He considered that quotas could be more effective than currency depreciation in dealing with external imbalances. Thus, for Keynes, currency depreciation was no longer sufficient and protectionist measures became necessary to avoid trade deficits. To avoid the return of crises due to a self-regulating economic system, it seemed essential to him to regulate trade and stop free trade (deregulation of foreign trade).
He points out that countries that import more than they export weaken their economies. When the trade deficit increases, unemployment rises and GDP slows down. And surplus countries exert a "negative externality" on their trading partners. They get richer at the expense of others and destroy the output of their trading partners. John Maynard Keynes believed that the products of surplus countries should be taxed to avoid trade imbalances. Thus he no longer believes in the theory of comparative advantage (on which free trade is based) which states that the trade deficit does not matter, since trade is mutually beneficial.
This also explains his desire to replace the liberalisation of international trade (Free Trade) with a regulatory system aimed at eliminating trade imbalances in his proposals for the Bretton Woods Agreement.
Views on trade imbalances
Keynes was the principal author of a proposalthe so-called Keynes Planfor an
International Clearing Union
The International Clearing Union (ICU) was one of the institutions proposed to be set up at the 1944 United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, in the United States, by British economist John Maynard Keynes. ...
. The two governing principles of the plan were that the problem of settling outstanding balances should be solved by "creating" additional "international money", and that debtor and creditor should be treated almost alike as disturbers of equilibrium. In the event, though, the plans were rejected, in part because "American opinion was naturally reluctant to accept the principle of equality of treatment so novel in debtor-creditor relationships".
The new system is not founded on free-trade (liberalisation
of foreign trade
) but rather on the regulation of international trade, to eliminate trade imbalances: the nations with a surplus would have an incentive to reduce it, and in doing so they would automatically clear other nations deficits.
He proposed a global bank that would issue its currencythe bancorwhich was exchangeable with national currencies at fixed rates of exchange and would become the unit of account between nations, which means it would be used to measure a country's trade deficit or trade surplus. Every country would have an overdraft facility in its bancor account at the International Clearing Union. He pointed out that surpluses lead to weak global aggregate demandcountries running surpluses exert a "negative externality" on trading partners, and posed, far more than those in deficit, a threat to global prosperity.
In his 1933 ''Yale Review'' article "National Self-Sufficiency," he already highlighted the problems created by free trade. His view, supported by many economists and commentators at the time, was that creditor nations may be just as responsible as debtor nations for disequilibrium in exchanges and that both should be under an obligation to bring trade back into a state of balance. Failure for them to do so could have serious consequences. In the words of Geoffrey Crowther, Baron Crowther, Geoffrey Crowther, then editor of ''
The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Eco ...
'', "If the economic relationships between nations are not, by one means or another, brought fairly close to balance, then there is no set of financial arrangements that can rescue the world from the impoverishing results of chaos."
These ideas were informed by events prior to the
Great Depression whenin the opinion of Keynes and othersinternational lending, primarily by the US, exceeded the capacity of sound investment and so got diverted into non-productive and speculative uses, which in turn invited default and a sudden stop to the process of lending.
Influenced by Keynes, economics texts in the immediate post-war period put a significant emphasis on balance in trade. For example, the second edition of the popular introductory textbook, ''An Outline of Money'', devoted the last three of its ten chapters to questions of foreign exchange management and in particular the "problem of balance". However, in more recent years, since the end of the
Bretton Woods system in 1971, with the increasing influence of
monetarist schools of thought in the 1980s, and particularly in the face of large sustained trade imbalances, these concernsand particularly concerns about the destabilising effects of large trade surpluseshave largely disappeared from mainstream economics discourse and Keynes's insights have slipped from view. They are receiving some attention again in the wake of the
financial crisis of 2007–08
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
.
Personal life
Relationships
Keynes's early romantic and sexual relationships were exclusively with men.
Keynes had been in relationships while at Eton and Cambridge; significant among these early partners were Dilly Knox and Daniel Macmillan.
[ Keynes was open about his affairs, and from 1901 to 1915 kept separate diaries in which he tabulated his many sexual encounters.][The Sex Diaries of John Maynard Keynes](_blank)
The Economist, 28 January 2008, Evan Zimroth (Clare Hall, Cambridge) Keynes's relationship and later close friendship with Macmillan was to be fortunate, as Macmillan Publishers, Macmillan's company first published his tract ''Economic Consequences of the Peace''.
Attitudes in the Bloomsbury Group, in which Keynes was avidly involved, were relaxed about homosexuality. Keynes, together with writer Lytton Strachey
Giles Lytton Strachey (; 1 March 1880 – 21 January 1932) was an English writer and critic. A founding member of the Bloomsbury Group and author of '' Eminent Victorians'', he established a new form of biography in which psychological insight ...
, had reshaped the Victorian morality, Victorian attitudes of the Cambridge Apostles
The Cambridge Apostles (also known as ''Conversazione Society'') is an intellectual society at the University of Cambridge founded in 1820 by George Tomlinson, a Cambridge student who became the first Bishop of Gibraltar.W. C. Lubenow, ''The Ca ...
: "since [their] time, homosexual relations among the members were for a time common", wrote Bertrand Russell
Bertrand Arthur William Russell, 3rd Earl Russell, (18 May 1872 – 2 February 1970) was a British mathematician, philosopher, logician, and public intellectual. He had a considerable influence on mathematics, logic, set theory, linguistics, ...
. The artist Duncan Grant, whom he met in 1908, was one of Keynes's great loves. Keynes was also involved with Lytton Strachey, though they were for the most part love rivals, not lovers. Keynes had won the affections of Arthur Hobhouse, and as with Grant, fell out with a jealous Strachey for it. Strachey had previously found himself put off by Keynes, not least because of his manner of "treat[ing] his love affairs statistically".
Political opponents have used Keynes's sexuality to attack his academic work. One line of attack held that he was uninterested in the long-term ramifications of his theories because he had no children.[
Keynes's friends in the Bloomsbury Group were initially surprised when, in his later years, he began pursuing affairs with women, demonstrating himself to be bisexuality, bisexual. Ray Strachey, Ray Costelloe (who later married Oliver Strachey) was an early heterosexual interest of Keynes. In 1906, Keynes had written of this infatuation that, "I seem to have fallen in love with Ray a little bit, but as she isn't male I haven't [been] able to think of any suitable steps to take."
]
Marriage
In 1921, Keynes wrote that he had fallen "very much in love" with Lydia Lopokova, a well-known Russian Ballet dancer, ballerina and one of the stars of Sergei Diaghilev's ''Ballets Russes''. In the early years of his courtship, he maintained an affair with a younger man, W. J. H. Sprott, Sebastian Sprott, in tandem with Lopokova, but eventually chose Lopokova exclusively. They were married in 1925, with Keynes's former lover Duncan Grant as best man. "What a marriage of beauty and brains, the fair Lopokova and John Maynard Keynes" was said at the time. Keynes later commented to Strachey that beauty and intelligence were rarely found in the same person, and that only in Duncan Grant had he found the combination. The union was happy, with biographer Peter Clarke writing that the marriage gave Keynes "a new focus, a new emotional stability and a sheer delight of which he never wearied". The couple hoped to have children but this did not happen.
Among Keynes's Bloomsbury friends, Lopokova was, at least initially, subjected to criticism for her manners, mode of conversation and supposedly humble social originsthe last of the ostensible causes being particularly noted in the letters of Vanessa Bell, Vanessa and Clive Bell, and Virginia Woolf.[''Lady Talky'', Alison Light, London Review of Books, Vol. 30 No. 24, 18 December 2008] In her novel ''Mrs Dalloway'' (1925), Woolf bases the character of Rezia Warren Smith on Lopokova. E. M. Forster later wrote in contrition about "Lydia Keynes, every whose word should be recorded": "How we all used to underestimate her".
Support for the arts
Keynes thought that the pursuit of money for its own sake was a pathological condition, and that the proper aim of work is to provide leisure. He wanted shorter working hours and longer holidays for all.
Keynes was interested in literature in general and drama in particular and supported the Cambridge Arts Theatre financially, which allowed the institution to become one of the major British stages outside London.
Keynes's interest in classical opera and dance led him to support the Royal Opera House at Covent Garden and the Ballet Company at Sadler's Wells Theatre, Sadler's Wells. During World War II, the war, as a member of CEMA (Council for the Encouragement of Music and the Arts), Keynes helped secure government funds to maintain both companies while their venues were shut. Following the war, Keynes was instrumental in establishing the Arts Council of Great Britain and was its founding chairman in 1946. From the start, the two organisations that received the largest grants from the new body were the Royal Opera House and Sadler's Wells.
Keynes built up a substantial collection of fine art, including works by Paul Cézanne, Edgar Degas, Amedeo Modigliani, Georges Braque, Pablo Picasso and Georges Seurat (some of which can now be seen at the Fitzwilliam Museum). He enjoyed collecting books; he collected and protected many of Isaac Newton's papers. In part on the basis of these papers, Keynes wrote of Newton as "the last of the magicians."
Philosophical and spiritual views
Keynes, like other members of the Bloomsbury Group, was greatly influenced by the philosophy of G. E. Moore
George Edward Moore (4 November 1873 – 24 October 1958) was an English philosopher, who with Bertrand Russell, Ludwig Wittgenstein and earlier Gottlob Frege was among the founders of analytic philosophy. He and Russell led the turn from ideal ...
, which in 1938 he described as "still my religion under the surface". According to Moore, states of mind were the only valuable things in themselves, the most important being "the pleasures of human intercourse and the enjoyment of beautiful objects". Virginia Woolf's biographer tells an anecdote of how Virginia Woolf, Keynes and T. S. Eliot discussed religion at a dinner party, in the context of their struggle against Victorian era morality.[
]
Keynes may have been Confirmation, confirmed, but according to Cambridge University he was clearly an agnostic, which he remained until his death. According to one biographer, "he was never able to take religion seriously, regarding it as a strange aberration of the human mind" but also added that he came to "value it for social and moral reasons" later in life. Another biographer writes that he "broke the family faith and became a 'ferocious agnostic during his time at Eton. One Cambridge acquaintance remembered him as "an atheism, atheist with a devotion to King's chapel". At Cambridge, he was strongly associated with the Cambridge Heretics Society, an avowed atheist group which promoted secularism and secular humanism, humanism.
Investments
Keynes was ultimately a successful investor, building up a private fortune. His assets were nearly wiped out following the Wall Street Crash of 1929, which he did not foresee, but he soon recouped. At Keynes's death, in 1946, his net worth stood just short of £500,000equivalent to about £20.5 million ($27.1 million) in 2018. The sum had been amassed despite lavish support for various charities and philanthropies and despite his ethical reluctance to sell on a falling market in cases where he saw such behaviour as likely to deepen a slump.
Keynes managed the endowment of King's College, Cambridge
King's College is a constituent college of the University of Cambridge. Formally The King's College of Our Lady and Saint Nicholas in Cambridge, the college lies beside the River Cam and faces out onto King's Parade in the centre of the cit ...
starting in the 1920s, initially with an unsuccessful strategy based on market timing but later shifting to focus in the publicly traded stock of small and medium-size companies that paid large dividends.[Joel Tillinghast (2017). Big Money Thinks Small: Biases, Blind Spots and Smarter Investing. Columbia University Press, ] This was a controversial decision at the time, as stocks were considered high-risk and the centuries-old endowment had traditionally been invested in agricultural land and fixed income assets like bonds. Keynes was granted permission to invest a small minority of assets in stocks, and his adroit management resulted this portion of the endowment growing to become the majority of the endowment's assets.[ The active component of his portfolio outperformed a British equity index by an average of 6%][ to 8% a year over a quarter century, earning him favourable mention by later investors such as Warren Buffett and George Soros.
Joel Tillinghast of Fidelity Investments describes Keynes as an early practitioner of value investing, a school of thought formalised in the US by Benjamin Graham and David Dodd at Columbia Business School during the 1920s and 1930s.][ However, Keynes is believed to have developed his ideas independently.][ Keynes also regarded as a pioneer of diversification (finance), financial diversification as he recognised the importance of holding assets with "opposed risks" as he wrote "since they are likely to move in opposite directions when there are general fluctuations";][ and also as an early international investor who avoided Equity home bias puzzle, home country bias by investing substantially in stocks outside the United Kingdom. Ken Fisher characterised Keynes as an exception to the rule that economists usually make horrible investors.][Kenneth L. Fisher (2007). 100 Minds That Made the Market. Wiley, ISBN 9780470139516]
Political life
Keynes was a lifelong member of the Liberal Party
The Liberal Party is any of many political parties around the world. The meaning of ''liberal'' varies around the world, ranging from liberal conservatism on the right to social liberalism on the left.
__TOC__ Active liberal parties
This is a li ...
, which until the 1920s had been one of the two main political parties in the United Kingdom, and as late as 1916 had often been the dominant power in government. Keynes had helped campaign for the Liberals at elections from about 1906, yet he always refused to run for office himself, despite being asked to do so on three separate occasions in 1920. From 1926, when Lloyd George became leader of the Liberals, Keynes took a major role in defining the party's economic policy, but by then the Liberals had been displaced into third-party status by the growing workers-oriented Labour Party (UK), Labour Party.
In 1939 Keynes had the option to enter Parliament as an independent MP with the Cambridge University (UK Parliament constituency), University of Cambridge seat. A by-election for the seat was to be held due to the illness of an elderly Conservative Party (UK), Tory, and the master of Magdalene College, Cambridge, Magdalene College had obtained agreement that none of the major parties would field a candidate if Keynes chose to stand. Keynes declined the invitation as he felt he would wield greater influence on events if he remained a free agent.
Keynes was a proponent of eugenics. He served as director of the Galton Institute, British Eugenics Society from 1937 to 1944. As late as 1946, shortly before his death, Keynes declared eugenics to be "the most important, significant and, I would add, genuine branch of sociology which exists."
Keynes once remarked that "the youth had no religion save communism and this was worse than nothing." Marxism "was founded upon nothing better than a misunderstanding of David Ricardo, Ricardo", and, given time, he (Keynes) "would deal thoroughly with the Marxists" and other economists to solve the economic problems their theories "threaten to cause".
In 1931 Keynes had the following to say on Leninism:
Keynes was a firm supporter of women's rights and in 1932 became vice-chairman of the MSI Reproductive Choices, Marie Stopes Society which provided birth control education. He also campaigned against job discrimination against women and unequal pay. He was an outspoken campaigner for reform of the LGBT movements, laws against homosexuality.
Heraldic arms
Death
Throughout his life, Keynes worked energetically for the benefit both of the public and his friends; even when his health was poor, he laboured to sort out the finances of his old college. Helping to set up the Bretton Woods system, he worked to institute an international monetary system that would be beneficial for the world economy. In 1946, Keynes suffered a series of heart attacks, which ultimately proved fatal. They began during negotiations for the Anglo-American loan in Savannah, Georgia, where he was trying to secure favourable terms for the United Kingdom from the United States, a process he described as "absolute hell". A few weeks after returning from the United States, Keynes died of a heart attack at Tilton, his farmhouse home near Firle, East Sussex, England, on 21 April 1946, at the age of 62. Against his wishes (he wanted his ashes to be deposited in the crypt at King's), his ashes were scattered on the Downs above Tilton.
Both of Keynes's parents outlived him: his father John Neville Keynes
John Neville Keynes ( ; 31 August 1852 – 15 November 1949) was a British economist and father of John Maynard Keynes.
Biography
Born in Salisbury, Wiltshire, Keynes was the child of John Keynes (1805–1878) and his wife Anna Maynard Neville ...
(1852–1949) by three years, and his mother Florence Ada Keynes (1861–1958) by twelve. Keynes's brother Sir Geoffrey Keynes
Sir Geoffrey Langdon Keynes ( ; 25 March 1887, Cambridge – 5 July 1982, Cambridge) was a British surgeon and author. He began his career as a physician in World War I, before becoming a doctor at St Bartholomew's Hospital in London, where h ...
(1887–1982) was a distinguished surgeon, scholar and bibliophile. His nephews include Richard Keynes (1919–2010), a physiologist, and Quentin Keynes (1921–2003), an adventurer and bibliophile. Keynes had no children; his widow, Lydia Lopokova, died in 1981.
Cultural representations
In John Buchan's novel The Island of Sheep, ''Island of Sheep'' (1936) the character of the financier Barralty is based on Keynes.
In the film Wittgenstein (film), ''Wittgenstein'' (1993), directed by Derek Jarman, Keynes was played by John Quentin.
The docudrama ''Paris 1919'', based around Peacemakers (book), Margaret MacMillan's book, featured Paul Bandey as Keynes.
In the BBC series about the Bloomsbury Group, ''Life in Squares'', Keynes was portrayed by Edmund Kingsley.
The novel ''Mr Keynes' Revolution'' (2020) by E. J. Barnes is about Keynes's life in the 1920s.
''Love Letters'', based on the correspondence of Keynes and Lydia Lopokova, was performed by Tobias Menzies and Helena Bonham Carter, Helena Bonham-Carter at Charleston Farmhouse, Charleston in 2021.
Publications
Books
* 1913 ''Indian Currency and Finance''
* 1919 '' The Economic Consequences of the Peace''
* 1921 '' A Treatise on Probability''
* 1922 ''Revision of the Treaty''
* 1923 ''A Tract on Monetary Reform''
* 1926 ''The End of Laissez-Faire''
* 1930 ''A Treatise on Money''
* 1931 ''Essays in Persuasion''
* 1936 ''The General Theory of Employment, Interest and Money
''The General Theory of Employment, Interest and Money'' is a book by English economist John Maynard Keynes published in February 1936. It caused a profound shift in economic thought, giving macroeconomics a central place in economic theory and ...
''
* 1940 ''How to Pay for the War, How to Pay for the War: A radical plan for the Chancellor of the Exchequer''
* 1949 ''Two Memoirs''. Ed. by David Garnett (On Carl Melchior and G. E. Moore
George Edward Moore (4 November 1873 – 24 October 1958) was an English philosopher, who with Bertrand Russell, Ludwig Wittgenstein and earlier Gottlob Frege was among the founders of analytic philosophy. He and Russell led the turn from ideal ...
.)
Articles and pamphlets
(A partial list.)
* 1915 ''The Economics of War in Germany''
* 1922 ''Inflation as a Method of Taxation''
* 1925 ''Am I a Liberal?''
* 1926 ''Laissez-Faire and Communism''
* 1929 ''Can Lloyd George Do It?''
* 1930 ''Economic Possibilities for our Grandchildren''
* 1931 ''The End of the Gold Standard'' (Sunday Express)
* 1931 ''The Great Slump of 1930''
* 1933 ''The Means to Prosperity''
* 1933 ''An Open Letter to President Roosevelt'' (New York Times)
* 1933 ''Essays in Biography''
* 1937 ''The General Theory of Employment''
See also
*
*
*
*
*
*
*
*
*
References
Notes and citations
Sources
* Roger Backhouse (economist), Backhouse, Roger E. and Bateman, Bradley W.. ''Capitalist Revolutionary: John Maynard Keynes''. 2011
* Barnett, Vincent. ''John Maynard Keynes''. London: Routledge, 2013. .
* Beaudreau, Bernard C.. ''The Economic Consequences of Mr. Keynes: How the Second Industrial Revolution Passed Great Britain By''. iUniverse, 2006,
* Clarke, Peter. ''Keynes: The Twentieth Century's Most Influential Economist''. Bloomsbury, 2009,
* Clarke, Peter. ''Keynes: The Rise, Fall and Return of the 20th Century's Most Influential Economist'', Bloomsbury Press, 2009
*
* Donald Markwell, Markwell, Donald. ''John Maynard Keynes and International Relations: Economic Paths to War and Peace''. Oxford University Press, 2006. . .
* Donald Markwell, Markwell, Donald
''Keynes and Australia''
. Reserve Bank of Australia, 2000.
* Milo Keynes, Keynes, Milo (ed). ''Essays on John Maynard Keynes''. Cambridge University Press, 1975. .
* Moggridge, Donald Edward. ''Keynes''. Macmillan, 1980. .
* Don Patinkin, Patinkin, Don. "Keynes, John Maynard." In: ''New Palgrave: A Dictionary of Economics, The New Palgrave: A Dictionary of Economics, Vol. 2.'' Macmillan, 1987, pp. 19–41. . .
* Schuker, Stephen A. "American 'Reparations' to Germany, 1919–33." ''Princeton Studies in International Finance'', No. 61, 1988.
* Schuker, Stephen A. "J.M. Keynes and the Personal Politics of Reparations." ''Diplomacy & Statecraft'', Vol. 25, Nos. 3/4, 2014. .
*
*
*
*
*
*
*
* Blaug, Mark
"Recent Biographies of Keynes."
''Journal of Economic Literature'', vol. 32, no. 3, September 1994, pp. 1204–1215. .
* James M. Buchanan, Buchanan, James M. and Richard E. Wagner
''Democracy in Deficit: The Political Legacy of Lord Keynes.'' The Collected Works of James M. Buchanan, Vol. 8.
Indianapolis: Liberty Fund, 2008.
* Clarke, Peter. ''Keynes: The Rise, Fall and Return of the 20th Century's Most Influential Economist''. Bloomsbury Press, 2009.
* Paul Davidson (economist), Davidson, Paul. ''John Maynard Keynes'' (Great Thinkers in Economics). New York: Palgrave Macmillan, 2007. .
*
* Dimand, Robert W. and Harald Hagemann, eds. ''The Elgar Companion to John Maynard Keynes'' (Edward Elgar, 20190 + 670 pp
online review
* Harrod, R. F.. ''The Life of John Maynard Keynes''. Macmillan, 1951. .
*
*
* Robert Skidelsky, Skidelsky, Robert. ''John Maynard Keynes: 1883-1946: Economist, Philosopher, Statesman.'' (2005)
** Robert Skidelsky, Skidelsky, Robert. ''John Maynard Keynes, Vol. 1: Hopes Betrayed, 1883-1920.'' (1986)
** Robert Skidelsky, Skidelsky, Robert. ''John Maynard Keynes: Volume 2: The Economist as Savior, 1920–1937'' (1994)
** Robert Skidelsky, Skidelsky, Robert. ''John Maynard Keynes, Vol. 3: Fighting for Freedom, 1937–1946''.
*
* Peter Temin, Temin, Peter, and David Vines. ''Keynes: Useful Economics for the World Economy''. MIT Press, 2014.
* Nicholas Wapshott, Wapshott, Nicholas. ''Keynes Hayek: The Clash That Defined Modern Economics'' (2011)
Primary sources
*
External links
Professor Robert Skidelsky explains Keynes theories video
Professor Robert Skidelsky on economist Keynes video
Churchill, Keynes & The Gold Standard – UK Parliament Living Heritage
Correspondence with John Maynard, Baron Keynes, four volumes held at The British Library
Treaty of Versailles & Keynes – UK Parliament Living Heritage
*
*
*
*
*
John Maynard Keynes
on Google Scholar
Keynes, ''The Economic Consequences of the Peace''
(1919)
(1926)
(1930)
(1933)
(1933)
(1933)
Keynes, ''The General Theory of Employment, Interest and Money''
(1936)
*
''Interactive E-Book John Maynard Keynes: The Lives of a Mind''
(2016)
The Keynes Centre at University College Cork
{{DEFAULTSORT:Keynes, John Maynard
John Maynard Keynes,
1883 births
1946 deaths
20th-century British economists
Academics of the University of Cambridge
Alumni of King's College, Cambridge
LGBT peers
British bibliophiles
Bisexual men
Bisexual writers
Bisexual scientists
Bloomsbury Group
Bretton Woods Conference delegates
British Empire in World War II
British Zionists
Cambridge University Moral Sciences Club
Companions of the Order of the Bath
Chatham House people
Cultural critics
English atheists
English agnostics
English art collectors
English eugenicists
English farmers
English investors
English philanthropists
British conscientious objectors
British social liberals
Economics journal editors
English stock traders
Fellows of the British Academy
Fellows of King's College, Cambridge
Fellows of the Econometric Society
Historians of economic thought
Keynes family, John Maynard
Keynesian economics
Keynesians,
LGBT politicians from England
LGBT scientists from the United Kingdom
LGBT writers from England
Liberal Party (UK) hereditary peers
Political realists
People educated at Eton College
People educated at St Faith's School
Presidents of the Econometric Society
Presidents of the Cambridge Union
Probability theorists
Social critics
Bisexual academics
20th-century English philosophers
Members of the Inner Temple
People from Firle
Barons created by George VI
Virtue ethicists
20th-century English businesspeople
LGBT philosophers