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'John Maynard Keynes, 1st Baron Keynes',
CB (pronounced "cains",
IPA ) (
5 June 1883 –
21 April 1946) was a
British economist whose ideas, called
Keynesian economics, had a major impact on modern economic and political theory as well as on many governments' fiscal policies. He advocated
interventionist government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of economic
recessions,
depressions and
booms. These monetary measures have led to inflation of the money supply. Economists consider him one of the main founders of modern theoretical
macroeconomics. His expression "In the long run, we are all dead" is much quoted.
Biography
Personal and marital life
Born at 6 Harvey Road,
Cambridge, John Maynard Keynes was the son of
John Neville Keynes, an economics lecturer at
Cambridge University, and
Florence Ada Brown, a successful author and a social reformist. His younger brother
Geoffrey Keynes (1887–1982) was a surgeon and
bibliophile and his younger sister Margaret (1890–1974) married the Nobel-prize-winning physiologist
Archibald Hill.
Keynes was very tall at .
In 1918, Keynes met
Lydia Lopokova, a well-known
Russian
ballerina, and they married in
1925. By most accounts, the marriage was a happy one. Before meeting Lopokova, Keynes's love interests had been men, including a relationship with the artist
Duncan Grant and with the writer
Lytton Strachey. For medical reasons, Keynes and Lopokova were unable to have children, though both his siblings had children of note.
Keynes was ultimately a successful
investor, building up a substantial private fortune. He was nearly wiped out following the
Stock Market Crash of
1929, but he soon recouped his fortune. He enjoyed collecting books: for example, he collected and protected many of
Isaac Newton's papers. He was interested in literature in general and drama in particular and supported the
Cambridge Arts Theatre financially, which allowed the institution to become, at least for a while, a major British stage outside of London.
Bertrand Russell named Keynes as the most intelligent person he had ever known, commenting, "Every time I argued with Keynes, I felt that I took my life in my hands, and I seldom emerged without feeling something of a
fool." Keynes also famously commented to his wife that he "had met God on the 5:15 train" when he received Russell's protege
Ludwig Wittgenstein on behalf of Cambridge.
Education
Keynes enjoyed an elite early education at
Eton, where he displayed talent in a wide range of subjects; particularly mathematics, classics and history. His abilities were remarkable for their sheer diversity. He entered
King’s College, Cambridge, in 1902, to study
mathematics, but his interest in politics led him towards the field of
economics, which he studied at Cambridge under
A.C. Pigou and
Alfred Marshall. Marshall is believed to have prompted Keynes's shift in interest from mathematics and classics to economics. Keynes received his B.A. in 1905 and his M.A. in 1908
Career
Keynes accepted a lectureship at Cambridge in economics funded personally by
Alfred Marshall, from which position he began to build his reputation. Soon he was appointed to the Royal Commission on Indian Currency and Finance, where he showed his considerable talent at applying economic theory to practical problems.
His expertise was in demand during the First World War. He worked for the Adviser to the Chancellor of the Exchequer and to the Treasury on Financial and Economic Questions. 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.
At this latter endeavor Keynes’ “nerve and mastery became legendary,†in the words of
Robert Lekachman, as in the case where he managed to put together — with difficulty — a small supply of Spanish
pesetas and sold them all to break the market: it worked, and pesetas became much less scarce and expensive. These accomplishments led eventually to the appointment that would have a huge effect on Keynes’ life and career: financial representative for the Treasury to the 1919 Paris Peace Conference.
Keynes' career lifted off as an adviser to the
British finance department from 1915 – 1919 during
World War I, and their representative at the
Versailles peace conference in 1919. His observations appeared in the highly influential book
The Economic Consequences of the Peace in 1919, followed by ''
A Revision of the Treaty'' in 1922. Using statistics provided to him by the German delegation, he argued that the reparations which
Germany was forced to pay to the victors in the war were too large, would lead to the ruin of the German economy and result in further conflict in Europe. These predictions were borne out when the German economy suffered in the
hyperinflation of 1923. Only a fraction of reparations were ever paid.
Keynes published his ''
Treatise on Probability'' in 1921, a notable contribution to the philosophical and mathematical underpinnings of
probability theory, championing the important view that ''probabilities'' were no more or less than truth values intermediate between simple truth and falsity. He attacked the deflation policies of the 1920s with ''
A Tract on Monetary Reform'' in 1923, a trenchant argument that countries should target stability of domestic prices and proposing flexible exchange rates. The ''
Treatise on Money'' (1930) (2 volumes) effectively set out his
Wicksellian theory of the credit cycle.
As Keynes recognizes in his
magnum opus which was published in 1936, the ''
General Theory of Employment, Interest and Money'', his efforts challenged the
economic paradigm. In the foreword to the German edition of the General Theory ,
[1] Keynes states that "the theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire."
In this book Keynes put forward a theory based upon the notion of
aggregate demand to explain variations in the overall level of economic activity, such as were observed in the
Great Depression. The total income in a society is defined by the sum of consumption and investment; and in a state of unemployment and unused production capacity, one can ''only'' enhance employment and total income by ''first'' increasing expenditures for either consumption or investment. The book was indexed by Keynes's student, later the economist
David Bensusan-Butt.
The total amount of saving in a society is determined by the total income and thus, the economy could achieve an increase of total saving, even if the interest rates were lowered to increase the expenditures for investment. The book advocated activist economic policy by government to stimulate demand in times of high
unemployment, for example by spending on public works. The book is often viewed as the foundation of modern
macroeconomics. Historians agree that Keynes influenced U.S. president
Roosevelt's New Deal, but disagree as to what extent. Deficit spending of the sort the New Deal began in 1938 had previously been called "pump priming" and had been endorsed by President
Herbert Hoover. Few senior economists in the U.S. agreed with Keynes in the 1930s. With time, however, his ideas became more widely accepted.
[2]
In 1942, Keynes was a highly recognized economist and was raised to the
House of Lords as 'Baron Keynes', of Tilton in the County of Sussex, where he sat on the
Liberal benches. During
World War II, Keynes argued in ''
How to Pay for the War'' that the war effort should be largely financed by higher
taxation, rather than
deficit spending, in order to avoid
inflation. As Allied victory began to look certain, Keynes was heavily involved, as leader of the British delegation and chairman of the
World Bank commission, in the 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, involving a world
central bank, the
Bancor, responsible for a common world unit of currency. The USA's greater negotiating strength, however, meant that the final outcomes accorded more closely to the less radical plans of
Harry Dexter White.
Keynes wrote ''
Essays in Biography'' and ''
Essays in Persuasion'', the former giving portraits of economists and notables, whilst the latter presents some of Keynes' attempts to influence
decision-makers during the
Great Depression. Keynes was editor in chief for the
Economic journal from 1912. He was also a member of the
Liberal Party.
Main contributions to economic thought
In his ''
magnum opus'', ''
The General Theory of Employment, Interest, and Money'', Keynes laid the foundation for the branch of economics termed "
Macroeconomics" today. Based on the methods devised by
Alfred Marshall, he argued that macroeconomic relationships differ from their microeconomic counterparts because the
ceteris paribus clauses applicable to different levels of
aggregation differ. The view of given prices and wages income determines demand (see
IS-LM), pre-dates Keynes. His innovation is to take, in his core argument, prices and wages as perfectly flexible and establish that the interaction of "aggregate demand" (in his sense) and "aggregate supply" (in his sense) may lead to stable unemployment equilibria. His work on employment went against the idea that the market ultimately settles at a state of full employment - a central tenet of Classical economists. Instead he argued that there exists a continuum of equilibria, the full employment equilibrium position being just one of them.(This idea underlies the choice of the title "General Theory": the classical theory being just a special case.)
His main contribution can be seen in establishing an approach to macroeconomics that maintains its relationship to the underlying microeconomic behaviours, but assumes a form qualitatively different from microeconomic models. (This contrasts with the assumption made in
New Classical Economics where macro relationships are modelled analogously to micro-relationships, →
Robert Lucas, Jr.). He maintained, however, many factually doubtful assumptions of standard theory. He assumed for instance that (marginal) labour productivity decreases with expanding employment. This is incompatible with the empirical findings summarized in
Okun's Law. He combined this position with the
marginal productivity theory of wages, implying that real wages decrease with increasing employment. This is empirically incorrect, as has been pointed out by the economist Dunlop, and the criticism has readily been accepted by Keynes. Further, Keynes suggested in the General Theory that inflation would occur only near "full employment" (in his sense), but it has been observed in many cases that inflation creeps up in states of severe underemployment (
Stagflation). The assumption entertained by Keynes that inflation can only occur near full employment is still maintained in modern macroeconomics (→
NAIRU). Keynes held that the cause of unemployment is a too high rate of savings, or insufficient investment expenditure. He conjectured that the amount of labour supplied is different when the decrease in real wages is due to a decrease in the money wage, than when it is due to an increase in the price level, assuming money wages stay constant. This conjecture relates to the "actual attitudes of workers" and is "not theoretically fundamental," although the
New Keynesian economics emphasizes this point.
In his ''Theory of Money'', Keynes said that savings and investment were independently determined. The amount saved had little to do with variations in interest rates which in turn had little to do with how much was invested. Keynes thought that changes in saving depended on the changes in the predisposition to consume which resulted from marginal, incremental changes to income. Therefore, investment was determined by the relationship between expected rates of return on investment and the rate of interest.
In 1944,
Mount Washington Hotel hosted the
United Nations Monetary and Financial Conference also known as the Bretton Woods International Monetary Conference. Delegates from 44 nations convened, establishing the
World Bank and
International Monetary Fund, setting the
gold exchange standard at $35.00 an ounce and designating the
United States dollar as the backbone of international exchange. Keynes was leader of the British delegation. The signing of the formal documents took place in the Gold Room, located off the Hotel Lobby and now preserved as an historic site, creating the
Bretton Woods system. This system partly ended with the
Nixon Shock.
Keynes vs. Hayek
Keynes had a fearsome reputation as a talented debater and
Friedrich von Hayek refused to discuss economics matters in person with him on several occasions. (However, this repeated refusal came after Hayek had extensively critiqued Keynes's 1930 ''
Treatise on Money'',
[3] only to have Keynes assert that the ''Treatise'' no longer reflected his thinking.) However, after reading Hayek's ''
The Road to Serfdom'' Keynes said, "In my opinion it is a grand book ... Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement." Keynes was known, however, to open his letters with such complimentary language. He concluded the same letter with the prophecy, "What we need therefore, in my opinion, is not a change in our economic programmes, which would only lead in practice to disillusion with the results of your philosophy; but perhaps even the contrary, namely, an enlargement of them. Your greatest danger is the probable practical failure of the application of your philosophy in the United States."
[4] Hayek explained the first section of the letter saying that this is "because
Keynes believed that he was fundamentally still a classical English liberal and wasn't quite aware of how far he had moved away from it. His basic ideas were still those of individual freedom. He did not think systematically enough to see the conflicts."
[5]
Arts Council of Great Britain
Keynes' personal interest in Classical Opera and Dance focused on his support of the Royal Opera House, Covent Garden and the Ballet Company at
Sadlers Wells. During the War as a member of CEMA 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 the founding Chairman in
1946. Unsurprisingly from the start the two organisations that received the largest grant from the new body were the Royal Opera House and Sadlers Wells.
Death
Keynes died of
myocardial infarction at his vacation home in
Tilton, East Sussex., his heart problems being aggravated by the strain of working on post-war international financial problems. He died soon after he arranged a guarantee of an American Loan to Great Britain. Keynes' father,
John Neville Keynes (1852 – 1949) outlived his son by three years. Keynes' brother Sir
Geoffrey Keynes (1887 – 1982) was a distinguished
surgeon,
scholar and
bibliophile. His nephews include
Richard Keynes (born 1919) a
physiologist; and
Quentin Keynes (1921 – 2003) an adventurer and
bibliophile.
Bibliography
★ Essays in Persuasion
★ A Treatise On Probability
★ Tract on Monetary Reform
★
The General Theory of Employment, Interest, and Money
★ The Economic Consequences of the Peace
Influences on Keynes' works
★
Knut Wicksell
★
Arthur C. Pigou
★
Alfred Marshall
★
Adam Smith
★
David Ricardo
★
Dennis Robertson
★
Karl Marx
★
Thomas Malthus
★
Michal Kalecki
Keynes' influence
Keynes' theories were so influential, even when disputed, that a subfield of
Macroeconomics called
Keynesian economics is further developing and discussing his theories and their applications. John Maynard Keynes had several cultural interests and was a central figure in the so-called
Bloomsbury group, consisting of prominent artists and authors in Britain. His
autobiographical essays ''Two Memoirs'' appeared in 1949.
Critique
★ While
Milton Friedman describes ''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.
[Milton Friedman, ''John Maynard Keynes'', Federal Reserve Bank of Richmond ''Economic Quarterly'' Volume 83/2, Spring 1997]. He and other monetarists have consequently argued that
Keynesian economics can result in
stagflation, the combination of low growth and high inflation that developed economies suffered in the early 1970s. More to Friedman's taste was the 1923
Tract on Monetary Reform, which he regarded as Keynes's best work because of its focus on maintaining domestic price stability.
★ Friedrich von Hayek reviewed the Treatise on Money so harshly that Keynes decided to set Piero Sraffa to review (and condemn no less harshly) Hayek's own competing work. The Keynes-Hayek conflict was but one battle in the Cambridge-LSE war. Hayek also felt that application of Keynes policies gives too much power to the state and leads to socialism.[6]
★ Ludwig von Mises
★ Paul Mattick
★ Murray Rothbard's essay ''Keynes, the Man''[2], a scathing attack on both Keynes' economic theories and personage. Rothbard criticized Keynesian Economics as being "old discredited Mercantilism fallacies dressed up by Keynes in a wilderness of unclear writing and pretentious jargon."
★ Rational expectations
★ Henry Hazlitt has written a book entitled ''The Failure of the New Economics'', a detailed chapter-by-chapter critique of Keynes' "General Theory" [3]
★ Roger W. Garrison author of ''Time and Money: The Macroeconomics of Capital Structure'' and other works
★ The Crisis of Keynesian Economics A Marxist View by Geoffrey Pilling
★ Winston Churchill was quoted as saying: "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions."
See also
★ Keynesian economics or Keynesianism
★ MichaÅ‚ Kalecki
★ Simon Kuznets
★ Paul Samuelson
★ John Hicks
★ John Kenneth Galbraith
★ G.L.S. Shackle
★ Silvio Gesell
External links
★
★ Bio, bibliography, and links
★
★ The Keynesian Revolution
★ Bio at Time 100 - the most important people of the century
★ John Maynard Keynes, ''The Economic Consequences of the Peace'' (1919)
★ John Maynard Keynes, ''The end of laissez-faire'' (1926)
★ John Maynard Keynes, ''An Open Letter to President Roosevelt'' (1933)
★ John Maynard Keynes, ''The General Theory of Employment, Interest and Money'' (1936)
★ Eton College Keynes (Economics) Society
★ Biography resources dedicated to John Maynard Keynes
★ Short bio with birth location
★ Escoffier, Jeffrey. "Keynes, John Maynard." In Glbtq: An Encyclopedia of Gay, Lesbian, Bisexual, Transgender, and Queer Culture. glbtq, Inc.: Chicago, 2004.
★ ''Essays on John Maynard Keynes and Robert Lekachman '' by Reuben L. Norman Jr., Ph.D. ( 1998-2007 )
★ Smith, Marx, Kondratieff and Keynes: Their Intellectual Life Spans, the Convergence of their Theories based upon the Long Wave Hypothesis and the Internet'' by Reuben L. Norman Jr., Ph.D. ( June 6, 1998 )
★ Keynes's Career and Biographical Timeline
References
★ ''The Economic Consequences of Mr. Keynes: How the Second Industrial Revolution Passed Great Britain By'', Bernard C. Beaudreau, iUniverse, 2006, ISBN 0-595-41661-6
★ ''Essays on John Maynard Keynes'', Milo Keynes (Editor), Cambridge University Press, 1975, ISBN 0-521-20534-4
★ ''The Life of John Maynard Keynes'', R. F. Harrod, London, Macmillan, 1951, ISBN 1-12-539598-2
★ "Keynes, John Maynard," Don Patinkin, ''The '', v. 2, 1987, pp. 19-41. Macmillan ISBN 0-333-37235-2 (US Edition: ISBN 0-935859-10-1)
★ ''John Maynard Keynes: Hopes Betrayed 1883-1920'', Robert Skidelsky, Papermac, 1992, ISBN 0-333-57379-X (US Edition: ISBN 0-14-023554-X)
★ ''John Maynard Keynes: The Economist as Saviour 1920-1937'', Robert Skidelsky, Papermac, 1994, ISBN 0-333-58499-6 (US Edition: ISBN 0-14-023806-9)
★ ''The Commanding Heights: The Battle for the World Economy'', Daniel Yergin with Joseph Stanislaw, New York: Simon & Schuster, 1998, ISBN 0-684-82975-4
★ ''John Maynard Keynes: Fighting for Britain 1937-1946'' (published in the United States as ''Fighting for Freedom''), Robert Skidelsky, Papermac, 2001, ISBN 0-333-77971-1 (US Edition: ISBN 0-14-200167-8)
★ ''Lytton Strachey'', Michael Holroyd, 1995, ISBN 0-393-32719-1
Citations
1. Keynes, John Maynard. Foreword to the General Theory. Foreword to the German Edition/Vorwort Zur Deutschen Ausgabe [[1]]
2. Mr Keynes Has A Plan, , Kingsley, Martin, Picture Post, 1940
3. Hayek, Friedrick August von. “Reflections on the Pure Theory of Money of Mr. J.M. Keynesâ€, ''Economica'' #11 (August 1931) & #35 (February 1932)
4. [Hoover, Kenneth R. ''Economics as Ideology''. Rowman and Littlefield Publishers(2003) p. 152 ISBN 0742531139]
5. Reason Magazine, ''The Road to Serfdom, Foreseeing the Fall''. F.A. Hayek interviewed by Thomas W. Hazlett
6. Robert Dransfield, Don Dransfield, '' Key Ideas in Economics'', Nelson Thornes (2003), ISBN 074877081X p.81
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