John Maynard Keynes 1883-1946
Keynes is considered one of the foremost economists of all time. His The General Theory of Employment, Interest and Money transformed the course of economic thought with its controversial interpretation of the causes of unemployment and prescriptions for its remedy. The impact of this book on twentieth-century economic history—known as the Keynesian Revolution—has been profound, encompassing economic method, theory, and policy.
Born and raised in Cambridge, England, Keynes grew up in an atmosphere that fostered intellectual achievement. His father, John Neville Keynes, was a noted logician, economist, and a registrar at Cambridge University, while his mother, Florence Ada Keynes, was a writer and social welfare advocate as well as the first woman mayor of Cambridge. Keynes attended Eton from 1897 until 1902 and then entered King's College, Cambridge, on a scholarship in mathematics and the classics. During his freshman year at Cambridge, Keynes was invited to join an intellectual group called "The Apostles" that met periodically to discuss literary, philosophical, political, and aesthetic questions. Among the members of the Apostles were Leonard and Virginia Woolf, Lytton Strachey, E. M. Forster, and Bertrand Russell, all of whom would later become leaders of the exclusive circle of intellectuals and artists known as the Bloomsbury Group. Through his association with the Apostles, Keynes became introduced to the philosophy of G. E. Moore; critics note the pervasive influence of Moore's Principia Ethica on Keynes's A Treatise on Probability, his only philosophical work, as well as on his economic methodology. After graduating from Cambridge with a master's degree in mathematics, Keynes studied economics for a year in preparation for a civil service examination. In 1906 he was assigned by the British government to the India Office; the knowledge he gained there formed the basis of his first book, Indian Currency and Finance. Keynes resigned from the India Office in 1908 to join the economics faculty at Cambridge. He taught at Cambridge until 1915, when he returned to government service as a Treasury official. By the end of World War I, Keynes had risen to a prominent position in the Treasury and was responsible for managing foreign-exchange arrangements. Although he seemed destined for great success as a public official, Keynes's trip to the Paris Peace Conference as economic adviser to Prime Minister Lloyd George caused his career to change directions once again. Appalled by the political maneuverings of the conference and convinced that the reparations policies imposed upon Germany were excessive, Keynes resigned from his Treasury post. Shortly after, he published a stinging indictment of the Versailles Treaty, The Economic Consequences of the Peace, which provoked international controversy and made Keynes famous. During the 1920s, Keynes resumed his teaching duties at Cambridge, pursued an active business life in London as a financial consultant and insurance company executive, and was named bursar at King's College. Around the middle of the decade, Keynes became convinced that he needed to develop a strong theoretical foundation to support his belief that public expenditures would be useful in lowering unemployment. This conclusion became the impetus for A Treatise on Money and the General Theory. By the time the General Theory appeared, politicians and economists all over the world were searching for a way to reverse one of the longest depressions in economic history; orthodox, or classical, economic policy, which held that prosperity would return if prices and wages were lowered, was not promoting recovery anywhere. Keynes's General Theory was quickly accepted by many economists as an answer to the world's economic tragedies, and when Keynesian fiscal measures began to produce the desired results, he became widely viewed as the savior of capitalism. The General Theory also influenced economic thinking on how World War II should be financed. When the war commenced, Keynes returned to the British Treasury and was consulted on all important questions regarding the economic management of the conflict. He was a principal negotiator at the Bretton Woods Conference in 1944, where he played a significant role in the inauguration of the International Monetary Fund and the World Bank. His last major public service was his negotiation in 1945 of a multi-billion-dollar U.S. loan to England. He died of a heart attack on April 21, 1946, shortly after returning from an economic conference in Savannah, Georgia.
The revolutionary content of Keynes's economic theory, the bulk of which is contained in A Treatise on Money, the General Theory, and, to a lesser extent, A Tract on Monetary Reform, developed out of his active involvement in England's economic problems during the 1920s and 1930s. During the 1920s, he advocated economic policies, either in an official capacity or as an independent expert, that he arrived at largely by intuition. In The End of Laissez-Faire and Can Lloyd George Do It?, he recommended a government-sponsored program of public works to get the unemployed off welfare, but these works lacked a theoretical foundation, and A Tract on Monetary Reform, which also suggested that government intervention could curb unemployment, was unsuccessful at refuting the classical argument, or so-called "Treasury view," that government spending financed by loans would cause inflation or crowd out private investment. In A Treatise on Money and the General Theory, Keynes sought to establish a firm theoretical basis that would explain the reasoning behind his policy proposals. In A Treatise on Money, he attempted to replace the classical explanation of money and its function in the economy, known as the quantity theory of money, with a more dynamic model that related booms and slumps to oscillations in the credit cycle and that described the causal processes by which the price level is determined. It was not until he began composing the General Theory, however, that Keynes was able to completely break away from the quantity theory of money. When the General Theory was published, it was viewed as a powerful challenge to orthodox economic theory, which held that a decrease in the wage level would stimulate employment because firms would take on more labor at a lower price, and that the interest rate would always adjust in such a manner as to prevent variations in savings and investment from causing any change in spending. Keynes declared this theory nonsense, tracing the origins of unemployment not to excessively high wages but to the total purchasing power in the economy, or aggregate demand. While classical economists focused on the individual firm or household, Keynes looked at output and employment as a whole. He maintained that a decrease in wages would not stimulate employment because it would lower the overall demand for goods and services, thereby causing prices to drop. He also contended that the classical economists erred in thinking that savings would always be equal to investment, arguing that there are times when savers wish to save more than investors are willing to invest, causing part of output to go unsold and leading producers to cut back on employees. Keynes placed great emphasis on the idea that private investment was a function not only of interest rates but also of expectations about costs and demand for products in the future. He was skeptical that monetary policy in the form of lower interest rates would provide a sufficient stimulus to business investment in times of severe economic depression to bring the economy back up to a level of full employment. He therefore proposed that fiscal measures such as public works or subsidies to afflicted groups were the only possible correctives to prolonged unemployment.
On January 1, 1935, during the course of writing the General Theory, Keynes wrote to George Bernard Shaw: "I believe myself to be writing a book on economic theory which will largely revolutionise—not I suppose at once but in the course of the next ten years—the way the world thinks about economic problems." Keynes's prophecy proved accurate. Quickly after the publication of the General Theory, governments everywhere began adopting policies advocated by Keynes or associated with his name, a trend that continued for over thirty years. By the late 1940s, his theories had been incorporated into textbooks in the United States and England, and millions of students were introduced to the idea of national income accounting. Keynes was not without his critics, however. While many scholars attributed the economic prosperity experienced after World War II to the adoption of Keynesian policies, some insisted that it was the result of other factors, such as rearmament in Europe and the United States after the outbreak of the Korean War, improved international economic relations, and new technology that stimulated large amounts of private investment. Keynes was also attacked by hard-line communists, who argued that the General Theory was an attempt to save capitalism with remedies he knew to be ineffective. In the 1970s, with the onset of rising inflation and unemployment, the popularity of Keynes's ideas plummeted. Many economists traced the weakening of private investment to growing budget deficits and maintained that inflation was the result of the Keynesian policy of high employment, which had caused too great an increase in wages. Today, Keynes's policies remain in a state of official disfavor, but there are large numbers of economists who contend that the world's current economic problems are the result of the pursuit of anti-Keynesian ideas. The dispute over the validity of Keynes's ideas has taken shape in a vast amount of literature written by professional and academic economists. Immediately after the publication of the General Theory, classical economists sought to dispel the notion that Keynes was proposing a drastic change in economic thought by arguing that Keynes's ideas were a special case of orthodox equilibrium theory. In the ensuing years, additional attempts have been made to reconcile classical economic theory with the existence of involuntary employment, further undermining the revolutionary content of the General Theory. Other economists, and a large number of socialists, have read the General Theory as a radical threat to the capitalist system. These conflicting interpretations have resulted in large part from the vagueness and incomprehensibility of certain parts of the General Theory, which has allowed scholars to conjecture what Keynes meant to be saying. Among the most common types of studies on Keynes are expositions of specific aspects of his theory, such as investment, savings, consumption, and interest; analyses of the development of his economic thought, primarily as revealed in A Tract on Monetary Reform, A Treatise on Money, and the General Theory; examinations of the relationship between his theories and his policy proposals; and studies attempting to establish the difference between Keynes's own ideas and the various schools of Keynesian thought his works have inspired. The publication of Keynes's collected works by the Royal Economic Society and the centenary of his birth in 1983 prompted countless reassessments that further added to the growing literature on Keynes. In recent years, scholars have placed greater emphasis on Keynes's philosophical beliefs as expressed in A Treatise on Probability, studying the moral underpinnings of his economic method and tracing his theory of investment expectations to his ideas on probability and induction. As many of Keynes's critics point out, the passionate controversy he has inspired is evidence of the depth and range of his ideas. In the minds of most scholars, this fertility of thought, combined with his enormous influence on economic theory and policy, justifies his reputation as the twentieth-century's most important economist.