John Maynard Keynes
Keynes was a British economist and one of the most influential of the 20th century.
John Maynard Keynes was born on 5 June 1883 in Cambridge into a well-to-do academic family. His father was an economist and a philosopher, his mother became the town’s first female mayor. He excelled academically at Eton as well as Cambridge University, where he studied mathematics. After going to work in the India Office, in 1908, he quit the civil service and returned to Cambridge. Following the outbreak of World War One, Keynes joined the treasury, and in the wake of the Versailles peace treaty, he published ‘The Economic Consequences of the Peace’ in which he criticised the exorbitant war reparations demanded from a defeated Germany and prophetically predicted that it would foster a desire for revenge among Germans. This best-selling book made him world famous.
During the inter-war years, Keynes amassed a considerable personal fortune from the financial markets and, as bursar of King’s College, greatly improved the college’s financial position. He became a prominent arts patron and board member of a number of companies. In 1926, he married Lydia Lopokova, a Russian ballerina.
Keynes’ best-known work, ‘The General Theory of Employment, Interest and Money’, was published in 1936, and became a benchmark for future economic thought.
Keynes’s General Theory revolutionized the way economists think about economics. It was pathbreaking in several ways, in particular because it introduced the notion of aggregate demand as the sum of consumption, investment, and government spending; and because it showed (or purported to show) that full employment could be maintained only with the help of government spending. Economists still argue about what Keynes thought caused high unemployment. Some think he attributed it to wages that take a long time to fall. But Keynes actually wanted wages not to fall, and in fact advocated in the General Theory that wages be kept stable. A general cut in wages, he argued, would decrease income, consumption, and aggregate demand. This would offset any benefits to output that the lower price of labor might have contributed.
Why shouldn’t government, thought Keynes, fill the shoes of business by investing in public works and hiring the unemployed? The General Theory advocated deficit spending during economic downturns to maintain full employment. Keynes’s conclusion initially met with opposition. At the time, balanced budgets were standard practice with the government. But the idea soon took hold and the U.S. government put people back to work on public works projects.
Contrary to some of his critics’ assertions, Keynes was a relatively strong advocate of free markets. It was Keynes, not Adam Smith, who said, “There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them.”Keynes believed that once full employment had been achieved by fiscal policy measures, the market mechanism could then operate freely. “Thus,” continued Keynes, “apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialise economic life than there was before”