John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton,
CB (pronounced "canes",
IPA ) (
June 5,
1883 –
April 21,
1946) was a
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 is particularly remembered for advocating
interventionist government policy, by which the government would use fiscal and monetary measures to aim to mitigate the adverse effects of economic
recessions,
depressions and
booms. Economists consider him one of the main founders of modern theoretical
macroeconomics. His popular expression "In the long run we are all dead" is still quoted.
Personal and marital life
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, standing at approximately 6' 6" (200 cm). He had a serious relationship with the
Bloomsbury painter
Duncan Grant from
1908 to
1915. He continued to assist Grant financially for the rest of his life. Keynes met
Lydia Lopokova, a well-known
Russian
ballerina, in October
1918. The two married and, by most accounts, Keynes enjoyed a happy marriage with Lopokova. For medical reasons they 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 soon recouped his fortunes. He enjoyed collecting books and for example collected and protected during his lifetime 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.
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, 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." Hayek says 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."
[Reason Magazine, The Road to Serfdom, Forseeing the Fall. F.A. Hayek interviewed by Thomas W. Hazlett] Bertrand Russell named Keynes as the most intelligent person he had ever known, commenting: "Every time I argued with Keynes, I felt I was taking my life in my hands".
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 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.
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 togetherâ€"with difficultyâ€"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
1915â€"
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. 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. 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.
His
magnum opus, the
General Theory of Employment, Interest and Money challenged the
economic paradigm when published in
1936. 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 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 discuss 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.
In
1942 Keynes was a highly recognised 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.
Investor
Keynes' brilliant record as a
stock investor is demonstrated by the publicly available data of a fund he managed on behalf of
King's College, Cambridge.
From
1928 to
1945, despite taking a massive hit during the
Stock Market Crash of 1929, Keynes' fund produced a very strong average increase of 13.2% compared with the general market in the United Kingdom declining by an average 0.5% per annum.
The approach generally adopted by Keynes with his investments he summarised accordingly:
*1. A careful selection of a few investments having regard to their cheapness in relation to their probable actual and potential
intrinsic value over a period of years ahead and in relation to alternative investments at the time;
*2. A steadfast holding of these fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it is evident that they were purchases on a mistake, and;
*3. A balanced investment position, i.e. a variety of risks in spite of individual holdings being large, and if possible opposed risks (
e.g. a holding of
gold shares among other
equities, since they are likely to move in opposite directions when there are general
fluctuations).
Keynes argued that "It is a mistake to think one limits one's risks by spreading too much between enterprises about which one knows little and has no reason for special confidence ... One's knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself to put full confidence."
Keynes' advice on
speculation, some might say, is timeless:
(Investment is) intolerably boring and over-exacting to any one who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.
When reviewing an important early work on equities investments, Keynes argued that "Well-managed industrial companies do not, as a rule, distribute to the
shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back in the business. Thus there is an element of compound interest operating in favor of a sound industrial investment."
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 that for 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 behaviors but assumes a form qualitatively different from microeconomic models. In doing so, he maintained many factually doubtful assumptions. He assumed for instance that (marginal) labor 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 errononeous assumption entertained by Keynes that inflation can only occur near full employment is still maintained in modern macroeconomics (
NAIRU,
New classical economics). Keynes held that the cause of unemployment is a too high rate of savings, or insufficient investment expenditure. He conjectured that the amount of labor 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.
Death
Keynes died of
infarction, his heart problems being aggravated by the strain of working on post-war international financial problems. 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 are
Richard Keynes (born
1919) a
physiologist; and
Quentin Keynes (
1921–
2003) an adventurer and
bibliophile.
*
Arthur C. Pigou*
Alfred Marshall*
Adam Smith*
David Ricardo*
Karl Marx*
Thomas MalthusKeynes' 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
Great Britain. His
autobiographical essays
Two Memoirs appeared in
1949.
The work
1930 Treatise on Money (2 volumes) was regarded as Keynes' best work by his frequent intellectual opponent,
Milton Friedman. Friedman and other monetarists have argued that
Keynesian economists do not pay enough attention to
stagflation and other inflationary issues.
*
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.
*
Ludwig von Mises*
Murray Rothbard*
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" [
1]
*
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
*
Essays on John Maynard Keynes,
Milo Keynes (Editor), Cambridge University Press, 1975, ISBN 0-521-20534-4
*
John Maynard Keynes: Hopes Betrayed 1883-1920,
Robert Skidelsky, Papermac, 1992, ISBN 033357379X (US Edition: ISBN 014023554X)
*
John Maynard Keynes: The Economist as Saviour 1920-1937, Robert Skidelsky, Papermac, 1994, ISBN 0333584996 (US Edition: ISBN 0140238069)
*
The Commanding Heights: The Battle for the World Economy, Daniel Yergin with Joseph Stanislaw, New York: Simon & Schuster, 1998, ISBN 0684829754
*
John Maynard Keynes: Fighting for Britain 1937-1946 (published in the United States as
Fighting for Freedom), Robert Skidelsky, Papermac, 2001, ISBN 0333779711 (US Edition: ISBN 0142001678)
*
Lytton Strachey,
Michael Holroyd, 1995, ISBN 0393327191
*
Keynesian economics or Keynesianism
*
Michał Kalecki*
Simon Kuznets*
Paul Samuelson*
John Hicks*
John Kenneth Galbraith*
G.L.S. Shackle*
Silvio Gesell*
Bio, bibliography, and links*
Free ebook of John Maynard Keynes at
Project Gutenberg*
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)
*[http://www.etoncollege.com Eton College Keynes (Economics) Society,}
