John Maynard Keynes

2008/9 Schools Wikipedia Selection. Related subjects: Economics

Western Economists
20th-Century Economists
( Keynesian economics)
John Maynard Keynes
Birth June 5, 1883(1883-06-05) Cambridge, England
Death April 21, 1946 (aged 62) Tilton, East Sussex, England
School/tradition Keynesian
Main interests economics, political economy, Probability
Notable ideas Spending multiplier
Influenced by Knut Wicksell, Arthur C. Pigou, Alfred Marshall, Adam Smith, David Ricardo, Dennis Robertson, Karl Marx, Thomas Malthus, Michal Kalecki, J.S. Mill, Alfred Marshall
Influenced T. K. Whitaker, Michał Kalecki Simon Kuznets, Paul Samuelson, John Hicks, G.L.S. Shackle, Silvio Gesell, William Vickrey, Galbraith

John Maynard Keynes, 1st Baron Keynes CB (pronounced /ˈkeɪnz/ "cains") ( 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. He is one of the fathers of modern theoretical macroeconomics.


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 reformer. 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' early romantic and sexual relationships were almost all with men. Homosexuality was not unusual in the Bloomsbury group in which Keynes was avidly involved. One of his great loves was the artist Duncan Grant, whom he met in 1908, and he was also involved with the writer Lytton Strachey. Keynes appeared to turn away from homosexual relationships around the time of the first World War. In 1918, he met Lydia Lopokova, a well-known Russian ballerina, and they married in 1925.

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 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 protégé Ludwig Wittgenstein on behalf of Cambridge.


Keynes enjoyed an elite 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. It is Marshall who is believed to have prompted Keynes's shift in interest from mathematics and classics to economics. It was at this time when he became the President of the Cambridge University Liberal Club. Keynes received his B.A. in 1905 and his M.A. in 1908.


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.

Painter Duncan Grant with Keynes.
Painter Duncan Grant with Keynes.

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 propose 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 , 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.

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 International Clearing Union, responsible for a common world unit of currency, the Bancor. 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.

Economic thought

In his magnum opus, The General Theory of Employment, Interest, and Money (1936), 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 innovation in his core argument is to stop taking prices and wages as perfectly flexible, arguing instead for a certain degree of stickiness. Thanks to stickiness, it is established 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. (This contrasts with the assumption made in New Classical Economics where macro relationships are modelled analogously to micro-relationships, → Robert Lucas, Jr.).

He assumed 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 was shown to be empirically incorrect by the economist Dunlop, and Keynes accepted this. Keynes also 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.

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 (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 the founding Chairman in 1946. Unsurprisingly from the start the two organizations that received the largest grant from the new body were the Royal Opera House and Sadlers Wells.

British Eugenics Society

Keynes served on the board of directors of the British Eugenics Society in 1945, even as documented proof of the Nazi concentration camps were becoming more widely known in Great Britain during the final year of World War II as British and American troops liberated several concentration camps in Germany. Even so, in 1946 before his death, Keynes still declared eugenics "the most important, significant and, I would add, genuine branch of sociology which exists."


Keynes died of myocardial infarction (heart attack) at his holiday home in Tilton, East Sussex. He died soon after he arranged a guarantee of an Anglo-American loan to Great Britain, a process he described as "absolute hell". Keynes' father, John Neville Keynes (1852 – 1949) outlived his son by three years. Keynes's 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.


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.


From Hayek

Friedrich von Hayek extensively critiqued Keynes's 1930 Treatise on Money, 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." 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,

"I should... conclude rather differently. I should say that what we want is not no planning, or even less planning, indeed I should say we almost certainly want more. But the planning should take place in a community in which as many people as possible, both leaders and followers wholly share your own moral position. Moderate planning will be safe enough if those carrying it out are rightly oriented in their own minds and hearts to the moral issue. This is in fact already true of some of them. But the curse is that there is also an important section who could be said to want planning not in order to enjoy its fruits but because morally they hold ideas exactly the opposite of yours, and wish to serve not God but the devil.

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."

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.

From Friedman

While Milton Friedman 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 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 Tract on Monetary Reform (1923), which he regarded as Keynes's best work because of its focus on maintaining domestic price stability.

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