1883 - 1946
Keynes was an English economist whose writings are considered the basis for the school of thought known as Keynesian economics, as well as its various offshoots. Originally trained in mathematics, he built on and refined earlier work on the causes of business cycles. His ideas, further developed after his death as New Keynesianism, are seen as foundational to mainstream macroeconomics. He has been referred to as the "father of macroeconomics and is considered one of the most influential economists of the 20th century.
Keynes was educated at King's College at the University of Cambridge, where he graduated in 1904 with a B.A. in mathematics. During the Great Depression of the 1930s, Keynes spearheaded the Keynesian Revolution, challenging the ideas of neoclassical economics that held that free markets would, in the short to medium term, automatically provide full employment, as long as workers were flexible in their wage demands. He argued that aggregate demand (total spending in the economy) determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment, and since wages and labour costs are rigid downwards, the economy will not automatically rebound to full employment.
Keynes advocated the use of fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions. After the 1929 crisis, Keynes also turned away from free trade, a fundamental pillar of neoclassical economics. He criticized Ricardian comparative advantage theory (the foundation of free trade), considering the theory's initial assumptions unrealistic, and became definitively protectionist. He detailed these ideas in his magnum opus, The General Theory of Employment, Interest and Money, published in early 1936. By the late 1930s, leading Western economies had begun adopting Keynes's policy recommendations. Almost all capitalist governments had done so by the end of the two decades following Keynes's death in 1946. As a leader of the British delegation, Keynes participated in the design of the international economic institutions established after the end of World War II but was overruled by the American delegation on several aspects.
His influence began to wane in the 1970s, partly as a result of the stagflation that plagued the British and American economies during that decade, and partly because of criticism of Keynesian policies by Milton Friedman and other monetarists, who disputed the ability of government to favourably regulate the business cycle with fiscal policy. The 2008 financial crisis sparked the 2008â2009 Keynesian resurgence; Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the 2008 financial crisis by President Barack Obama of the United States, Prime Minister Gordon Brown of the United Kingdom, and other heads of governments.
When Time magazine included Keynes among its Most Important People of the Century in 1999, it reported that "his radical idea that governments should spend money they don't have may have saved capitalism". The Economist has described Keynes as "Britain's most famous 20th-century economist".[21] In addition to being an economist, Keynes was also a civil servant, a director of the Bank of England, and a part of the Bloomsbury Group of intellectuals.
The book was published by John Maynard Keynes in 1936. It is arguably the most significant economic work of the twentieth century. Written in the aftermath of the Great Depression, it shattered the prevailing classical orthodoxy which held that markets were self-correcting and that full employment was the natural state of a capitalist economy. Keynesâs work shifted the focus of economics from the supply-side mechanics of individual firms to the aggregate behavior of the entire economy, effectively birthing the field of macroeconomics.
Keynesâs central argument is that the level of employment is not determined by the price of labor, as classical economists suggested, but by aggregate demandâthe total spending by households, businesses, and the government. He introduced the revolutionary idea that an economy could reach an equilibrium at a point of high unemployment. In the classical view, if unemployment rose, wages would fall until everyone was hired again. Keynes countered that falling wages would simply lead to falling demand, which would in turn lead to further layoffs, creating a downward spiral that the market could not exit on its own.
One of the most important concepts in the book is the consumption function and the marginal propensity to consume. Keynes observed that as income increases, consumption also increases, but not by as much as the income itself. This leaves a gap that must be filled by investment if full employment is to be maintained. However, investment is volatile because it is driven by what Keynes famously called animal spiritsâthe spontaneous urge to action rather than inaction, and the fluctuating expectations of future profit.
To explain how a small change in spending can have a large impact on the economy, Keynes developed the concept of the investment multiplier. He argued that an initial injection of spending, such as a government project or a business expansion, creates income for workers and suppliers, who then spend a portion of that income, creating more income for others. This cycle amplifies the original expenditure, meaning that a decrease in investment can cause a much larger contraction in the overall economy than the initial loss of funds might suggest.
Keynes also reimagined the role of interest rates through his theory of liquidity preference. While classical economists saw interest as the reward for saving, Keynes viewed it as the reward for parting with liquidity. He argued that people have a preference for holding cash, especially during times of uncertainty. If the demand for liquidity is high, interest rates will rise, which can discourage investment even if there is a surplus of savings available. In extreme cases, the economy can enter a liquidity trap, where monetary policy becomes ineffective because interest rates are already so low that people prefer to hoard cash rather than lend or invest it.
The book serves as a powerful justification for government intervention in the economy. Keynes argued that when private demand is insufficient to maintain full employment, the government has a responsibility to step in and manage the economy through fiscal policy. By increasing public spending or cutting taxes, the state can boost aggregate demand and "prime the pump" of the economic engine. This was a radical departure from the "laissez-faire" approach and provided the intellectual framework for the New Deal and the post-war economic boom.
Keynesâs work was also deeply concerned with the psychology of the market. He criticized the idea that investors are always rational, pointing out that professional investment is often like a "beauty contest" where participants try to guess what others will think is beautiful, rather than making objective valuations. This focus on uncertainty and expectations remains one of the most enduring parts of his legacy, distinguishing his work from more rigid mathematical models that assume perfect information.