John Maynard Keynes

Keynesian Economics

In 1918, Keynes accompanied Prime Minister David Lloyd George to the peace talks which were held in Versailles in the wake of the conflict. The outcome of these talks, known as the Versailles Treaty, laid out a plan which stifled the German economy. After resigning from his post, Keynes launched a scathing attack against the Western leaders responsible for the Treaty.

Keynes was also heavily influenced by the Great Depression, which began in 1929 and led him to challenge laissez-faire economics. For example, he was a supporter of the Liberal Party's proposed Public Works programme, which aimed to create employment programmes that were paid for by the government.

1936 saw the publication of Keynes's seminal work, The General Theory of Employment, Interest and Money. This book came to be known as Keynesian economics and had a massive impact on Western economies for the next forty years. In 1936, Keynes suffered a heart attack.

Fig. 1 - John Maynard Keynes pictured in the year of his death, 1946

Over the next ten years, he divided his time between his lecture post at King's College and his work as an economic policy adviser for the British government and the Allies during World War II. In 1946, John Maynard Keynes died aged 63.

John Maynard Keynes: theory

In economics and economic policy, John Maynard Keynes's theory has been hugely influential. Let's break down two of Keynes's major contributions here.

The roblem

It is important to note that Keynes's economic theories aimed to remedy the boom-and-bust cycle, and all of his theories were placed in this framework.

His ideas, and how they were applied in the 20th Century have come to be known as Keynesianism.

Increased government spending

A willingness to spend, on behalf of the state, is a key component of Keynesian theory. Keynes argued that, in times of recession, governments must be willing to increase their budget deficit in order to stimulate economic growth. Keynes called this practice deficit spending, and he argued that by undertaking it states would encourage public spending.

Let's take the example of the New Deal, which was launched in the USA by President Franklin D. Roosevelt, following the Wall Street Crash in 1929.

This theory is integral to the managed economy, which Keynes formulated and advocated for.

Demand economics

As a result of this idea, Keynesianism can be understood as a demand-side economic theory. Prior to Keynes's theory, the economy had been seen through the lens of supply-side economics.

For Keynes, the reverse was true. In the wake of the Great Depression, factories across the world sat idle as the demand for their products rapidly declined. Keynes realised that the creation of jobs would not immediately affect costs, as prices remained stable during economic crises. Public investment in infrastructure could create this, leading to the multiplier effect.

Keynesian theory challenged the classical notion that the market was an automated, self-regulating entity. Keynes proposed the idea that, by studying macroeconomic trends, states could regulate the natural depressions of the capitalist economy.

In times of economic depression, this meant enacting deficit spending, in order to encourage expenditure. Keynes also advocated for reduced rates of taxation as another method of stimulating borrowing, expenditure, and therefore economic growth.

John Maynard Keynes: capitalism

In times of prosperity, Keynesianism dictates that governments should increase expenditure and taxation rates, alongside interest rates on the loans it distributes. All of this was done to prepare for the inevitable bust which will always occur in the capitalist economy.

Through managed capitalism, Keynesian economics ushered in a new era of liberal thinking. Keynes's economic theories were central to the development of modern liberalism, which challenged the assumptions of the classical school. From the 1940s until the 1980s, Keynesian economics was adopted by states across Europe and worldwide.

However, following the rise of neoliberalism in the 1980s, the Keynesian approach to capitalism faded out of the mainstream.

John Maynard Keynes: theory of employment

Another important aspect of Keynes's economic theory was how he understood employment, and its impact on economic stability.

Like all his theories on the political economy, Keynes's view of employment was governed by an analysis of the demand-side economy. For him, employment rates were representative of the effectual demand present in the economy. By this, Keynes meant the aggregate demand represented by consumption, investment, and government expenditure - including imports and exports.

Keynes did not, however, advocate for full employment. Instead, Keynes believed that the economy could achieve equilibrium without it. Once again, this is a factor of the demand-side economic view Keynes adopted. He argued that unemployment was a natural consequence of a lack of demand which, in turn, created a lack of production. With greater aggregate demand, the natural course is that manpower would be required to fill the positions, thus stimulating the economy.

John Maynard Keynes: books

As we have seen, Keynes was heavily influenced by two major events in his lifetime: first, the Treaty of Versailles; second, the Wall Street crash of 1928. Their influence is evidenced in his works.

Economic Consequences of the Peace (1919)

A member of the British delegation which travelled to Paris as part of the peace talks following the First World War, Keynes was horrified by what he saw. In his view, the approach of the victorious Allied nations against the incredibly weak German state amounted to economic incompetence. By utilising economic sanctions to hinder the German's ability to re-develop their military, the victorious Allied nations had adopted a stance that weaponised their economic superiority.

For Keynes, who had a keen interest in the political economy, the result of this behaviour would be complete destabilisation. He contended that, in their aggressive stance

In this quote, Keynes addresses the need for political institutions to recognise the power and influence which they hold over the economy. He is imploring Western leaders to recognise that punitive economic measures threaten the balance of the entire 'delicate, complicated' world economy. This can be seen as an early example of Keynesian economic management.

The General Theory of Employment, Interest and Money (1936)

In the opening chapter, Keynes leaves no doubt that his economic theory is an attack on that of the classical liberal school, as he says

His first argument against the assumptions made in classical economic theory is against the notion of the production-side economy, established by Say's Law. In this classical liberal theory, production stimulates the economy, as the income acquired from the sale of goods generates the production of different goods. For example, I make a table, then sell it, and use the money to buy a door produced by someone else.

One key feature of Say's Law, and classical liberalism in general, was the notion that production and consumption were conducted in the economic sphere by rational actors. This model of economics was, for Keynes, problematic. It assumed that the economic activity of individuals should be left free from any form of intervention of the state, as they will always make informed choices.

Fig. 3 - Unemployed dockyard workers in New York during the Great Depression

In The General Theory, Keynes argues against this economic model, stating instead that it was demand (and the expenditure which it creates) which drives the economy forwards. Therefore, it was the duty of the government to stimulate demand by investing in employment programmes. For Keynes, this understanding of the economy was representative of 'the economic society in which we actually live'.