John Maynard Keynes

How do we go about managing capitalism, which in its purest form promotes unrestricted competition between individuals? For John Maynard Keynes, it was necessary for the state to intervene to stimulate the economy and encourage the distribution of wealth. How did he do it? Let's find out!

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Contents
Table of contents

    John Maynard Keynes: biography

    John Maynard Keynes was born on the 5th of June 1883 in Cambridge, England. Keynes's father was an economist who worked at King's College, and his mother was one of the first female graduates from the same university.

    In 1902, Keynes entered King's College. Influenced by the economist Alfred Marshall, Keynes's interests began to branch into the study of politics and economics. Thus, during his early academic career, Keynes began to develop his understanding of the political economy.

    Political economy

    A field which studies how economic trends are connected to and managed by political institutions. It aims to understand how the phenomena of macroeconomics are influenced by decisions made in the political sphere.

    With the outbreak of the First World War, Keynes acted as an economic policy adviser in the Treasury.

    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.

    Laissez-faire

    Directly translates from French as 'allow to do', and is a label given to the classical liberal economic principle of non-intervention in the economy.

    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.

    John Maynard Keynes John Maynard Keynes pictured in 1946 StudySmarterFig. 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.

    Boom-and-bust cycle

    An informal name given to the periods of prosperity (boom) and recession (bust) which are a feature of the capitalist economy.

    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.

    Budget deficit

    A state in which spending exceeds income, which is usually applied to governments.

    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.

    The New Deal

    The earliest example of practical Keynesian economics, the New Deal saw the US government spend $3 billion dollars on employment programmes, such as the Civil Works Agency (CWA), over 6 years.

    Mixed economy

    A capitalist economy combining the free-market economy with some degree of state intervention and planning.

    By investing in job creation programmes during economic depressions, Keynesianism states that the government will stimulate public spending. Simply put, when people have jobs, they spend money. When people spend money, the economy improves.

    John Maynard Keynes United States President Franklin D. Roosevelt StudySmarterFig. 2 - Franklin D. Roosevelt (United States President from 1933-1945)

    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.

    Classical (Supply Economics)Keynesian (Demand Economics)
    When the economy takes a downward turn, demand for goods will decrease. Demand only takes a temporary hit during these periods before returning to normal and is only interrupted by the introduction of a minimum wage or trade union interventions. The economy requires expenditure (or demand) during times of economic turmoil, for example, the Great Depression. It is the responsibility of the government to create a budget deficit, artificially stimulating the economy.

    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.

    The Multiplier Effect

    The Multiplier Effect was an exceptional piece of foresight which demonstrated Keynes's shrewd understanding of the economy. It stated that should the state create public jobs, for example in the building of roads or bridges, they would save money on benefits. This is due to the fact that the number of employed people increases, providing them with spending power. Finally, the resulting income for businesses permits more tax revenue and debt can be paid off, rather than throwing money away on benefits.

    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.

    Macroeconomics

    A branch of economics which is concerned with large-scale phenomena within the economy, such as inequality, inflation, or gross domestic product (GDP).

    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.

    If you'd like to know more about this you can check out our articles on Neoliberalism and the New Right!

    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.

    Equilibrium

    The balance of supply and demand.

    Full employment

    The condition of all possible members of a workforce having employment.

    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

    ...the spokesmen of the French and British peoples have run the risk of completing the ruin, which Germany began, by a Peace which... must impair... the delicate, complicated organisation, already shaken and broken by war.1

    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

    the characteristics... assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous.2

    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.

    John Maynard Keynes Unemployed dockyard workers in New York during the Great Depression StudySmarterFig. 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'.

    John Maynard Keynes - Key takeaways

    • John Maynard Keynes was born in 1883 and died in 1946.
    • Throughout the course of his life, Keynes was profoundly impacted by the Treaty of Versailles (1919) and the Great Depression (1928).
    • Keynes's contention that capitalism needed to be regulated and managed by the state ushered in a new era of modern liberal economics.
    • Keynes challenged the classical liberal assumptions regarding rational behaviour and the self-regulating economy.
    • Although he advocated for state-sponsored employment programmes, Keynes denied that full employment was the ideal state in which the economy can exist.
    • In Economic Consequences of the Peace (1919), Keynes criticised Western leaders for their behaviour during peace talks in Versailles. In The General Theory of Employment (1936), Keynes advocated for a managed economy and challenged the assumptions of classical liberal economists.

    References

    1. John Maynard Keynes quoted by Jens Hölscher, Keynes's Economic Consequences of the Peace: A Reappraisal (2015), pp. 84.
    2. John Maynard Keynes quoted by John Cunningham Wood, John Maynard Keynes: Critical Assessment Second Series (1994), pp. 476.
    Frequently Asked Questions about John Maynard Keynes

    What was John Maynard Keynes's theory? 

    Keynes's economics, known as Keynesianism, is a demand-side economic theory that advocates for government intervention in the economic sphere.

    How did John Maynard Keynes influence the world? 

    Keynes is widely regarded as saving capitalism in the wake of the 1928 financial crash, as his economic theories allowed governments to stimulate growth in the economy.

    Was John Maynard Keynes a capitalist? 

    Keynes's theories never aimed to overthrow capitalism, but rather aimed to limit the inequalities created under the laissez-faire economic model.

    Who is John Maynard Keynes in economics? 

    In economics, Keynes can be regarded as the founder of the modern liberal school, which challenged some of the key assumptions made by classical liberal economists.

    What organisation did John Maynard Keynes propose? 

    Keynes proposed a form of social organisation in which the government took responsibility for reacting to the trends of the economic market.

    Test your knowledge with multiple choice flashcards

    What field of economics was Keynes's analysis concerned with?

    The signing of which Treaty had a profound impact on Keynes's work?

    Which of these describes a budget deficit?

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