John Maynard Keynes

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John Maynard Keynes

Keynesian economics
Keynes in 1946
Birth	5 June 1883(1883-06-05) Cambridge, England
Death	21 April 1946 (aged 62) Tilton, East Sussex, England
Nationality	United Kingdom
Field	Political economy, probability
Alma mater	King's College, Cambridge
Influences	Adam Smith, David Ricardo, John Stuart Mill, Thomas Malthus, Karl Marx, Alfred Marshall, Knut Wicksell, Arthur C. Pigou, Dennis Robertson
Opposed	Alfred Marshall, Arthur C. Pigou, Dennis Robertson
Influenced	T. K. Whitaker, Michał Kalecki, Simon Kuznets, Paul Samuelson, John Hicks, G. L. S. Shackle, Silvio Gesell, William Vickrey, John Kenneth Galbraith, Karl Schiller, Joseph Stiglitz, Paul Krugman
Contributions	Keynesian Economics, Liquidity preference, Spending multiplier

John Maynard Keynes, 1st Baron Keynes (pronounced /ˈkeɪnz/) (5 June 1883 – 21 April 1946) was a British economist whose ideas have been a central influence on modern macroeconomics, both in theory and practice. He advocated interventionist government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of business cycles, economic recessions, and depressions. His ideas are the basis for the school of thought known as Keynesian economics, and its various offshoots.

In the 1930s, Keynes spearheaded a revolution in economic thinking, overturning the older ideas of neoclassical economics that held that free markets would automatically provide full employment as long as workers were flexible in their wage demands. Shortly before the end of the Great Depression, his ideas were wholeheartedly put into practice by leading Western economies. During the 1950s and 1960s, the success of Keynesian economics was so resounding that almost all capitalist governments adopted its policy recommendations.

Keynes's influence waned in the 1970s, due to critiques from Milton Friedman and other economists who were less optimistic about the ability of interventionist government policy to positively regulate the business cycle.^[1] However, the advent of the global financial crisis in 2007 has caused a resurgence in Keynesian thought. Keynesian economics has provided the theoretical underpinning for the plans of President Barack Obama and other global leaders to rescue the world economy.^[2]

In 1999, Time Magazine named Keynes one of the 100 most influential people of the 20th century and reported that, "His radical idea that governments should spend money they don't have may have saved capitalism".^[3] He is commonly considered one of the fathers of modern macroeconomics.^[4][5] In addition to being an economist, Keynes had been a civil servant, a patron of the arts, a director of the Bank of England, an advisor to several charitable trusts, a writer, a private investor, an art collector and a farmer.

Contents 1 Biography 1.1 Early life 1.2 Education 1.3 Career 1.3.1 1906 to WWI 1.3.2 WWI 1.3.3 The Versailles peace Conference 1.3.4 Keynes in the 1920s 1.3.5 Keynes in the 1930s 1.3.6 Keynes and World War Two 1.4 Personal life 1.4.1 Other notable quotes by Keynes 1.5 Involvement with the Liberal Party 1.6 Support for the Arts 1.7 Death 2 Influence 2.1 Economics: The Keynesian Ascendancy 1939–1979 2.2 Economics: out of favor 1979–2007 2.3 Economics: The Keynesian Resurgence of 2008–2009 2.4 International Relations 3 Reception 3.1 Positive reception 3.1.1 Hayek 3.1.2 Lionel Robbins 3.1.3 LePenn 3.1.4 Russell 3.1.5 Churchill 3.1.6 The Times 3.2 Criticism 3.2.1 Hayek 3.2.2 Friedman 3.2.3 Schumpeter 3.2.4 Hazlitt 3.2.5 Rothbard 3.2.6 Allegations of anti-Semitism and pro Nazi sympathy 3.2.7 Allegations of pro-Inflationary views 4 See also 5 Notes 6 References 7 External links

[edit] Biography

[edit] Early life

John Maynard Keynes was born in the small English city Cambridge to a middle class family. His father, John Neville Keynes, was a lecturer at the university and his mother Florence Ada Keynes a local social reformer. Keynes was the first born, and was followed by two more children - Geoffrey Keynes in 1887 and Margaret Neville Keynes in 1890. The parents were loving and attentive, but not smotheringly so. They remained in the same house throughout their lives, where the children were always welcome to return. Keynes would receive considerable support from his father; including expert coaching to help him pass his scholarship exams and financial help both as a young man and when he was nearly wiped out at the onset of Great Depression in 1929. According to biographer Robert Skidelsky, Keynes' mother made her children's interests her own, and "because she could grow up with her children, they never outgrew home".^[6] The economist Harry Johnson wrote that the optimism imparted by Keynes's early life is key to understanding his later thinking. ^[7] Keynes was always confident he could find a solution to whatever problem he turned his attention to, and retained a lasting faith in the ability of government officials to do good.^[8] Keynes optimism was also cultural, in two senses - he was of the last of a generation raised by an empire still at the height of its power, to its own eyes and at least outwardly by much of the world seen as preeminent in both power and benevolence. Again according to Skidelsky, Keynes was also of the last generation who felt entitled to govern by culture, rather than by expertise. The sense of cultural unity current in Britain from the 19th century to the end of WWI provided the well educated a framework, which set various spheres of knowledge in relation to each other and to life, enabling them to confidently draw from different fields when addressed practical problems.^[6]

[edit] Education

Keynes had his early education at home and in kindergarten. He attended St Faith's preparatory school as a day pupil from 1892 - 1897. Teachers described Keynes as brilliant, but on occasion as careless and lacking in determination. His health was often poor in this period, leading to several long absences.

Keynes won a scholarship to study at Eton, where he displayed talent in a wide range of subjects; particularly mathematics, classics and history. Despite his middle class background, Keynes mixed easily with upper class pupils. In 1902 Keynes left Eton for King's College, Cambridge, to study mathematics. The famous Alfred Marshall begged Keynes to become an economist^[9] and Keynes's own inclinations drew him towards philosophy, especially the ethical system of G.E. Moore. Keynes was an active member of the semi secretive Cambridge Apostles society, a debating club largely reserved for the brightest students - like many members Keynes retained a bond to the club after graduating and continued to attend occasional meetings throughout his life. Before leaving Keynes became the President of the Cambridge University Liberal Club. In May 1904 he received a first class B.A. in mathematics. Over the next two years Keynes continued to involve himself with university social life, debate and philosophy; attended economics lectures; traveled in Europe and prepared for Tripos and Civil Service exams.

[edit] Career

[edit] 1906 to WWI

Keynes's Civil Service career began in October 1906, as a clerk in the Indian Office. To start with he enjoyed his work but by 1908 has become bored and resigned to return to Cambridge and work on probability theory, at first privately funded only by two Dons at the university - his father and the economist Arthur Pigou. In 1909 Keynes's published his first professional economic article in Economics Journal , which was about the effect of a recent global economic downturn on India ^[10] Also in 1909 Keynes accepted a lectureship in economics funded personally by Alfred Marshall. Keynes's earnings rose further as he began to take on pupils for private tuition, and on being elected a fellow. In 1911 Keynes was made editor of The Economic Journal. By 1913 he had published his first book Indian Currency and Finance. He was then appointed to the Royal Commission on the same subject as his book, Indian Currency and Finance, where Keynes showed considerable talent at applying economic theory to practical problems.

[edit] WWI

The British Government called on Keynes's expertise during the First World War. While he didn't formally re-join the civil service in 1914, Keynes had travelled up to London on the government's request a couple of days before hostilities broke out. Bankers had been pushing for the suspension of specie payments – the convertibility of bank notes into gold – but with Keynes's help the Chancellor of the Exchequer (then Lloyd George) was persuaded that would be a bad idea as it would hurt the future reputation of the city if payments were suspended before absolutely necessary. It was in January 1915 that Keynes took up an official government job at the Treasury.

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. According to economist Robert Lekachman Keynes's "nerve and mastery became legendary" due to his performance of these duties, as in the case where he managed to assemble — with difficulty — a small supply of Spanish pesetas. The secretary of the Treasury was delighted to hear Keynes had amassed enough to provide a temporary solution for the British Government. But Keynes did not hand the pesetas over, he sold them all to break the market: his boldness paid off, as pesetas became much less scarce and expensive.^[11] These accomplishments led to the appointment that would have a huge effect on Keynes's life and career: financial representative for the Treasury to the 1919 Versailles peace conference.

[edit] The Versailles peace Conference

Keynes's experience at Versailles was influential in shaping his future outlook, yet it was not a successful one for him. Keynes's main interest had been in trying to prevent Germany's compensation payments being set so high it would traumatize innocent German people, damage the nation's ability to pay and sharply limit her ability to buy exports from other countries - thus hurting not just Germany's own economy but that of the wider world. Unfortunately for Keynes, conservative powers in the coalition that emerged from the 1918 coupon election were able to ensure both Keynes himself and the Treasury were largely excluded from formal high-level talks concerning reparations; their place taken by the Heavenly Twins. So Keynes was forced to try and exert influence mostly from behind the scenes.

The three principal players at Versailles were Britain's Lloyd George, France's Clemenceau and America's President Wilson. It was only Lloyd George to whom Keynes had much direct access; until the 1918 election he had some sympathy with Keynes's view but while campaigning had found his speeches were only well-received by the public if he promised to harshly punish Germany, and had therefore committed to extracting high payments. Lloyd George did however win some loyalty from Keynes with his actions at the Paris conference by intervening against the French to ensure the dispatch of much-needed food supplies to German civilians. Clemenceau also pushed for high reparations , generally France argued for an even more severe settlement than Britain. Wilson initially favoured relatively clement treatment of Germany – he feared too harsh conditions could ferment the rise of extremism, and wanted Germany to be left sufficient capital to pay for imports. To Keynes's dismay, Lloyd George and Clemenceau were able to pressure Wilson to agree to very high repayments being imposed. Towards the end of the conference, Keynes came up with a plan that he argued would not only help Germany and other impoverished central European powers but also be good for the world economy as a whole. It involved the writing down of war debts which would have the effect of increasing international trade all round. Lloyd George agreed it might be acceptable to the British electorate. However America was against it, the US then being the largest creditor and by this time Wilson had started to believe in the merits of a harsh peace as a warning to future aggressors. So despite his best efforts, the end result of the conference was a treaty which disgusted Keynes both on moral and economic grounds, and led to his resignation from the Treasury.

Keynes's analyses on the predicted damaging effects of the treaty appeared in the highly influential The Economic Consequences of the Peace, published in 1919. This work has been described as Keynes's best book, where he was able to bring all his gifts to bear - his passion as well as his skill as an economist. In addition to economic analyses, the book contained pleas to the readers sense of compassion:

“

I cannot leave this subject as though its just treatment wholly depended either on our own pledges or on economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,--abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe.

”

Also present was striking imagery such as "...that year by year Germany must be kept impoverished and her children starved and crippled..." along with bold predictions which were later justified by events:

“

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing.

”

Keynes predictions were borne out firstly when the German economy suffered in the hyperinflation of 1923 and further by the second World War. Only a fraction of reparations were ever paid. The Economic Consequences of the Peace gained Keynes international fame, but also caused him to be regarded as anti establishment – it wasn't until after the outbreak of WWII that Keynes was offered a directorship of a major British Bank, or an acceptable offer to return to government with a formal job. Keynes was still able to influence policy making however – through his network of contacts, his published works and by serving on government committees plus attending high-level policy meetings as a consultant.

[edit] Keynes in the 1920s

Keynes had completed his Treatise on Probability before the war, but published it in 1921. The work was 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. Keynes developed the first upper-lower probabilistic interval approach to probability in chapters 15 and 17 of this book, as well as having developed the first decision weight approach with his conventional coefficient of risk and weight, c, in chapter 26. In addition to his academic work, the 1920s saw Keynes active as a journalist selling his work internationally and working in London as a financial consultant. In 1922 Keynes continued to advocate reduction of German reparations with A Revision of the Treaty. He attacked the post WWI deflation policies with A Tract on Monetary Reform in 1923 – a trenchant argument that countries should target stability of domestic prices , avoiding deflation even at the cost of allowing their currency to depreciate. The Tract also called for an end to the gold standard, something Keynes was to argue strongly against until Britain finally abandoned it in 1931. The 1920s saw high unemployment in Britain even before the outbreak of the Great Depression - as well as advocating depreciating the currency as a way to boost jobs by making British exports more affordable, Keynes was from 1924 to start recommending a fiscal response to unemployment by means of government spending on public works.

[edit] Keynes in the 1930s

The Treatise on Money was published in 1930 in 2 volumes. A central idea of the book was that if the amount of money being saved exceeds the amount being invested - which can happen if interest rates are too high – then unemployment will rise. This is in part a result of people not spending too high a proportion of what employers pay out, making it difficult, on aggregate, for employers to make a profit. Keynes made several visits to America where he offered support for the public spending policies that characterized Roosevelt's New Deal.

Keynes' magnum opus the General Theory of Employment, Interest and Money was published in 1936. It was indexed by Keynes's student, later the economist David Bensusan-Butt. The work served as a theoretical justification for the interventionist policies Keynes favored for tackling a recession. The General Theory challenged the earlier economic paradigm, which had held that providing it was unfettered by government interference, the market would naturally establish full employment equilibrium. Keynes believed the classical theory was a "special case" that applied only to the particular conditions present in the 19th century, his own theory being the general one. Classical economists had believed in Says Law , which simply put states "supply creates its own demand", and that in a free market workers would always be willing to lower their wages to a level where employers could profitably offer them jobs. An innovation from Keynes was the concept of stickiness – the recognition that in reality workers often refuse to lower their wage demands even in cases where a classical economist might argue it is rational for them to do so. Thanks in part to stickiness, it is established that the interaction of "aggregate demand" and "aggregate supply" may lead to stable unemployment equilibria - and in these cases it is to the state and not the market that economies must look to for their salvation.

The General Theory argues that demand, not supply, is the key variable governing the overall level of economic activity. Aggregate demand, which equals total un-hoarded income in a society, is defined by the sum of consumption and investment. 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. Without government intervention to increase expenditure, an economy can remain trapped in a low employment equilibria – the demonstration of this possibility has been described as the revolutionary formal achievement of the work. ^[12] The book advocated activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works. The General Theory 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 through most of the 1930s, ^[13] With time, however, his ideas became more widely accepted ,^{[14] [15]} with eminent professors in America such as Alvin Hansen accepting Keynes ideas before the outbreak of WWII.

Keynes's himself had only limited participation in the theoretical debates that followed the publication of the General Theory as he suffered a heart attack in 1937, requiring him to take long periods of rest. He began to recover in 1939, but for the rest of his life his professional energies were largely directed towards the practical side of economics – the problems of ensuring optimum allocation of resources for the War efforts, post-War negotiations with America, and the new international financial order that was presented at Bretton Woods.

[edit] Keynes and World War Two

During World War II, Keynes argued in How to Pay for the War, published in 1940, that the war effort should be largely financed by higher taxation and especially by compulsory saving (essentially workers loaning money to the government), rather than deficit spending, in order to avoid inflation. Compulsory saving would act to dampen domestic demand, assist in channelling additional output towards the war efforts, would be fairer than punitive taxation and would have the advantage of helping to avoid a post war slump by boosting demand once workers were allowed to withdraw their savings. In 1942, Keynes was rewarded for his service to Great Britain by a peerage, receiving a seat in the House of Lords as Baron Keynes, of Tilton in the County of Sussex, where he sat on the Liberal benches. 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 mid-1944 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. He proposed the creation of a common world unit of currency, the Bancor and of new global institutions — a world central bank and the International Clearing Union. Keynes envisaged these institutions managing an international trade and payments system with strong incentives for countries to avoid substantial trade deficits or surpluses. The USA's greater negotiating strength, however, meant that the final outcomes accorded more closely to the less radical plans of Harry Dexter White. According to US economist Brad Delong, on almost every point where he was overruled by the Americans , Keynes was later proved correct by events.^[16] At the time there was little theoretical support for Keynes's position that it wouldn't be in even America's own long term interest to have their national currency serve as de facto international legal tender. It was only in the 1960s this concept was formally treated as the Triffin dilemma. The two new institutions, later known as the World Bank and IMF, were founded as a compromise that primarily reflected the American vision. There would be no incentives for states to avoid a large trade surplus, instead the burden for correcting a trade imbalance would continue to fall just on the deficit countries, which Keynes had argued were least able to address the problem without inflicting economic hardship on their populations. Yet Keynes was still pleased when accepting the final agreement, saying that if the institutions stayed true to their founding principles, "the brotherhood of man will have become more than a phrase."^[17][18]

[edit] Personal life

Keynes's early romantic and sexual relationships were almost exclusively with men.^[19] Attitudes in the Bloomsbury Group, in which Keynes was avidly involved, were relaxed about homosexuality. 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.^[19]

In 1921 he fell "very much in love" with Lydia Lopokova, a well-known Russian ballerina, and one of the stars of Serge Diaghilev's Ballets Russes. They married in 1925, ^[19][20] leading to the widely repeated couplet of unknown authorship: "Oh what a marriage of beauty and brains. The fair Lopokova and John Maynard Keynes". Their union was by all accounts happy,^[21] though childless – Lydia became pregnant in 1927 but was unable to carry to full term. Keynes spent much time aiding her to prolong her career to help compensate for the lack of children.

Keynes was ultimately a successful investor, building up a very substantial private fortune. He was nearly wiped out following the Stock Market Crash of 1929 which he failed to foresee, but he soon recouped his fortune. At his death in 1946 Keynes's worth stood just short of £500,000 - equivalent to about £11 million in 2009. The sum had been amassed despite lavish support for various good causes and his personal ethics which made him reluctant to sell on a falling market as he knew if too many did that it could deepen a slump. Keynes built up a significant collection of fine art, including notable works by Paul Cézanne, Edgar Degas, Amadeo Modigliani, Georges Braque, Picasso, and Georges-Pierre Seurat.^[20] 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, at least for a while, to become a major British stage outside of London.^[20]

Like several other notable British authors of his time, Keynes was a member of the Bloomsbury Group. Virginia Woolf's biographer tells an anecdote on how Virginia Woolf, Keynes and T. S. Eliot would discuss religion at a dinner party, in the context of their struggle against Victorian era morality. ^[22] Keynes had attended church up to his teens,^[23] but by university he had become agnostic, which he remained until his death.^[24] At the end of the said dinner party, a disturbance reminded Keynes "of his theme", and he remarked that "the youth had no religion save Communism and this was worse than nothing."^[22] Marxism "was founded upon nothing better than a misunderstanding of Ricardo", and given time, he, Keynes, "would deal thoroughly with the Marxists" and other economists, to solve the economic problems their theories threatened to cause.^[22]

In 1931 Keynes went on to write the following on Marx's work ^[25]

“

How can I accept the Communist doctrine, which sets up as its bible, above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? Even if we need a religion, how can we find it in the turbid rubbish of the red bookshop? It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process of conversion which has changed all his values.

”

[edit] Other notable quotes by Keynes

• On his friend Ludwig Wittgenstein's return to Cambridge, Keynes famously wrote: ^[26]

"Well, God has arrived. I met him on the 5.15 train."

• Predicting a future with economic problems largely solved , Keynes's wrote: ^[27] "When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals."

• Anticipating the success of his own ideas, Keynes wrote: ^[28]

“

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back... soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

”

[edit] Involvement with the Liberal Party

Keynes was a life-long member of the Liberal party, which until the 1920s had been one of the two main political parties in Great Britain, and as late as 1916 had often been the dominant power in government. Keynes had helped campaign for the Liberals at elections from as early as 1906, yet he always refused to run for office himself, despite being asked to do so on three separate occasions in 1920. From 1926 when Lloyd George became leader of the Liberals, Keynes took a major role in defining the party's economics policy, but by then the Liberals had been displaced into third party status by the Labour party. ^[6]

[edit] Support for the Arts

Keynes's personal interest in Classical Opera and Dance led him to support the Royal Opera House at Covent Garden and the Ballet Company at Sadler's 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 organisations that received the largest grant from the new body were the Royal Opera House and Sadler's Wells.

[edit] Death

Throughout his life Keynes worked energetically for the benefit both of the public and his friends – even when his health was poor he laboured to sort out the finances of his old college^[29] and to try to design an international monetary system that would benefit the whole world at Bretton Woods. Keynes suffered his final series of fatal heart attacks during negotiations for an Anglo-American loan he was trying to secure on favourable terms for Great Britain from the United States, a process he described as "absolute hell".^{[30] [31]} Keynes died at his holiday home in Tilton, East Sussex on 21 April 1946, a few weeks after returning from America. Keynes's 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. His widow, Lydia Lopokova, lived on until 1981. Since his death at Easter 1946, Keynes has been described several times as a saviour.^[29][31]

[edit] Influence

[edit] Economics: The Keynesian Ascendancy 1939–1979

From about 1939–1979 Keynes provided the main inspiration for economic policy makers in Europe , America and much of the rest of the world. ^[32] While economists had been increasingly won over to Keynes's way of thinking in the late 1930s , it was only after outbreak of World War II that governments started to borrow money for spending on a scale sufficient to eliminate unemployment. For John Kenneth Galbraith , then a US government official charged with controlling inflation : "one could not have had a better demonstration of the Keynesian ideas."^[33] After the war Winston Churchill attempted to check the rise of Keynesian policy making in Great Britain. He had been influenced by Hayek's 1944 book The Road to Serfdom and used rhetoric critical of the mixed economy in his 1945 election campaign. Despite his popularity as a war hero Churchill suffered a landslide defeat to Clement Attlee who continued to run the British economy on Keynesian lines. ^[33] By the 1950s Keynesian policies were adopted by almost the entire developed world and similar measures for a mixed economy were used by many developing nations. Keynes's views on the economy became mainstream in the worlds universities. Throughout the 1950s and 1960s Europe, the United States and Japan enjoyed considerably lower unemployment and higher growth than they have before or since. Professor Gordon Fletcher has written that the fifties and sixties, when Keynes' influence was at its peak, appear in retrospect as a golden age.^[32] In late 1965 Time magazine ran a cover article with the title inspired by a possibly tongue-in-cheek comment from Milton Friedman, also echoed by President Nixon, that "We Are All Keynesians Now". The article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government." The article also states that Keynes was one of the three most important economists ever, and that his General Theory was more influential than the magna opera of other famous economists —Smith's The Wealth of Nations and Marx's Das Kapital.^[34] Newsweek magazine later parodied this headline with the title "We are all Socialists now" on 16 February 2009, comparing the United States Congressional Republican minority's unfavourable reaction to President Barack Obama's bail-outs to Friedman's response to popular Keynesianism.^[35]

[edit] Economics: out of favor 1979–2007

Keynesian economics were officially discarded by the British Government in 1979. Attacks against Keynes's ideas had began to gain significant acceptance from the early 1970s as they were able to make a credible case that Keynesian models no longer reflected economic reality. Keynes himself had included few formulas and no explicit mathematical models in his General Theory. For commentators such as economist Hyman Minsky Keynes's limited use of mathematics was partly the result of his scepticism about whether phenomena as inherently uncertain as economic activity could ever be adequately captured by maths. Nevertheless , many models were developed by Keynesian economists, with a famous example being the Phillips curve which predicted an inverse relationship between unemployment and inflation. It implied that unemployment could be reduced by government stimulus with a calculable cost to inflation. In 1968 Milton Friedman had completed a rigorous demonstration that the fixed relationship implied by the Philips curve did not exist. Friedman suggested that sustained Keynesian policies could lead to both unemployment and inflation rising at once – a phenomena that soon became known as stagflation. In the early 1970s stagflation appeared in both the US and Britain just as Friedman had predicted, with economic conditions deteriorating further after the 1973 oil crisis. Aided by the prestige gained from his successful forecast, Friedman led increasingly successful attacks against the Keynesian consensus, convincing not only academics and politicians but also much of the general public with his radio and television broadcasts. The academic credibility of Keynesian Economics was further undermined by additional criticism from other Monetrarists trained in the Chicago school of economics, by the Lucas Critique and by attacks from Friedrich von Hayek's Austrian School. ^[32] So successful were these attacks that by 1980 Robert Lucus was saying economists would often take offence if described as Keynesians. ^[36] Keynesian principles also fared poorly on the practical side of economics - by 1979 they had been displaced by Monetarism as the primary influence on Anglo-American economic policy.^[32] However many officials on both sides of the Atlantic retained a preference for Keynes, and in 1984 the Federal Reserve officially discarded monetarism, after which Keynesian principles made a partial comeback as an influence on policy making.^[37] Not all academics accepted the criticism against Keynes - Minsky has argued that Keynesian economics had been debased by excessive mixing with neo-classical ideas from the 1950s, and that it was unfortunate the branch of economics had even continued to be called "Keynesian". ^[10] Others have argued it was not so much excessive Keynesian activism that caused the economic problems of the 1970s but the break down of the Bretton Woods system of capital controls, which allowed capital flight from countries the markets viewed as excessively Keynesian or socially progressive.^[38] A more typical response was to accept some elements of the criticisms while refining Keynesian economic theories to defend them against arguments that would invalidate the whole Keynesian framework - the resulting body of work largely composing New Keynesian economics. In 1992 Alan Blinder was writing about a "Keynesian Restoration" as work based on Keynes's ideas had to some extent became fashionable once again in academia , though in the mainstream it was highly synthesized with Monetarism and other neo-classical thinking. In the world of policy making free-market influences broadly sympathetic to Monetarism remained very strong at government level - in powerful normative institutions like the World Bank, IMF and US Treasury, and in prominent opinion-forming media such as the Financial Times and the Economist.^[39]

[edit] Economics: The Keynesian Resurgence of 2008–2009

The financial crisis of 2007–2009 led to public skepticism about the free market consensus even from some on the economic right. In March 2008, Martin Wolf, chief economics commentator at the Financial Times, announced the death of the dream of global free-market capitalism, and quoted Josef Ackermann, chief executive of Deutsche Bank, as saying "I no longer believe in the market's self-healing power."^[40] In the same month Macro economist James K. Galbraith used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack against the consensus for monetarist economics and argued that Keynesian economics were far more relevant for tackling the emerging crises. ^[41] Influential Economist Robert Shiller had began advocating robust government intervention to tackle the financial crises, specifically citing Keynes.^{[42] [43]} A series of major bail-outs followed starting on 7 September with the announcement that the U.S. government was to nationalize the two firms which oversaw most of the U.S. subprime mortgage market—Fannie Mae and Freddie Mac. In October, the British Chancellor of the Exchequer referred to Keynes as he announced plans for substantial fiscal stimulus to head off the worst effects of recession, in accordance with Keynesian economic thought.^{[44] [45]} Similar policies have been adopted by other governments worldwide.^{[46] [47]} This is in stark contrast to the action permitted to Indonesia during its financial crisis of 1997, when it was forced by the IMF to close 16 banks at the same time, prompting a bank run.^[48]

The works on Keynes of Hyman Minsky, ^[10] Robert Skidelsky, ^[6] Donald Markwell ^[49] and Axel Leijonhufvud ^[50] were widely cited. Other prominent Keynesian economists include Paul Krugman, Robert Reich, Joseph Stiglitz. Much recent discussion reflected Keynes's advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the International Monetary Fund and the World Bank, which many had argued should be reformed at a "new Bretton Woods" even before the crises broke out.^[51] IMF and United Nations economists advocated a coordinated international approach to fiscal stimulus.^[52] Donald Markwel argued that in the absence of such an international approach, there would be a risk of worsening international relations and possibly even world war arising from similar economic factors to those present during the depression of the 1930s. ^[49] By the end of December 2008, the Financial Times reported that "the sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades" ^[53] In a March 2009 speech entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People's Bank of China came out in favour of Keynes's idea of a centrally managed global reserve currency. Dr Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's Bancor. Dr Zhou said that national currencies were unsuitable for use as global reserve currencies as a result of the Triffin dilemma - the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency. Dr Zhou proposed a gradual move towards increased used of IMF Special Drawing Rights (SDRs) as a centrally managed global reserve currency ^{[54] [55]} Although Dr Zhou's ideas have not yet been broadly accepted, leaders meeting in April at the 2009 G-20 London summit agreed to allow $250 Billion of Special Drawing Rights to be created by the IMF, to be distributed globally. In June, OECD reported improvements to the global economic outlook , with overall growth now forecast for 2010 instead of a small contraction. OECD specifically credited stimulus plans, which they warned should not be rolled back too swiftly. ^[56]

[edit] International Relations

Keynes important contribution to thinking about international relations—including economic causes of war and economic means of promoting peace—has been neglected until recently. ^[51]

[edit] Reception

[edit] Positive reception

Keynes's economic thinking only began to achieve close to universal acceptance in the last few years of his life. On a personal level Keynes's charm was such he was generally well received where ever he went – even those who found themselves on the wrong side of his occasionally sharp tongue rarely bore a grudge. ^[57] Keynes's speech at the closing of the Bretton Woods negations was received with a lasting standing ovation, rare in international relations, as delegates acknowledged the scale of his achievements made despite poor health. ^[8] After he died his arch rival Hayeck was to say it was as if Keynes had been raised to sainthood and that his work should not be questioned. ^{[58] [59]}

[edit] Hayek

Austrian School economist Friedrich Hayek ^[12] was Keynes's most prominent contemporary critic, with sharply opposing views on the economy. Yet after Keynes death he wrote:

“

He was the one really great man I ever knew, and for whom I had unbounded admiration. The world will be a very much poorer place without him.

”

[edit] Lionel Robbins

Lionel Robbins ^[12] a former Austrian School economist who had suffered many heated debates with Keynes in the 1930s, had this to say after observing Keynes in early negotiations with the Americans while drawing up plans for Bretton Woods:

“

This went very well indeed. Keynes was in his most lucid and persuasive mood: and the effect was irresistible. At such moments, I often find myself thinking that Keynes must be one of the most remarkable men that have ever lived - the quick logic, the birdlike swoop of intuition, the vivid fancy, the wide vision, above all the incomparable sense of the fitness of words, all combine to make something several degrees beyond the limit of ordinary human achievement.

”

[edit] LePenn

Douglas LePenn ^[12], an official from the Canadian High Commission , wrote:

“

I am spellbound. This is the most beautiful creature I have ever listened to. Does he belong to our species? Or is he from some other order? There is something mythic and fabulous about him. I sense in him something massive and sphinx like, and yet also a hint of wings.

”

[edit] Russell

Bertrand Russell ^[20] named Keynes one of the most intelligent people 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.

”

[edit] Churchill

Winston Churchill ^[45] has been quoted in The Times saying:

“

If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.

”

[edit] The Times

Keynes's ^[60] obituary in The Times wrote:

“

There is the man himself – radiant, brilliant, effervescent, gay, full of impish jokes ... He was a humane man genuinely devoted to the cause of the common good.

”

[edit] Criticism

As a man of the centre described as undoubtedly having the greatest impact of any 20th century economist, ^[31] Keynes attracted considerable criticism from both sides of the political spectrum. In the 1920s, Keynes was seen as anti establishment and was mainly attacked from the right. In the "red 1930s" ^[61], while Keynes was engaging principally with the right to try and persuade them of the merits of more progressive policy, the most vociferous criticism against him came from the left who saw him as a supporter of capitalism. From the 1950s and onwards most of the attacks against Keynes have again been from the right.

[edit] Hayek

Friedrich von Hayek is often ranked along with Keynes, Friedman and sometimes Schumpeter as one of the most influential economists of the 20th century. ^{[62] [63]} Hayek extensively critiqued Keynes's 1930 Treatise on Money,^[64] only to have Keynes assert that the Treatise no longer reflected his thinking. However, after reading Hayek's The Road to Serfdom , Keynes ^[65] wrote to Hayek saying: "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." Yet he concluded the same letter with the recommendation:

“

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 ^[66]

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 ^[67] explained the first section of the letter by saying it was written:

“

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.

”

Hayek ^[68] felt that application of Keynes's policies would give too much power to the state and would lead to socialism. Professor Herbert Frankel later expanded on this perceived danger of Keynes's thinking, drawing on support from the work of Georg Simmel. Attacks on Keynes for lending support to socialism and excessive state control have remained popular from Libertarians and Austrian School Economists. ^[32]

[edit] 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.^[69] 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.^[69]

[edit] Schumpeter

Joseph Schumpeter was an economist the same age as Keynes and one of his main rivals. He was among the first reviewers to argue that Keynes's General Theory wasn't really a general thoery at all, but in fact a special case. ^[70] He said the work expressed "the attitude of a decaying civilisation". After Keynes's death Schumpeter wrote a brief biographical piece called Keynes the Economist - on a personal level he was very positive about Keynes as a man; praising his pleasant nature, courtesy and kindness. He assessed some of Keynes biographical and editorial work as among the best he'd ever seen. Yet Schumpeter remained critical about Keynes's economics, linking Keynes's childlessness to what Schumpeter saw as an essentially short term view. He considered Keynes to have a kind of unconscious patriotism that caused him to fail to understand the problems of other nations. For Schumpeter:^[71] "Practical Keynesianism is a seedling which cannot be transplanted into foreign soil: it dies there and become poisonous as it dies."

[edit] Hazlitt

Austrian School economic commentator and journalist Henry Hazlitt wrote a paragraph-by-paragraph refutation of The General Theory in his extensive critique of Keynesianism in The Failure of the New Economics.

[edit] Rothbard

Libertarian Austrian School economist and economic historian Murray Rothbard wrote a strongly worded critique of Keynes entitled "Keynes the Man".^[72] Rothbard accused Keynes of being an intellectual lightweight, fixated on simple short-term solutions to complex long-term problems, obsessed with his own ego and influence, and one of the most destructive statist intellectuals of the 20th century.

[edit] Allegations of anti-Semitism and pro Nazi sympathy

Critics such as Rothbard have sought to infer that Keynes had sympathy with Nazism or that he was anti-Semitic. Several of Keynes's private letters do suggest an anti-Jew bias, and in the foreword to the German edition of the General Theory,^[73] 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.

”

However, these allegations have been roundly rejected by Keynes's supporters.^[8] Professor Gordon Fletcher writes that a "the suggestion of a link between Keynes and any support of totalitarianism cannot be sustained".^[32] Once the aggressive tendencies of the Nazis towards Jews and other minorities became apparent, Keynes made clear his loathing of Nazism. As a lifelong pacifist he had initially favoring peaceful containment, yet he began to advocate for a forceful resolution when many conservatives were still arguing for appeasement. After the war got underway he criticized the left for losing their nerve to confront Hitler.^[12]

“

The intelligentsia of the Left were the loudest in demanding that the Nazi aggression should be resisted at all costs. When it comes to a showdown, scarce four weeks have passed before they remember that they are pacifists and write defeatist letters to your columns, leaving the defense of freedom and civilization to Colonel Blimp and the Old School Tie, for whom Three Cheers.

”

Keynes several times used his influence to help his Jewish friends, most notably when he successfully lobbied for Wittgenstein to be allowed residency in Great Britain. Scholars have suggested the occasional anti-Jewish sentiments expressed in Keynes's private letters reflects clichés current at the time which he accepted uncritically rather than any genuine ill feeling towards Jews. ^[74]

[edit] Allegations of pro-Inflationary views

Rothbard and others have criticized Keynes for being indifferent or even positive about inflation. ^[75] Keynes had indeed expressed a preference for inflation over deflation, saying that if one has to choose between the two evils its "better to disappoint the rentier" than to inflict pain on working class families. However Keynes was consistently adamant about the need to avoid inflation where possible. In The Economic Consequences of the Peace, Keynes had wrote:

“

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

”

Keynes remained convinced of the dangers of inflation to the end of his life, ^[32] during WWII he argued strongly for policies that would minimize post war inflation.

[edit] See also

Wikiversity has learning materials about John Maynard Keynes

• Keynesian economics
• Stockholm School
• John Hicks
• John A. Hobson
• Michał Kalecki
• Simon Kuznets
• Axel Leijonhufvud
• Thomas Malthus
• Donald Markwell
• Alfred Marshall
• J.S. Mill
• Hyman Minsky
• Arthur C. Pigou
• David Ricardo
• Dennis Robertson
• Paul Samuelson
• Robert Skidelsky
• Knut Wicksell
• Keynes family
• Commanding Heights

[edit] Notes

[edit] References

• John Maynard Keynes: Hopes Betrayed 1883-1920, Robert Skidelsky, Papermac, 1992, ISBN 0-333-57379-X (US Edition: ISBN 0-14-023554-X)
• John Maynard Keynes: The Economist as Saviour 1920-1937, Robert Skidelsky, Papermac, 1994, ISBN 0-333-58499-6 (US Edition: ISBN 0-14-023806-9)
• John Maynard Keynes: Fighting for Britain 1937-1946 (published in the United States as Fighting for Freedom), Robert Skidelsky, Papermac, 2001, ISBN 0-333-77971-1 (US Edition: ISBN 0-14-200167-8)
• The Life of John Maynard Keynes, R. F. Harrod, Macmillan, 1951, ISBN 1-12-539598-2
• Essays on John Maynard Keynes, Milo Keynes (Editor), Cambridge University Press, 1975, ISBN 0-521-20534-4
• Keynes , Donald Edward Moggridge , Macmillan, 1980 , ISBN 0-333-29524-2
• Keynes, John Maynard, Don Patinkin, The New Palgrave: A Dictionary of Economics, v. 2, 1987, pp. 19–41. Macmillan ISBN 0-333-37235-2 (US Edition: ISBN 0-935859-10-1)
• The Commanding Heights: The Battle for the World Economy, Daniel Yergin with Joseph Stanislaw, New York: Simon & Schuster, 1998, ISBN 0-684-82975-4
• John Maynard Keynes and International Relations: Economic Paths to War and Peace, Donald Markwell, Oxford University Press, 2006. ISBN 0-19-829236-8 978-0-19-829236-4
• The Economic Consequences of Mr. Keynes: How the Second Industrial Revolution Passed Great Britain By, Bernard C. Beaudreau, iUniverse, 2006, ISBN 0-595-41661-6
• John Maynard Keynes (Great Thinkers in Economics), Paul Davidson, Palgrave Macmillan, 2007 , ISBN 1403996237

[edit] External links

• Works by John Maynard Keynes at Project Gutenberg
• 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)
• Keynes's Career and Biographical Timeline
• Bio, bibliography, and links
• Short bio with birth location
• Biography of Keynes by David Gowland
• Who's This Fella Keynes, Anyway Newsweek "Cheat Sheet" article by Matthew Philips
• Keynes, John Maynard by Jeffrey Escoffier, Glbtq: An Encyclopedia of Gay, Lesbian, Bisexual, Transgender, and Queer Culture (2004)
• Eton College Keynes (Economics) Society
• The Keynesian Revolution
• Essays on John Maynard Keynes and Robert Lekachman by Reuben L. Norman Jr., Ph.D. ( 1998-2007 )
• Smith, Marx, Kondratieff and Keynes: Their Intellectual Life Spans, the Convergence of their Theories based upon the Long Wave Hypothesis and the Internet by Reuben L. Norman Jr., Ph.D. ( June 6, 1998 )
• Keynes and Australia by Donald Markwell , Reserve Bank of Australia (2000)
• Keynes and Internatonal Economic and Political Relations by Donald Markwell, Trinity College, University of Melbourne (2009)

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Persondata
NAME	Keynes, John Maynard, 1st Baron Keynes
ALTERNATIVE NAMES
SHORT DESCRIPTION	British economist
DATE OF BIRTH	5 June 1883
PLACE OF BIRTH	Cambridge, UK
DATE OF DEATH	21 April 1946
PLACE OF DEATH	Tilton, East Sussex, UK