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John Maynard Keynes and His Economic Theory

John Maynard Keynes is perhaps the most influential economist of the modern era. His economic theories were groundbreaking and revolutionary and have had a huge impact on the fiscal policies of many modern democratic governments, including that of the United States.  Keynes is most famous for his interventionist economic policy, known today as Keynesian economic theory.  In Keynesian economic theory, Keynes advocated the active intervention of the government in a nation’s economy.  Keynes believed that in times of recession, depression and economic booms, governments should use all of the fiscal and monetary measures at their disposal in order to alter and guide the effects of these economic conditions to the betterment of the country (Keynes, 1924).  Because of his staggering influence on modern economic thought, scholars today consider Keynes the main founder of macroeconomics.

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John Maynard Keynes was born on June 5, 1883 in Great Britain; Keynes was nobility by birth, holding the hereditary title of Baron.  His father, John Neville Keynes, was an economics professor at Cambridge University, so Keynes came by his penchant for economic thought quite naturally.  Keynes’s mother was Florence Ada Brown; she was an author of some success, as well as a social reformist at a time when it was unusual for women to have careers outside of their families.  Keynes obviously had two very strong, independent, and opinionated figures as role models in his parents, and their early influences no doubt had a direct guiding action on Keynes’s later career ambitions and successes.  This inclination toward high achievement and success can also be seen in Keynes’s younger siblings.  His brother, Geoffrey, became a surgeon and his sister, Margaret, married a Nobel prize winning physiologist.

Keynes married Russian ballerina Lydia Lopokova in 1925.  The marriage produced no children, but Keynes had several nieces and nephews, many of whom became highly successful and well-known in their own careers.  Keynes showed a marked aptitude for financial matters early on in his life and quickly became a successful investor as an adult.  He easily built up a fortune through his investments, though lost most of it in the stock market crash of 1929 (Cottrell, 1995).  However, Keynes’s financial prowess proved indomitable, and he soon built his fortune up again, despite the heavy loss he took in the stock market crash.

Keynes was educated at the famed Eton school in his early years, showing an aptitude for mathematics and history.  This solid early foundation allowed him to be accepted into King’s College in Cambridge, England in 1902, where he studied mathematics.  However, Keynes’s interests went far beyond mere numbers; he was also avidly interested in politics and government.  Because of this, Keynes began to study economics at Cambridge.  Economics is, after all, a blending of mathematics and government, as no government operates without money and economic principles guide a government’s use of money.  Keynes had some remarkable economics professors at King’s College, many of whom were already famous in their fields.  These teachers included the influential economist Alfred Marshall.  Marshall proved to have a powerful influence on Keynes, and Keynes ultimately received his Bachelor’s degree in Economics in 1905 and his Master’s degree in 1909.

After graduating from King’s College with his Master’s degree, Keynes became an economics lecturer at Cambridge College.  This position was, ironically, personally funded by Keynes’s old professor, Alfred Marshall.  Marshall believed strongly in Keynes’s aptitude as an economist, and this belief was a powerful guiding factor in Marshall’s funding of Keynes’s lecturer position at Cambridge.  As a lecturer at Cambridge, Keynes quickly became known as somewhat of an economics prodigy.  His excellent reputation as an economic thinker began to build itself up to staggering proportions.

Before long, Keynes found himself appointed by the British government to the Royal Commission on Indian Currency and Finance.  In this position, Keynes applied economic theory to practical problems in Indian currency and finance and impressed everyone with his remarkable economic prowess.  When World War One came along, Keynes saw his economic abilities put him in high demand as a consultant and advisor.  During the war, he worked directly for the Advisor to the Chancellor of the Exchequer and also to the Treasury on Financial and Economic Questions.  In these positions, Keynes was charged with acquiring scarce currencies for stockpiling by the British government and also with drafting the terms of credit between Great Britain and its allied nations during the war.  Keynes proved so adept at these skills—single-handedly increasing the availability and value of the Spanish peseta coin in one famous instance–that he was appointed as the financial representative of the Treasury of Great Britain to the 1919 Paris Peace Conference (Laybourn, 2002).  This appointment was a major influence and pivotal turning point for the rest of Keynes’s career.

Keynes’s experience and success at the Paris Peace Conference were quickly followed up with his authorship of two remarkable economics books, The Economic Consequences of the Peace in 1919 and A Revision of the Treaty in 1922.  In these books, Keynes made the convincing argument that Germany was being forced to pay reparations to the victor nations from World War One that were too large and burdensome for the war-torn and weary nation to bear.  Keynes argued that being forced to pay such large reparations would ruin Germany’s economy and would lead to more violence in Europe down the road (Dillard, 1948).  In these warnings, Keynes proved to be remarkably and eerily correct.  Germany’s economy suffered the scourge of hyperinflation in 1923, ultimately causing Germany to default on most of the reparations.  Two decades later, Germany was once again at the center of a worldwide conflict with the initiation of hostilities in World War Two.

In 1921, Keynes published another economics book, the Treatise on Probability.  This book took an in-depth look at the philosophy and mathematics behind probability theory, taking the stance that probabilities are simply truth values that are indeterminate between simple truth and falsehood (McCann, 1994).  In 1923, he published A Tract on Monetary Reform which argued that countries should try to make prices of domestic goods more stable while increasing flexibility in the exchange rates of currency between countries.  In 1930, Keynes published the Treatise on Money, which gave a detailed outline of his views on the place and purpose of credit in the economies of nations.

These books were all well-known and well-received, especially among government leaders, fellow economists, and university intelligentsia. However, Keynes’s greatest, most influential, and best-known work came in 1936 with the publication of the General Theory of Employment, Interest, and Money.  Keynes used this book to express and elaborate on his theory that aggregate demand explained the variations in the overall level of economic activity of a nation.  These variations were directly observed during the Great Depression and helped Keynes to formulate and solidify his theory.  In this theory, Keynes believed that the total income a society produces is determined by the sum of the consumption and investment in that society.  When there is unemployment and untapped production capacity, these things can be increased and improved by increasing the expenditures for either consumption or investment.  On the other hand, Keynes believed that the total amount of savings in a society is determined by the total income produced in that society; therefore, the economy of that society should be able to increase its total savings by increasing the expenditures for investment, even if interest rates are lowered.

This book is where Keynes first introduced his interventionist economic theory that made him world famous.  In this book, Keynes strongly advocated active intervention by the government into the economic affairs of the nation it governed.  Keynes particularly wanted governments to intervene in economic affairs in times of high unemployment.  By intervening in whatever ways it had at its disposal, such as in increased spending on public works and other projects designed to increase the need for new jobs in the economy.  This interventionist government theory had a big influence on U.S. president Franklin Delano Roosevelt when he was formulating his New Deal to bring America out of the Great Depression.  This led Roosevelt to begin deficit spending, something most economists of the time vehemently disagreed with, believing it to be bad for a nation’s economy.  However, after seeing the effectiveness of the New Deal in bringing the American economy back to life, modern economists gradually began to embrace Keynes’s ideas; after all, there is nothing like seeing a plan in action to make believers out of even the worst skeptics.

The publication of the General Theory of Employment, Interest, and Money is widely considered by economic scholars to be the birth of the modern field of macroeconomics.  In this book, the influence of Keynes’s old mentor, Alfred Marshall, can be keenly felt.  Keynes argues that prices and wages in a society are, by nature, flexible and that the interaction of aggregate demand and aggregate supply can cause unemployment levels to become stable.  Up until that point, most economists believed that the market will eventually bring about full employment through natural forces; however, Keynes believed this to be not always the case.  In fact, Keynes argued that the market can naturally support and bring about a variety of states of employment and unemployment, depending on the interaction between aggregate supply and aggregate demand (Keynes, 1936).

Keynes argued in this work that labor productivity actually decreases as employment increases.  He also believed that wages decrease as employment increases.  These two arguments were later proven to be incorrect, and mark one of just a handful of instances where the theories of Keynes have been disproved.  However, even Albert Einstein has had some of his theories disproved; Keynes was, as we all are, only human and prone to error.  His genius is borne out in the fact that so many of his economic theories have been proven out and have withstood the test of time.  The fact that his theories have had so much influence on the modern economic policies of many nations, and that these theories continue to have influence in the affairs of nations, is further testament to the strong and solid economic mind and abilities of Keynes.  He was truly one of the great economic theorists in history.

Because of Keynes’s fame and influence and the good things his ideas brought to Great Britain and other nations, the British government rewarded Keynes with a seat in the House of Lords in parliament.  Keynes took this seat in 1942, which allowed him to play a role in influencing Britain’s policies during World War Two.  Keynes successfully argued that Britain should pay for its part in the war by increasing taxes, so as to avoid the inflation that could come about through deficit spending at that time.  Keynes also served as chairman of the World Bank commission (and leader of the British delegation to that commission).  The World Bank Commission established guidelines for a world banking system between nations, a major turning point in the field of macroeconomics.  In fact, the establishment of the world banking system relied heavily on the Keynes Plan, which established an international clearing union and the radical management of currencies in a central world bank.  Keynes also argued for a common world unit of currency, but this particular argument failed to carry, as the United States was opposed to it, and the United States had a greater negotiating power on the World Bank Commission at that time than did other participating nations.

Keynes continued his brilliant economic career with the publication of Essays in Biography.  In this book, Keynes wrote vivid and detailed biographies of famous economists.  He also wrote Essays in Persuasion, in which he attempted to persuade influential economic decision makers during the Great Depression over to his way of economic thinking.  Keynes was also the editor-in-chief of the Economic Journal.  In whatever he did, Keynes was always on the cutting edge of economics and in positions where he could have a direct influence on the economic processes of the times.

John Maynard Keynes died on April 21, 1946, due to heart health problems.  These problems were likely aggravated due to the stress he was under from the end of the war and his many duties and responsibilities of the time.  However, Keynes’s fame and influence did not die with him, not by any stretch of the imagination.  His work on the World Bank Commission continued to have a lasting effect on the operations of that austere body and on economic relations between the nations of the world, even into the present day.  His economic theories formed the basis of the operations economic policies of the United States government well into the 1970s.  Even today, the economic polices of the United States and that of many other democratic nations in the world are still influenced by the theories of John Maynard Keynes, at least to some degree.  There are entire classes in universities nowadays that are devoted to Keynesian economics.  Economic scholars are still talking about and debating the finer points and the merits of Keynes’s economic theories.  It is rare that so influential, and sometimes controversial, a thinker emerges in the field of economics, and even rarer still that an economist is born whose name continues to be easily recognizable as a leader in the field by even the general public long after they are gone.  John Maynard Keynes is one of the few with this distinction, and that is a legacy unto itself.
























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