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John Maynard Keynes: Economic Theory & Overview

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

Only the most influential thinkers in a discipline have an entire field named after them. In this lesson, you'll learn about one such economist - John Maynard Keynes. After the lesson, you can test your understanding with a short quiz.

Short Biography

John Maynard Keynes was a British economist who lived from 1883 - 1946. Keynes' economic theories had a significant influence on policy in Europe and America during and after the Great Depression. Professionally, Keynes spent time as an economics lecturer at Cambridge and as an employee of the British government working in India. While both experiences played an important role in Keynes' career, it was his writings while at Cambridge that gave him the exposure that would allow him to ultimately influence government policies around the world.

Economic Theory

Prior to Keynes, most European economies - and certainly the United States - had relied on Adam Smith's theory of free markets and the invisible hand. For the most part, the growth of capitalism was good to the countries that used it; just as it was supposed to, it provided the incentive for innovation and hard work. But it also created a boom and bust cycle that meant every few years the economy would shrink, costing people their jobs and wealth. Keynes thought there might be a better way for governments to be involved in the economy that could help smooth out the economic cycle that led the busts.

Keynes suggested that governments should take an active role in managing the economy. He believed that by being involved in the bond market, both as a seller and a buyer, governments could influence interest rates. By influencing interest rates, governments could encourage or discourage consumers from saving money. If the economy was struggling, the government could buy bonds, making interest rates drop. Since people wouldn't be able to make much money on their savings, and because they could borrow money so cheap, there would be more spending, and thus, economic growth.

On the other hand, if the economy started to grow too fast and inflation became a concern, the government could sell bonds, taking money out of the system and forcing rates higher, encouraging people to save rather than spend. Keynes' idea required constant monitoring and action by a centralized bank, but he strongly believed that involvement could eliminate, or at least seriously minimize, the severity and frequency of economic busts.

John Maynard Keynes

During World War I, Britain and the United States suspended the gold standard - a monetary policy aimed at controlling inflation that set a limit on the amount of currency a country could print to the value of the gold they held. After World War I, both countries went back to the gold standard, but Keynes argued that was a bad idea. Again, Keynes was pro-government intervention in the economy, and having currency tied to a standard limited what governments could do. The impact of Keynes' theories are clear today as the gold standard is no longer used anywhere in the world, and central banks play a huge role in domestic and international economies.

Keynesian Economics

Keynes' theories focused on the role government could, and should, play in managing fiscal policy to help foster sustainable economic growth. Keynes was supportive of government intervention, so the name of economic theories that encouraged government involvement in the economy became known as Keynesian Economics.

Reception of Keynesian economics has varied over the past century. During his lifetime, Keynes was very involved in helping Britain establish economic policy, and other European countries and the United States applied many of his theories. Especially after the Great Depression, the idea that the government could help eliminate, or at least minimize the impact of, economic busts was very popular. It remained a popular idea until the late 1970s, when the ideas of Milton Friedman, the ideologies of world leaders like Margaret Thatcher and Ronald Reagan, and the fear of big government that came from the post-Cold War USSR all emerged to cast a cynical shadow over government involvement in any aspect of the economy.

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