Learn about John Maynard Keynes' economic theory, his books, and Keynesian economics. Discover his contribution to the field, especially regarding population.
Updated: 04/09/2022
John Maynard Keynes
Who is John Maynard Keynes?
John Maynard Keynes, a British economist, was born in 1883 and lived for 63 years, and died in 1946. He was born and raised in Cambridge in a middle-income family with his father Neville Keynes and his mother, Florence Keynes. John Keynes' father was also an economist but later shifted to academic administration in one of Cambridge's colleges, King's College, where his son also attended higher education. John Maynard Keynes' mother happened to be a graduate of the same school. She was one of the first female individuals to graduate from that college.
John went to King's College in 1902 to undertake a bachelor's degree in mathematics. However, while undertaking his degree in mathematics, he encountered an economist named Alfred Marshall, who convinced him to shift his focus from mathematics to economics and politics. Alfred Marshall and Arthur Pigou helped him undertake classes on the quantity theory of money, which later played a significant role in his works. John Keynes completed his studies and joined civil service in Whitehall, a street in Britain with several government offices, in the Indian Office.
This endeavor shaped his first major project, which was to analyze India's monetary system, named Indian Currency and Finance. In 1908, he went back to Cambridge to work as an economics lecturer. He later went to work in the British Treasury, where he climbed the ladder to become a representative of the Treasury at the Versailles Conference in 1919. All these experiences formed his theories and writings, which would turn out to be transformational and of significant influence on government policies. Keynes' economic theories were well known in his time because of being a key proponent of monetary and fiscal policies to curb economic downturns. He founded the Keynesian economics school of thought, earning him the respect of being dubbed the "father of macroeconomics".
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.
Keynesian Economic Theory
John Maynard Keynes introduced Keynesian economics theory using a set of ideas combined under "The General Theory of Employment, Interest, and Money", aiming at theoretically and intellectually explaining the full implementation of government policies. The theory was devoted to providing a reliable approach to economic policies in the West.
In the 1930s, as the Great Depression was occurring, the economic theories of the time could not reliably explain the prevailing global economic downturns and solutions for promoting the onset of employment and production. The existing theories before Keynes' theories were from Adam Smith; the free market theory and the invisible hand. These theories were insufficient to provide a solution to the rough economic busts and booms.
Keynes then came up with his theory, where he argued that the government needed to be actively involved in the economy's management. He asserted that the purchase of open market bonds by the Federal Reserve would translate to a rise in the money supply and a decline in interest rates. Therefore, according to him, having an entirely free market without government involvement was unreliable. However, Keynes was also a proponent of free markets, but he argued that the purpose of the government getting involved in the operation of free markets would be to aid in the management of the business cycle.
Keynes also had a view on population where he clearly advocated for population control, arguing that the world would be a happier place if the population diminished and the quality of economic wellbeing rose. Therefore, he proposed using violence by the government to curb overpopulation, especially in the East.
Keynes was against the return to the gold standard by the U.S and Britain after World War II because both countries returned to the policy after WWI where they would set a threshold of printing currency based on the gold value at hand. Keynes vehemently argued that this was not the best direction because gold was undergoing instability and proposed a well-controlled credit system where the government would print money based on necessity.
John Maynard Keynes Books
1. The Indian Currency and Finance
John Maynard Keynes's first major work was the publication of "Indian Currency and Finance", in which he explained the country's monetary operations regarding currency and finance before World War I. After working in British Treasury for a while, when Germany was defeated in the war, he resigned and opted to become an economic activist.
2. The Economic Consequences of the Peace
The German defeat led to another major work described in the book "The Economic Consequences of the Peace". He established this move in a bid to defend Germany as it was forcefully supposed to render payments of war costs incurred by the countries that won after WWI.
3. The General Theory of Employment, Interest, and Money
Keynes was concerned about the prevailing and constantly increasing unemployment rate even before the Great Depression. He supported the public works program by Lloyd George, which was characterized by heightening government expenditure.
However, economists did not really understand this concept because Keynes did not also provide a theoretical explanation of the same. Later on, he developed the theory named "The General Theory of Employment, Interest, and Money" which explained that government jobs were the primary solution to reducing unemployment and not reducing wage rates.
Influence and Criticism of Keynes
Keynes's ideas were influential and revolutionary, especially after WWI and the Great Depression. Throughout the Great Depression, he challenged the invisible hand theory and neoclassical economics, which were proponents of free markets to attaining full employment. His thinking was that the determinant of reducing employment was not embedded in the price of labor or wage rate but in expenditure towards heightening demand.
Keynes also greatly influenced the view of macroeconomic policies and their application in today's world because the ideas are adopted to date. His argument was that an economy's total spending significantly impacted its overall output, inflation, and employment rate.
However, Keynesian Economics raised criticisms and concerns amongst other economists who did not entirely subscribe to Keynes' ideas. Keynesian economics proposed that the government should heighten its budget deficit during economic downturns. However, critics argued that this would translate to crowding out where interest rates would rise, causing a decline in private sector investment.
Critics also argued that adopting the expansionary fiscal policy would only lead to a short-term solution but cause inflation when it appears like the economy is in recovery from a recession. Monetarists like Milton Friedman criticized Keynesian economics by arguing that inflation was of more concern than unemployment after heightening demand because inflation only went high and unemployment did not decrease.
Therefore, Keynesian economics was positively impactful and accepted after the Great Depression and WWII because it seemed to provide solutions to the post-economic crisis and post-war problems. However, this lasted until the 1970s, when stagflation occurred and aggregate demand increased. Stagflation describes the economic situation where unemployment and inflation both heighten, causing slow growth in the economy. Monetarists and supply-side economists criticized Keynesian economics and shifted their focus to lowering inflation, and from that time onwards, Keynesian economics was not appreciated as much.
When the financial crisis and Great Recession occurred in 2007, Keynesian economics gained popularity again when the government applied the fiscal policy of implementing tax cuts and lowering interest rates to heighten the employment rate. The initiative helped curb the recession but was a supplement to the monetary policy.
Lesson Summary
John Maynard Keynes, a renowned British economist and revolutionist, was born in 1883 in Britain and died in 1946 in Sussex, U.K. He studied at Kings College, where he received his mathematics bachelor's degree. However, he encountered Alfred Marshall while in college and was convinced to shift to economics. Based on experiences garnered through his education, being a lecturer, and general working experience, he came up with economic ideologies that would help revolutionize views on economic policies, bearing the name Keynesian economics. In the 1930s, after the Great Depression, Keynes challenged the ability of free markets to help in curbing recessions. He argued that the government was to operate within the free market to help manage the business cycle by managing the unstable booms and busts. Keynesian economics also proposed the use of fiscal policy by the Federal Reserve to lower interest rates and raise the money supply by buying open market bonds.
After World War II, Keynes was against the return of Britain and the United States to the gold standard where the printing of currency was limited to the value of the gold they had. He proposed that the government should print money based on the prevailing needs in the economy. Keynes' theories were significantly adopted after the Great Depression and WWII due to the provision of solutions to the economic issues that arose from the occurrence of both events. However, in the 1970s, stagflation occurred where both inflation and unemployment underwent an upturn. Therefore, Keynesian economics was disregarded from that time until the occurrence of the Great Recession in 2007, when the theory gained popularity again. This was because of its use in helping curb the recession through fiscal policies like tax cuts and the reduction of interest rates.
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.
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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.
As you might expect, after the 'Great Recession' and financial crisis of 2007-2008, there was a resurgence of interest in Keynesian thought. Movements like 'Occupy Wall Street' became a voice for a growing group of citizens who were trying to take care of themselves but couldn't find a job to do so, all while CEOs and Wall Street traders made millions upon millions in bonuses. Once again, many saw the invisible hand holding down the masses and lifting up a select few. The extent to which the popularity of Keynesian thought makes its way into policy is yet to be seen.
Lesson Summary
Depending on the economic environment at any given time, popular opinion may follow Keynesian thought, or it may take on a more laissez-faire flavor (no government involvement). To find the best solution, managers, citizens, and policymakers need to understand the principles behind each approach to a capitalist economy. In this lesson, you learned about one side of that - the side based on the thoughts and theories of John Maynard Keynes.
Key Terms
- boom and bust: economic cycle in which every few years, the economy went through periods of growth and shrinking, costing people their jobs and wealth
- 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
- Keynesian economics: the name of economic theories that encouraged government involvement in the economy
Learning Outcomes
Study the lesson on John Maynard Keynes, and when you're ready, tackle these goals:
- Present a brief synopsis of John Maynard Keynes's background
- Discuss the fact that Keynes' economic theory differed from current economic theory of his day
- Point out the ways in which Keynesian economics was received through the last century
To unlock this lesson you must be a Study.com Member.
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Additional Info
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.
|
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.
As you might expect, after the 'Great Recession' and financial crisis of 2007-2008, there was a resurgence of interest in Keynesian thought. Movements like 'Occupy Wall Street' became a voice for a growing group of citizens who were trying to take care of themselves but couldn't find a job to do so, all while CEOs and Wall Street traders made millions upon millions in bonuses. Once again, many saw the invisible hand holding down the masses and lifting up a select few. The extent to which the popularity of Keynesian thought makes its way into policy is yet to be seen.
Lesson Summary
Depending on the economic environment at any given time, popular opinion may follow Keynesian thought, or it may take on a more laissez-faire flavor (no government involvement). To find the best solution, managers, citizens, and policymakers need to understand the principles behind each approach to a capitalist economy. In this lesson, you learned about one side of that - the side based on the thoughts and theories of John Maynard Keynes.
Key Terms
- boom and bust: economic cycle in which every few years, the economy went through periods of growth and shrinking, costing people their jobs and wealth
- 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
- Keynesian economics: the name of economic theories that encouraged government involvement in the economy
Learning Outcomes
Study the lesson on John Maynard Keynes, and when you're ready, tackle these goals:
- Present a brief synopsis of John Maynard Keynes's background
- Discuss the fact that Keynes' economic theory differed from current economic theory of his day
- Point out the ways in which Keynesian economics was received through the last century
To unlock this lesson you must be a Study.com Member.
Create your account
Frequently Asked Questions
Who is John Maynard Keynes in economics?
John Maynard Keynes is deemed the "father of modern macroeconomics" after steering Keynesian economics by writing books and articles to support his economic beliefs theoretically.
What did Maynard Keynes believe?
John Maynard Keynes believed that neoclassical economics was not sufficient to provide solutions to recessions and unemployment. He believed that government involvement in free markets was helpful in managing the business cycle.
What is John Maynard Keynes best known for?
John Maynard Keynes is best known for his contribution in explaining the causes of persistent unemployment and providing solutions thereafter. These were encompassed in his General Theory of Employment, Interest, and Money in Keynesian economics.
How did John Maynard Keynes influence the world?
John Maynard Keynes influenced the world by providing an economic reference to future generations on economics regarding the use of monetary and fiscal policies to mitigate economic downturns and recessions.
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John Maynard Keynes Economic Theory & Books | Who was John Maynard Keynes?
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