John Maynard Keynes, a highly influential 20th-century economist, whose theories revolutionized macroeconomics and government policy.
John Maynard Keynes stands as a towering figure in the landscape of 20th-century economics. His groundbreaking ideas were so transformative that they not only sparked intense debate but also gave rise to an entire school of economic thought named in his honor: Keynesian economics. Serving as a benchmark, Keynes’s work provides a lens through which the contributions of virtually all economists who followed can be evaluated and understood. His legacy is not just in specific theories, but in fundamentally shifting the way economists approach and analyze the complexities of the modern economy.
Born and educated in the intellectual hub of Cambridge, Keynes’s academic journey began at King’s College, Cambridge, culminating in a mathematics degree in 1905. His thirst for knowledge led him to stay another year, immersing himself in economics under the tutelage of distinguished economists Alfred Marshall and Arthur Pigou. Pigou’s scholarly work on the quantity theory of money notably influenced Keynes’s later publication, Tract on Monetary Reform. Venturing beyond academia, Keynes entered the British civil service. This period provided him with firsthand experience and data, which he meticulously compiled into his debut book on economics, Indian Currency and Finance. In this work, he offered a detailed exposition of the intricacies of India’s monetary system. By 1908, he returned to Cambridge as a lecturer, but his career path soon took another turn as he accepted a leave of absence to serve in the British Treasury. His ascent through the ranks was rapid, and by 1919, he held the esteemed position of the Treasury’s principal representative at the Versailles Peace Conference. However, his tenure was marked by dissent; believing the Treaty of Versailles imposed excessively harsh terms on Germany, Keynes resigned in protest.
Following his resignation, Keynes returned to the academic environment of Cambridge, resuming his lecturing duties. His influence extended beyond academia; he became a prominent voice as a journalist and speaker and was an integral member of the Bloomsbury Group, a collective of influential writers, intellectuals, philosophers and artists, which included luminaries such as Virginia Woolf and Bertrand Russell. Keynes’s expertise was again called upon on the international stage in 1944 at the Bretton Woods Conference. As one of the key architects of the postwar economic order, he played a crucial role in establishing the International Monetary Fund and shaping the system of fixed exchange rates that would govern international finance for decades. In his personal life, 1925 marked his marriage to the Russian ballet dancer Lydia Lopokova. His contributions to economics and public life were recognized with a knighthood in 1942, elevating him to the rank of Lord. John Maynard Keynes passed away on April 21, 1946. His father, John Neville Keynes, himself a celebrated economist of his time, survived him.
Keynes’s rise to public prominence preceded his recognition as a leading economist. His 1919 book, The Economic Consequences of the Peace, became a sensation, catapulting him to celebrity status. In this powerfully argued work, Keynes critiqued the onerous reparations demanded of Germany by the Allied powers after World War I. He astutely predicted that the sheer magnitude of these payments would trap Germany in perpetual poverty, leading to political instability. History would later prove Keynes’s analysis to be remarkably prescient. Beyond its economic insights, the book offered sharp character assessments of the Council of Four – Georges Clemenceau of France, British Prime Minister David Lloyd George, U.S. President Woodrow Wilson, and Vittorio Orlando of Italy – the principal architects of the treaty.
Keynes famously wrote of the Council: “The Council of Four paid no attention to these issues [including fostering good neighborly relations between Germany and Austro-Hungary], being preoccupied with others—Clemenceau to crush the economic life of his enemy, Lloyd George to do a deal and bring home something which would pass muster for a week, the President to do nothing that was not just and right” (Chapter 6).
During the 1920s, Keynes adhered to the quantity theory of money, a doctrine now known as monetarism. His writings on monetary issues during this period were firmly rooted in the principles imparted by his mentors, Marshall and Pigou. His publications, Tract on Monetary Reform (1923) and Treatise on Money, explored various aspects of monetary policy. His central policy prescription was the use of interest rates by central banks to stabilize the price level – lowering rates to combat inflation and raising them to counter deflation.
However, the persistent high unemployment in Britain during the interwar years, reaching as high as 20 percent, prompted a significant shift in Keynes’s economic thinking. Driven to understand the underlying causes of Britain’s economic malaise, he embarked on a profound intellectual journey that culminated in The General Theory of Employment, Interest and Money. This landmark work marked a dramatic departure from his earlier views and revolutionized macroeconomic theory.
The General Theory fundamentally reshaped how economists understood the economy. It was revolutionary in its introduction of aggregate demand as the sum of consumption, investment, and government spending. It controversially argued that full employment could only be achieved and sustained through active government spending. Economists continue to debate Keynes’s diagnosis of the causes of high unemployment. While some believe he attributed it to the slow adjustment of wages, Keynes actually opposed wage cuts, arguing in The General Theory for wage stability. He posited that general wage reductions would depress income, consumption, and aggregate demand, thus negating any potential benefits from lower labor costs.
Keynes challenged the conventional wisdom that markets would naturally self-correct to full employment. He argued that in times of economic downturn, governments should proactively step in to compensate for flagging private investment by increasing public spending on works and employing the jobless. The General Theory advocated for deficit spending as a tool to maintain full employment during recessions. Initially met with resistance, the idea of deficit spending gradually gained traction, particularly as balanced budgets were the norm at the time. However, the urgency of the Great Depression and the compelling logic of Keynes’s arguments led to a shift in policy thinking. Governments, including the U.S., began to implement public works projects to stimulate employment. Once embraced, the concept of deficit spending became a lasting feature of government economic policy, often outliving the downturns it was initially intended to address.
Despite being perceived by some critics as anti-market, Keynes was a staunch advocate for the efficiency of free markets under conditions of full employment. In fact, it was Keynes who famously articulated the classical view of market efficiency: “There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them.” Keynes believed that once fiscal policy had achieved full employment, the market mechanism could operate optimally. He further stated, “Thus, apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialise economic life than there was before.”
While Keynes’s original framework has been extensively revised and expanded upon, his foundational ideas continue to resonate in modern economic theory. Contemporary Keynesian economics, while rooted in The General Theory, is the product of decades of refinement and development by subsequent economists such as John Hicks, James Tobin, Paul Samuelson, Alan Blinder, Robert Solow, William Nordhaus, Charles Schultze, Walter Heller, and Arthur Okun. The field of econometrics itself owes much of its development to the effort to empirically validate Keynesian macroeconomic models. The enduring influence of John Maynard Keynes is evident in the vast number of distinguished economists whose work builds upon his pioneering contributions, a testament to the profound and lasting impact of his ideas on economic thought.
About the Author
David R. Henderson is the editor of The Concise Encyclopedia of Economics. He is also an emeritus professor of economics with the Naval Postgraduate School and a research fellow with the Hoover Institution at Stanford University. He earned his Ph.D. in economics at UCLA.
Selected Works
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Indian Currency and Finance. Reprinted in Keynes, Collected Writings. Vol. 1.
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The Economic Consequences of the Peace. Reprinted in Keynes, Collected Writings. Vol. 2.
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The Economic Consequences of the Peace. New York: Harcourt, Brace, and Howe. Available online at: http://www.econlib.org/library/YPDBooks/Keynes/kynsCP.html.
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A Tract on Monetary Reform. Reprinted in Keynes, Collected Writings. Vol. 4.
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The Economic Consequences of Mr. Churchill. Reprinted in Keynes, Collected Writings. Vol. 9.
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A Treatise on Money. Vol. 1: The Pure Theory of Money. Reprinted in Keynes, Collected Writings. Vol. 5.
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A Treatise on Money. Vol. 2: The Applied Theory of Money. Reprinted in Keynes, Collected Writings. Vol. 6.
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The General Theory of Employment, Interest and Money. Reprinted in Keynes, Collected Writings. Vol. 7.
1971–88. Collected Writings. London: Macmillan, for the Royal Economic Society.
Footnotes
1. General Theory, pp. 378–397.
Related Entries
Abba Ptachya Lerner
Lionel Robbins
Joan Violet Robinson
Jean Baptiste-Say
New Keynesian Economics
New Classical Macroeconomics
National Income Accounts
Related Links
Alberto Mingardi, Of Kings, Keynes, and Capitalism, at Econlib. December 7, 2020.
Pedro Schwartz, Gold is Money, In Spite of Mr. Keynes, at Econlib, May 6, 2013.
Pedro Schwartz, Keynes as Lucifer, at Econlib, September 7, 2015.
David Henderson, Economists Waging War, at Econlib, August 3, 2020.
Steve Fazzari on Keynesian Economics, an EconTalk podcast, January 12, 2009.
Steve Fazzari on Stimulus and Keynes, an EconTalk podcast, January 24, 2011.
Nicholas Wapshott on Keynes and Hayek, an EconTalk podcast, October 17, 2011.
Ricardo Reis on Keynes, Macroeconomics, and Monetary Policy, an EconTalk podcast, April 27, 2009.
Benn Steill on The Battle of Bretton Woods, an EconTalk podcast, February 16, 2015.
Larry White on The Clash of Economic Ideas, an EconTalk podcast, May 28, 2012.
Leonidas Zelmanovitz, Vera Smith: The Contrarian View, a Liberty Classic at Econlib, January 7, 2019.
