, as well as the economic policies of governments. He greatly refined earlier work on the causes of business cycle
s, and advocated the use of fiscal
and monetary measures to mitigate the adverse effects of economic recession
s and depressions
I work for a Government I despise for ends I think criminal.
In truth, the gold standard is already a barbarous relic.
If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.
Most men love money and security more, and creation and construction less, as they get older.
Words ought to be a little wild, for they are the assault of thoughts on the unthinking.
His peculiar gift was the power of holding continuously in his mind a purely mental problem until he had seen it through.
, as well as the economic policies of governments. He greatly refined earlier work on the causes of business cycle
s, and advocated the use of fiscal
and monetary measures to mitigate the adverse effects of economic recession
s and depressions
. His ideas are the basis for the school of thought known as Keynesian economics
, as well as 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 in the short to medium term automatically provide full employment, as long as workers were flexible in their wage demands. Keynes instead argued that aggregate demand
determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment. Following the outbreak of World War II, Keynes's ideas concerning economic policy were adopted by leading Western economies. During the 1950s and 1960s, the success of Keynesian economics resulted in almost all capitalist governments adopting its policy recommendations, promoting the cause of social liberalism
Keynes's influence waned in the 1970s, partly as a result of problems that began to afflict the Anglo-America
n economies from the start of the decade, and partly because of critiques from Milton Friedman
and other economists who were pessimistic about the ability of governments to regulate the business cycle with fiscal policy. However, the advent of the global financial crisis in 2007 caused a resurgence in Keynesian thought
. Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the crisis by Presidents George W. Bush
and Barack Obama
of the United States, Prime Minister Gordon Brown
of the United Kingdom, Prime Minister Kevin Rudd
of Australia, and other global leaders.
Keynes is widely considered to be one of the founders of modern macroeconomics
, and to be the most influential economist of the 20th century. In 1999, Time magazine included Keynes in their list of the 100 most important and influential people of the 20th century
, commenting that: "His radical idea that governments should spend money they don't have may have saved capitalism." In addition to being an economist, Keynes was also a civil servant, a director of the Bank of England
, a patron of the arts and an art collector, a part of the Bloomsbury Group
of intellectuals, an advisor to several charitable trusts, a writer, a private investor, and a farmer.
Early life and education
to an upper-middle-class family. His father John Neville Keynes
was an economist and a lecturer in moral sciences at the University of Cambridge and his mother Florence Ada Keynes
a local social reformer. Keynes was the first born, and was followed by two more children – Margaret Neville Keynes in 1885 and Geoffrey Keynes
According to economist and biographer Robert Skidelsky, Keynes's parents were loving and attentive. 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. Keynes's mother made her children's interests her own, and according to Skidelsky, "because she could grow up with her children, they never outgrew home".
Keynes had his early education at home and in kindergarten. He attended Perse School as a day pupil from 1892–1897. Teachers described Keynes as brilliant, but on occasion, careless and lacking in determination. His health was often poor during this period, leading to several long absences.
Keynes won a scholarship to Eton
, where he displayed talent in a wide range of subjects, particularly mathematics, classics
and history. At Eton, Keynes experienced the first "love of his life" in Dan Macmillan, older brother of the future Prime Minister Harold Macmillan
. Despite his middle-class background, Keynes mixed easily with upper-class pupils. In 1902 Keynes left Eton for King's College, Cambridge
after receiving a scholarship for this also to study mathematics
. Alfred Marshall
begged Keynes to become an economist,
although 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 Cambridge, Keynes became the President of the Cambridge University Liberal Club. In May 1904 he received a first class B.A. in mathematics. Aside from a few months spent on holidays with family and friends, Keynes continued to involve himself with the university over the next two years. He took part in debates, further studied philosophy and attended economics lectures informally as a graduate student. He also studied for his 1905 Tripos
and 1906 civil service exams.
The economist Harry Johnson
wrote that the optimism imparted by Keynes's early life is key to understanding his later thinking.
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.
Keynes's optimism was also cultural, in two senses – he was of the last generation raised by an empire still at the height of its power, in its own eyes and by much of the world (at least outwardly) seen as preeminent in both power and benevolence. Keynes was also of the last generation who felt entitled to govern by culture, rather than by expertise. According to Skidelsky, the sense of cultural unity current in Britain from the 19th century to the end of World War I provided a framework with which the well-educated could set various spheres of knowledge in relation to each other and to life, enabling them to confidently draw from different fields when addressing practical problems.
CareerKeynes's Civil Service career began in October 1906, as a clerk in the India Office
. He enjoyed his work at first, but by 1908 had become bored and resigned his position 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 published his first professional economics article in the Economics Journal, about the effect of a recent global economic downturn on India.
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 Indian Currency and Finance – the same topic as his book – where Keynes showed considerable talent at applying economic theory to practical problems.
World War IThe British Government called on Keynes's expertise during the First World War. While he did not formally re-join the civil service in 1914, Keynes travelled to London at the government's request a few days before hostilities started. 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 this would be a bad idea, as it would hurt the future reputation of the city if payments were suspended before absolutely necessary.
In January 1915 Keynes took up an official government position 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" because of 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, choosing instead to sell them all to break the market: his boldness paid off, as pesetas then became much less scarce and expensive. In the 1917 King's Birthday Honours, Keynes was appointed Companion of the Order of the Bath for his wartime work, and his success led to the appointment that would have a huge effect on Keynes's life and career; Keynes was appointed financial representative for the Treasury to the 1919 Versailles peace conference
. He was also appointed Officer of the Belgian Order of Leopold.
The Versailles peace conference
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 traumatise 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 that both Keynes himself and the Treasury were largely excluded from formal high-level talks concerning reparations. Their place was taken by the Heavenly Twins
– the judge Lord Sumner
and the banker Lord Cunliffe
whose nickname derived from the "astronomically" high war compensation they wanted to demand from Germany. Keynes was forced to try to 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 lenient treatment of Germany – he feared too harsh conditions could foment 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. Hence 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.
In June 1919 he turned down an offer to become chairman of the British Bank of Northern Commerce
, a job that promised a salary of £2000 in return for a morning per week of work.
Keynes's analysis on the predicted damaging effects of the treaty appeared in the highly influential book, 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 analysis, the book contained pleas to the reader's sense of compassion
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:
Keynes's predictions of disaster were borne out when the German economy suffered the hyperinflation of 1923
, and again by the collapse of the Weimar Republic
and the outbreak of World War II. 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 was not until after the outbreak of World War II that Keynes was offered a directorship of a major British Bank, or an acceptable offer to return to government with a formal job. However, Keynes was still able to influence government policy making – through his network of contacts, his published works and by serving on government committees, including attending high-level policy meetings as a consultant.
In the 1920s
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 1924 Keynes wrote an obituary
for his former tutor
which Schumpeter called "the most brilliant life of a man of science I have ever read."
Marshall's widow was "entranced" by the memorial, while Lytton Strachey rated it as one of Keynes's "best works".
In 1922 Keynes continued to advocate reduction of German reparations with A Revision of the Treaty. He attacked the post World War I 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. Britain suffered from high unemployment
through most of the 1920s, leading Keynes to recommend the depreciation of sterling
to boost jobs by making British exports more affordable. From 1924 he was also advocating a fiscal response, where the government could create jobs by spending on public works. During the 1920s Keynes's pro stimulus views had only limited effect on policy makers and mainstream academic opinion – according to Hyman Minsky one reason was that at this time his theoretical justification was "muddled" . The Tract had also called for an end to the gold standard. Keynes advised it was no longer a net benefit for countries such as Britain to participate in the gold standard
, as it ran counter to the need for domestic policy autonomy. It could force countries to pursue deflationary policies at exactly the time when expansionary measures were called for to address rising unemployment. The Treasury and Bank of England were still in favour of the gold standard and in 1925 they were able to convince the then Chancellor Winston Churchill
to re-establish it, which had a depressing effect on British industry. Keynes responded by writing The Economic Consequences of Mr. Churchill and continued to argue against the gold standard until Britain finally abandoned it in 1931.
During the Great DepressionKeynes had begun a theoretical work to examine the relationship between unemployment, money and prices back in the 1920s. The work, Treatise on Money
, was published in 1930 in two volumes. A central idea of the work 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 wanting to spend too high a proportion of what employers pay out, making it difficult, in aggregate, for employers to make a profit.
Keynes was deeply critical of the British government's austerity measures during the Great Depression. He believed that budget deficits were a good thing, a product of recessions. He wrote, "For Government borrowing of one kind or another is nature's remedy, so to speak, for preventing business losses from being, in so severe a slump as to present one, so great as to bring production altogether to a standstill."
At the height of the Great Depression
, in 1933, Keynes published The Means to Prosperity, which contained specific policy recommendations for tackling unemployment in a global recession, chiefly counter cyclical public spending. The Means to Prosperity contains one of the first mentions of the multiplier effect. While it was addressed chiefly to the British Government, it also contained advice for other nations affected by the global recession. A copy was sent to the newly elected President Roosevelt and other world leaders. The work was taken seriously by both the American and British governments, and according to Skidelsky, helped pave the way for the later acceptance of Keynesian ideas, though it had little immediate practical influence. In the 1933 London Economic Conference
opinions remained too diverse for a unified course of action to be agreed upon.
to address President Roosevelt directly, which he did by letters and face to face in 1934, after which the two men spoke highly of each other. However according to Skidelsky, the consensus is that Keynes's efforts only began to have a more than marginal influence on US economic policy after 1939.
Keynes's magnum opus
, the General Theory of Employment, Interest and Money was published in 1936. It was researched and indexed by one of Keynes's favourite students, later the economist David Bensusan-Butt
. The work served as a theoretical justification for the interventionist policies Keynes favoured for tackling a recession. The General Theory challenged the earlier neo-classical economic paradigm, which had held that provided it was unfettered by government interference, the market would naturally establish full employment
equilibrium. In doing so Keynes was partly setting himself against his former teachers Marshal and Pigou. 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 Say's Law
, which, simply put, states that "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 price 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. Due in part to price stickiness, it was established that the interaction of "aggregate demand" and "aggregate supply" may lead to stable unemployment equilibria – and in those cases, it is the state, and not the market, that economies must depend on 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 equilibrium – the demonstration of this possibility has been described as the revolutionary formal achievement of the work.
The book advocated activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works
. "Let us be up and doing, using our idle resources to increase our wealth," he wrote in 1928. "With men and plans unemployed, it is ridiculous to say that we cannot afford these new developments. It is precisely with these plants and these men that we shall afford them."
The General Theory is often viewed as the foundation of modern macroeconomics
. Few senior American economists agreed with Keynes through most of the 1930s.
Yet his ideas were soon to achieve widespread acceptance, with eminent American professors such as Alvin Hansen
agreeing with the General Theory before the outbreak of World War II.
Keynes 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. Hyman Minsky
and other post-Keynesian economists
have argued that as result of this, Keynes's ideas were diluted by those keen to compromise with classical economists or to render his concepts with mathematical models like the IS/LM model
(which, they argue, distort Keynes's ideas). Keynes 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, New Hampshire
World War II
, 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 September 1941 he was proposed to fill a vacancy in the Court of Directors of the Bank of England
, and subsequently carried out a full term from the following April. In June 1942, Keynes was rewarded for his service with a hereditary peerage in the King's Birthday Honours. On 7 July his title was gazetted
as "BARON KEYNES, of Tilton, in the County of Sussex." and he took his seat in the House of Lords
on the Liberal Party
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.
The two new institutions, later known as the World Bank
and International Monetary Fund
(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 only 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."
PostwarAfter the war, Keynes continued to represent the United Kingdom in international negotiations despite his deteriorating health. He succeeded in obtaining preferential terms from the United States for new and outstanding debts to facilitate the rebuilding of the British economy.
Just before his death in 1946, Keynes told Henry Clay, a professor of Social Economics and Advisor to the Bank of England
of his hopes that Adam Smith
's 'invisible hand
' can help Britain out of the economic hole it is in: "I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago."
The Keynesian ascendancy 1939–1979From the end of the Great Depression
to the mid-1970s, Keynes provided the main inspiration for economic policy makers in Europe, America and much of the rest of the world. While economists and policy makers had become increasingly won over to Keynes's way of thinking in the mid and late 1930s, it was only after the outbreak of World War II that governments started to borrow money for spending on a scale sufficient to eliminate unemployment. According to economist John Kenneth Galbraith
(then a US government official charged with controlling inflation), in the rebound of the economy from wartime spending, "one could not have had a better demonstration of the Keynesian ideas."
The Keynesian Revolution was associated with the rise of modern liberalism
in the West during the post-war period. Keynesian ideas became so popular that some scholars point to Keynes as representing the ideals of modern liberalism, as Adam Smith
represented the ideals of classical liberalism
. After the war Winston Churchill
attempted to check the rise of Keynesian policy-making in the United Kingdom, 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
whose government's economic policy continued to be influenced by Keynes's ideas.
In the late 1930s and 1940s, economists (notably John Hicks
, Franco Modigliani
, and Paul Samuelson
) attempted to interpret and formalise Keynes's writings in terms of formal mathematical models. In a process termed "the neoclassical synthesis
", they combined Keynesian analysis with neo-classical economics to produce Neo-Keynesian economics
, which came to dominate mainstream macroeconomic thought
for the next 40 years.
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. By then, Keynes's views on the economy had become mainstream in the world's universities. Throughout the 1950s and 1960s, the developed and emerging free capitalist economies enjoyed exceptionally high growth and low unemployment.
Professor Gordon Fletcher has written that the fifties and sixties, when Keynes's influence was at its peak, appear in retrospect as a Golden Age of Capitalism.
In late 1965 Time magazine ran a cover article with the title inspired by a possibly tongue-in-cheek comment from Milton Friedman
, a comment later echoed by U.S. President Richard 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 who ever lived, and that his General Theory was more influential than the magna opera of other famous economists, like Smith
's The Wealth of Nations
Economics: out of favour 1979–2007Keynesian economics were officially discarded by the British Government in 1979, but forces had begun to gather against Keynes's ideas over 30 years earlier. Friedrich von Hayek had formed the Mont Pelerin Society
in 1947, with the explicit intention of nurturing intellectual currents to one day displace Keynesianism and other collectivist influences. Its members included Austrian school
economist Ludwig von Mises
along with the then young Milton Friedman
. Initially the society had little impact on the wider world – Hayek was to say it was as if Keynes had been raised to sainthood after his death and that people refused to allow his work to be questioned.
Friedman however began to emerge as a formidable critic of Keynesian economics from the mid-1950s, and especially after his 1963 publication of A Monetary History of the United States.
On the practical side of economic life, big government had appeared to be firmly entrenched in the 1950s but the balance began to shift towards private power in the sixties. Keynes had written against the folly of allowing "decadent and selfish" speculators and financiers the kind of influence they had enjoyed after World War I. For two decades after World War II public opinion was strongly against private speculators, the disparaging label Gnomes of Zürich
being typical of how they were described during this period. International speculation was severely restricted by the capital controls in place after Bretton Woods. Journalists Larry Elliott
and Dan Atkinson
say 1968 was a pivotal year when power shifted in the favour of private agents such as currency speculators. They pick out a key 1968 event as being when America suspended the conversion of the dollar into gold except on request of foreign governments, which they identify as when the Bretton Woods system first began to break down.
Intellectually, attacks against Keynes's ideas had begun 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 formulæ 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 mathematical models. 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 published a paper arguing 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 phenomenon 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 Monetarists
trained in the Chicago school of economics, by the Lucas Critique
and by attacks from Hayek's Austrian School. So successful were these attacks that by 1980 Robert Lucas
was saying economists would often take offence if described as Keynesians.
Keynesian principles fared increasingly poorly on the practical side of economics—by 1979 they had been displaced by Monetarism as the primary influence on Anglo-American economic policy. 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.
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". Writing in The American Prospect
argued it was not so much excessive Keynesian activism that caused the economic problems of the 1970s but the breakdown of the Bretton Woods system of capital controls, which allowed capital flight from regulated economies into unregulated economies in a fashion similar to Gresham's Law
(where weak currencies undermine strong currencies).
Historian Peter Pugh has stated a key cause of the economic problems afflicting America in the 1970s was the refusal to raise taxes to finance the Vietnam War
, which was against Keynesian advice.
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 become fashionable once again in academia, though in the mainstream it was highly synthesised 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.
Economics: the Keynesian resurgence of 2008–2009
The Financial crisis of 2007–2010 led to public scepticism 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. In the same month macroeconomist 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.
Economist Robert Shiller
had begun advocating robust government intervention to tackle the financial crises, specifically citing Keynes.
Nobel laureate Paul Krugman
also actively argued the case for vigorous Keynesian intervention in the economy in his columns for the New York Times.
Other prominent economic commentators arguing for Keynesian government intervention to mitigate the financial crisis include George Akerlof
, Brad Delong,
and Joseph Stiglitz.
Newspapers and other media have also cited work relating to Keynes by Hyman Minsky
, Robert Skidelsky, Donald Markwell
and Axel Leijonhufvud
A series of major bail-outs were pursued during the financial crisis, starting on 7 September with the announcement that the U.S. government was to nationalise the two government-sponsored enterprise
s 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. Similar policies have been adopted by other governments worldwide.
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.
Much of the recent discussion reflected Keynes's advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the IMF and the World Bank
, which many had argued should be reformed at a "new Bretton Woods" even before the crises broke out.
IMF and United Nations economists advocated a coordinated international approach to fiscal stimulus.
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.
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"
In December 2008, Paul Krugman released his book, The Return of Depression Economics and the Crisis of 2008, arguing that economic conditions similar to that which existed during the earlier part of the century had returned, making Keynesian policy prescriptions more relevant than ever. In February 2009 Shiller and George Akerlof published Animal Spirits
, a book where they argue the current US stimulus package is too small as it does not take into account Keynes's insight on the importance of confidence and expectations in determining the future behaviour of businessmen and other economic agents.
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. 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
. Zhou proposed a gradual move towards increased use of IMF Special Drawing Rights
Although 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. Stimulus plans have been credited for contributing to a better than expected economic outlook by both the OECD
and the IMF, in reports published in June and July 2009. Both organisations warned global leaders that recovery is likely to be slow, so counter recessionary measures ought not be rolled back too early.
While the need for stimulus measures has been broadly accepted among policy makers, there has been much debate over how to fund the spending. Some leaders and institutions such as Angela Merkel
and the European Central Bank
have expressed concern over the potential impact on inflation, national debt and the risk that a too large stimulus will create an unsustainable recovery.
Among professional economists the revival of Keynesian economics has been even more divisive. Although many economists, such as George Akerlof
, Paul Krugman
, Robert Shiller
, and Joseph Stiglitz, support Keynesian stimulus, over 300 economists signed a petition stating that they do not believe higher government spending will help the United States economy. Some economists, such as Robert Lucas
, expressed scepticism over whether stimulus packages can work at all. Others, like Robert Barro
and Gary Becker
, say that empirical evidence for the beneficial effects of Keynesian stimulus does not exist.
PraiseKeynes'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 that he was generally well received wherever he went – even those who found themselves on the wrong side of his occasionally sharp tongue rarely bore a grudge.
Keynes's speech at the closing of the Bretton Woods negotiations was received with a lasting standing ovation, rare in international relations, as delegates acknowledged the scale of his achievements made despite poor health.
HayekAustrian School economist Friedrich Hayek
was Keynes's most prominent contemporary critic, with sharply opposing views on the economy. Yet after Keynes's death he wrote:
For his part, Keynes praised Hayek's book The Road to Serfdom, writing to the Austrian economist that, "Morally and philosophically I find myself in agreement with virtually the whole of it."
Lionel RobbinsLionel Robbins
, former head of the economics department at the London School of Economics
, who had 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:
, an official from the Canadian High Commission
named Keynes one of the most intelligent people he had ever known, commenting:
The TimesKeynes's obituary in The Times included the comment:
CritiquesAs a man of the centre described as undoubtedly having the greatest impact of any 20th century economist, 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" many young economists favoured Marxist views even in Cambridge, and while Keynes was engaging principally with the Right to try to 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.
HayekIn 1931 Friedrich von Hayek extensively critiqued Keynes's 1930 Treatise on Money, however, Keynes replied that the Treatise no longer reflected his thinking. After reading Hayek's The Road to Serfdom
, Keynes wrote to Hayek saying: "Morally and philosophically I find myself in agreement with virtually the whole of it" but concluded the same letter with the recommendation: On the pressing issue of the time, whether deficit spending could lift a country from depression, Keynes replied to Hayek's criticism in the following way:
Hayek explained the letter by saying:
Hayek felt that application of Keynes's policies would give too much power to the state and would lead to socialism.
FriedmanWhile 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.
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.
was an economist of the same age as Keynes and one of his main rivals. He was among the first reviewers to argue that Keynes's General Theory was not a general theory, but was in fact a special case.
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 "Practical Keynesianism is a seedling which cannot be transplanted into foreign soil: it dies there and becomes poisonous as it dies."
economic commentator and journalist Henry Hazlitt
's The Failure of the New Economics
is a paragraph-by-paragraph critique of The General Theory. In 1960 he published the book The Critics of Keynesian Economics where he gathered together the major criticisms of Keynes made up to that year.
Harry TrumanPresident Truman was skeptical of Keynesian theorizing. "Nobody can ever convince me that Government can spend a dollar that it's not got," he told Leon Keyserling
, a Keynesian economist who chaired Truman's Council of Economic Advisers
Allegations of racismKeynes was on occasion heard making statements which could be perceived as racist: for example, he would use the word "niggers" to refer to black people
in casual conversations. This term may have been used neutrally in some British circles at that time, and not necessarily an expression of negative feelings, as when, for example, he wrote to Duncan Grant that “the only really
sympathetic and original thing in America are the niggers, who are charming”. Nonetheless fellow British observers recount being shocked by some statements he made, such as the following, apropos the Washington summer: "It's far too hot. Much too hot for white men. All right for niggers." He also wrote that there was "beastliness in the Russian nature” as well as "cruelty and stupidity”, and other comments which may be construed as anti-Russian. Some critics, such as Rothbard, have sought to infer that Keynes had sympathy with Nazism, and a number of writers have described him as anti-Semitic. Keynes's private letters express portraits and descriptions some of which can be characterised as anti-Semitic, while others as pro-Semitic. Scholars have suggested that these reflect clichés current at the time that he accepted uncritically, rather than any racism. Keynes had many Jewish friends, including Isaiah Berlin
and Piero Sraffa
. 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 explicitly in order to rescue him from being deported to Nazi-occupied Austria. Keynes was, furthermore, a supporter of Zionism, serving on committees supporting the cause.
Allegations that he was racist or had totalitarian beliefs have been rejected by biographers such as Robert Skidelsky. Professor Gordon Fletcher writes that "the suggestion of a link between Keynes and any support of totalitarianism cannot be sustained". 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 favoured peaceful containment, yet he began to advocate for a forceful resolution while many conservatives were still arguing for appeasement. After the war started he roundly criticised the Left for losing their nerve to confront Hitler.
Allegations of pro-inflationary viewsKeynes has been characterised as being indifferent or even positive about inflation.
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 written:
Keynes remained convinced of the dangers of inflation to the end of his life, during World War II he argued strongly for policies that would minimise post-war inflation.
Personal lifeKeynes's early romantic and sexual relationships were almost exclusively with men. At Eton and at Cambridge, Keynes had been prolific in his homosexual activity; significant among these early partners were Dillwyn Knox and Daniel Macmillan. Keynes was open about his homosexual affairs, and between 1901 to 1915, kept separate diaries in which he tabulated his many homosexual encounters. Keynes's relationship and later close friendship with Macmillan was to be fortuitous; through Dan, Macmillan & Co
first published his Economic Consequences of the Peace. Attitudes in the Bloomsbury Group
, in which Keynes was avidly involved, were relaxed about homosexuality. Keynes, together with writer Lytton Strachey
, had reshaped the Victorian attitudes of the influential Cambridge Apostles
; "since [their] time, homosexual relations among the members were for a time common", wrote Bertrand Russell
. One of Keynes's greatest loves was the artist Duncan Grant
, whom he met in 1908. Like Grant, Keynes was also involved with the writer Lytton Strachey
, though they were for the most part love rivals, and not lovers. Keynes had won the affections of Arthur Hobhouse
, as well as Grant, both times falling out with a jealous Strachey for it. Strachey had previously found himself put off by Keynes, not least because of his manner of "treat[ing] his love affairs statistically".
An early heterosexual interest of Keynes's had been Ray Costelloe
, who was later to marry Oliver Strachey
. Of this infatuation, Keynes had written "I seem to have fallen in love with Ray a little bit, but as she isn't male I haven't [been] able to think of any suitable steps to take." In 1921, Keynes fell "very much in love" with Lydia Lopokova, a well-known Russian ballerina
, and one of the stars of Sergei Diaghilev
's Ballets Russes
. For the first years of the courtship, Keynes maintained an affair with a younger man, Sebastian Sprott, in tandem with Lopokova, but eventually chose Lopokova exclusively, on marrying her. They married in 1925. The union was happy, with biographer Peter Clarke writing that the marriage gave Keynes "a new focus, a new emotional stability and a sheer delight of which he never wearied".
Lydia became pregnant in 1927 but miscarried.
Among Keynes's Bloomsbury friends, Lopokova was, at least initially, subjected to criticism for her manners, mode of conversation and supposedly humble social origins – the latter of the ostensible causes being particularly noted in the letters of Vanessa
and Clive Bell
, and Virginia Woolf
. In her novel Mrs Dalloway
(1925), Woolf bases the character of Rezia Warren Smith on Lopokova. E. M. Forster
would later write in contrition: "How we all used to underestimate her".
of 1929, which he failed to foresee, but he soon recouped. At Keynes's death, in 1946, his worth stood just short of £500,000 – equivalent to about £11 million ($16.5 million) in 2009. The sum had been amassed despite lavish support for various causes and his personal ethic which made him reluctant to sell on a falling market that if too many did that it could deepen a slump.
Keynes built up a substantial collection of fine art
, including works, not all of them minor, by Paul Cézanne
, Edgar Degas
, Amedeo Modigliani
, Georges Braque
, Pablo Picasso
, and Georges Seurat (some of which can now be seen at the Fitzwilliam Museum
). He enjoyed collecting books: for example, he collected and protected many of Isaac Newton
's papers. It is in part on the basis of these papers that Keynes wrote of Newton as "the last of the magicians."
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.
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
Keynes had attended church up to his teens,
but by university he had become agnostic, which he remained until his death.
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." 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 "threaten[ed] to cause".
In 1931 Keynes went on to write the following on Marxism:
Involvement with the Liberal PartyKeynes was a life-long member of the Liberal party
, which until the 1920s had been one of the two main political parties in the United Kingdom, 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
In 1939 Keynes had the option to enter Parliament as an independent MP with the University of Cambridge seat
. A by-election for the seat was to be held due to the illness of an elderly Tory, and the master of Magdalene College had obtained agreement that none of the major parties would field a candidate if Keynes chose to stand. Keynes declined the invitation as he felt he would wield greater influence on events if he remained a free agent.
Support for the artsKeynes'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.
Support for eugenicsKeynes was a proponent of eugenics
. He served as Director of the British Eugenics Society from 1937 to 1944. As late as 1946, shortly before his death, Keynes declared eugenics to be "the most important, significant and, I would add, genuine branch of sociology which exists."
DeathThroughout 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 and to try to design an international monetary system
that would benefit the whole world at Bretton Woods
. Keynes suffered a series of heart attacks, which ultimately proved fatal, beginning during negotiations for an Anglo-American loan
in Savannah, Georgia
he was trying to secure on favourable terms for the United Kingdom from the United States, a process he described as "absolute hell." A few weeks after returning from America, Keynes died of a heart attack at Tilton, his farmhouse home near Firle
, East Sussex, UK, on 21 April 1946 at age 62. Both of Keynes's parents outlived him: father John Neville Keynes
(1852–1949) by three years, and mother Florence Ada Keynes
(1861–1958) by 12 years. Keynes's brother Sir Geoffrey Keynes
(1887–1982) was a distinguished surgeon
, scholar and bibliophile. His nephews include Richard Keynes
(1919–2010) a physiologist; and Quentin Keynes
(1921–2003), an adventurer and bibliophile. His widow, Lydia Lopokova, lived on until 1981.
- 1913 Indian Currency and Finance
- 1914 Ludwig von Mises's Theorie des Geldes (EJ)
- 1915 The Economics of War in Germany (EJ)
- 1919 The Economic Consequences of the PeaceThe Economic Consequences of the PeaceThe Economic Consequences of the Peace is a book written and published by John Maynard Keynes. Keynes attended the Versailles Conference as a delegate of the British Treasury and argued for a much more generous peace. It was a bestseller throughout the world and was critical in establishing a...
- 1921 A Treatise on ProbabilityA Treatise on ProbabilityA Treatise on Probability was published by John Maynard Keynes while at Cambridge University in 1921. The Treatise attacked the classical theory of probability and proposed a "logical-relationist" theory instead...
- 1922 The Inflation of Currency as a Method of Taxation (MGCRE)
- 1922 Revision of the Treaty
- 1923 A Tract on Monetary Reform
- 1925 Am I a Liberal? (N&A)
- 1926 The End of Laissez-Faire
- 1926 Laissez-Faire and Communism
- 1930 A Treatise on MoneyA Treatise on MoneyA Treatise on Money is a work on economics by English economist John Maynard Keynes. In the Treatise Keynes drew a distinction between savings and investment, arguing that where saving exceeded investment, recession would occur....
- 1930 Economic Possibilities for our Grandchildren
- 1931 The End of the Gold Standard (Sunday Express)
- 1931 Essays in Persuasion
- 1933 An Open Letter to President Roosevelt (New York Times)
- 1936 The General Theory of Employment, Interest and Money
- 1940 How to Pay for the War: A radical plan for the Chancellor of the Exchequer
- Animal spirits (Keynes)Animal spirits (Keynes)"Animal spirits" is the term John Maynard Keynes used in his 1936 book The General Theory of Employment, Interest and Money to describe emotions which influence human behavior and can be measured in terms of consumer confidence. Trust is also included or produced by "animal spirits"...
- Global financial systemGlobal financial systemThe global financial system is the financial system consisting of institutions and regulators that act on the international level, as opposed to those that act on a national or regional level...
- History of economic thoughtHistory of economic thoughtThe history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day...
- Keynes World War II loan
- Post-war consensusPost-war consensusThe post-war consensus is a name given by historians to an era in British political history which lasted from the end of World War II in 1945 to the election of Margaret Thatcher as Prime Minister of the United Kingdom in 1979....
- Stockholm School
- 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 biography at the New School: History of Economic Thought