Keynes and India: A Study in Economics and Biography

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Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing. Keynes's followers assert that his predictions of disaster were borne out when the German economy suffered the hyperinflation of , and again by the collapse of the Weimar Republic and the outbreak of the Second World War. However the historian Ruth Henig claims that "most historians of the Paris peace conference now take the view that, in economic terms, the treaty was not unduly harsh on Germany and that, while obligations and damages were inevitably much stressed in the debates at Paris to satisfy electors reading the daily newspapers, the intention was quietly to give Germany substantial help towards paying her bills, and to meet many of the German objections by amendments to the way the reparations schedule was in practice carried out".

Only a small fraction of reparations was ever paid. In fact, the historian Stephen Schuker demonstrates in American 'Reparations' to Germany, —33 , that the capital inflow from American loans substantially exceeded German out payments so that, on a net basis, Germany received support equal to four times the amount of the post-Second World War Marshall Plan. Schuker also shows that, in the years after Versailles, Keynes became an informal reparations adviser to the German government, wrote one of the major German reparation notes, and supported the hyperinflation on political grounds.

Nevertheless, The Economic Consequences of the Peace gained Keynes international fame, even though it also caused him to be regarded as anti-establishment — it was not until after the outbreak of the Second World War 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; this included attending high-level policy meetings as a consultant. Keynes had completed his A Treatise on Probability before the war but published it in 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 In addition to his academic work, the s saw Keynes active as a journalist selling his work internationally and working in London as a financial consultant.

In Keynes wrote an obituary for his former tutor Alfred Marshall which Joseph Schumpeter called "the most brilliant life of a man of science I have ever read. Britain suffered from high unemployment through most of the s, leading Keynes to recommend the depreciation of sterling to boost jobs by making British exports more affordable. From he was also advocating a fiscal response, where the government could create jobs by spending on public works.

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 favor of the gold standard and in 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 Keynes had begun a theoretical work to examine the relationship between unemployment, money, and prices back in the s. 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 payout, making it difficult, in aggregate, for employers to make a profit.

Another key theme of the book is the unreliability of financial indices for representing an accurate — or indeed meaningful — an indication of general shifts in purchasing power of currencies over time. In particular, he criticized the justification of Britain's return to the gold standard in at pre-war valuation by reference to the wholesale price index.

He argued that the index understated the effects of changes in the costs of services and labor. In he wrote, "We will not have any more crashes in our time. Keynes was deeply critical of the British government's austerity measures during the Great Depression. He believed that budget deficits during recessions were a good thing and a natural product of an economic slump.

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 the present one, so great as to bring production altogether to a standstill. At the height of the Great Depression, in , 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 Franklin D. Roosevelt and other world leaders. The work was taken seriously by both the American and British governments, and according to Robert Skidelsky , helped pave the way for the later acceptance of Keynesian ideas, though it had little immediate practical influence. In the London Economic Conference opinions remained too diverse for a unified course of action to be agreed upon.

Keynesian-like policies were adopted by Sweden and Germany, but Sweden was seen as too small to command much attention, and Keynes was deliberately silent about the successful efforts of Germany as he was dismayed by their imperialist ambitions and their treatment of Jews. In , he received considerable support for his views on counter-cyclical public spending in Chicago, then America's foremost center for economic views alternative to the mainstream.

It was researched and indexed by one of Keynes's favorite students, later the economist David Bensusan-Butt. The General Theory challenged the earlier neoclassical 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 Marshall and Pigou. Keynes believed the classical theory was a "special case" that applied only to the particular conditions present in the 19th century, his theory being the general one.

Classical economists had believed in Say's law , which, simply put, states that " supply creates its 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, 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.

It is precise 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 s. 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 , requiring him to take long periods of rest.

Among others, Hyman Minsky and Post-Keynesian economists have argued that as result, 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. In the General Theory and later, Keynes responded to the socialists who argued, especially during the Great Depression of the s, that capitalism caused war.

He argued that if capitalism were managed domestically and internationally with coordinated international Keynesian policies, an international monetary system that didn't put the interests of countries against each other, and a high degree of freedom of trade , then this system of managed capitalism could promote peace rather than conflict between countries. His plans during World War II for post-war international economic institutions and policies which contributed to the creation at Bretton Woods of the International Monetary Fund and the World Bank , and later to the creation of the General Agreement on Tariffs and Trade and eventually the World Trade Organization were aimed to give effect to this vision.

Although Keynes has been widely criticized — especially by members of the Chicago school of economics — for advocating irresponsible government spending financed by borrowing, in fact he was a firm believer in balanced budgets and regarded the proposals for programs of public works during the Great Depression as an exceptional measure to meet the needs of exceptional circumstances. During the Second World War , Keynes argued in How to Pay for the War , published in , that the war effort should be largely financed by higher taxation and especially by compulsory saving essentially workers lending money to the government , rather than deficit spending , in order to avoid inflation.

Compulsory saving would act to dampen domestic demand, assist in channeling 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 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. As the 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 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 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. According to US economist J.

John Maynard Keynes | Biography, Theory, Economics, Books, & Facts |

Bradford 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 the 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.

After 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 , Keynes told Henry Clay, a professor of social economics and advisor to the Bank of England , [57] of his hopes that Adam Smith 's " invisible hand " could help Britain out of the economic hole it was 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.

From the end of the Great Depression to the mids, Keynes provided the main inspiration for economic policymakers in Europe, America and much of the rest of the world. According to the 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. 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 s and s, economists notably John Hicks , Franco Modigliani , and Paul Samuelson attempted to interpret and formalise Keynes's writings in terms of formal mathematical models. In what had become known as the neoclassical synthesis , they combined Keynesian analysis with neoclassical economics to produce neo-Keynesian economics , which came to dominate mainstream macroeconomic thought for the next 40 years.

By the s, 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 s and s, the developed and emerging free capitalist economies enjoyed exceptionally high growth and low unemployment. In late Time magazine ran a cover article with a title comment from Milton Friedman later echoed by U. President Richard Nixon , " 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.

Keynesian economics were officially discarded by the British Government in , but forces had begun to gather against Keynes's ideas over 30 years earlier. Friedrich Hayek had formed the Mont Pelerin Society in , with the explicit intention of nurturing intellectual currents to one day displace Keynesianism and other similar influences. Initially the society had little impact on the wider world — according to Hayek it was as if Keynes had been raised to sainthood after his death and that people refused to allow his work to be questioned.

On the practical side of economic life, " big government " had appeared to be firmly entrenched in the s, but the balance began to shift towards the power of private interests in the s. 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.

International speculation was severely restricted by the capital controls in place after Bretton Woods. According to the journalists Larry Elliott and Dan Atkinson , was the pivotal year when power shifted in favour of private agents such as currency speculators. As the key event Elliott and Atkinson picked out America's suspension of the conversion of the dollar into gold except on request of foreign governments, which they identified as the beginning of the breakdown of the Bretton Woods system. Criticisms of Keynes's ideas had begun to gain significant acceptance by the early s, as they were then able to make a credible case that Keynesian models no longer reflected economic reality.

Keynes himself included few formulas and no explicit mathematical models in his General Theory. For economists such as 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 , Milton Friedman published a paper arguing that the fixed relationship implied by the Philips curve did not exist. In the early s stagflation appeared in both the US and Britain just as Friedman had predicted, with economic conditions deteriorating further after the oil crisis. Aided by the prestige gained from his successful forecast, Friedman led increasingly successful criticisms against the Keynesian consensus, convincing not only academics and politicians but also much of the general public with his radio and television broadcasts.

Keynes and India

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 criticisms from Hayek's Austrian School. Keynesian principles fared increasingly poorly on the practical side of economics — by they had been displaced by monetarism as the primary influence on Anglo-American economic policy. 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 Alan Blinder wrote 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 neoclassical thinking. In the world of policy making, free market influences broadly sympathetic to monetarism have remained very strong at government level — in powerful normative institutions like the World Bank , the IMF and US Treasury , and in prominent opinion-forming media such as the Financial Times and The Economist.

The global financial crisis of —08 led to public skepticism about the free market consensus even from some on the economic right. In March , Martin Wolf , chief economics commentator at the Financial Times , announced the death of the dream of global free-market capitalism. 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.

Shiller had begun advocating robust government intervention to tackle the financial crises, specifically citing Keynes. A series of major bailouts were pursued during the financial crisis, starting on 7 September with the announcement that the U. Government was to nationalise the two government-sponsored enterprises which oversaw most of the U. In October, Alistair Darling , 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.

By the end of December , the Financial Times reported that "the sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades. In February Robert J. 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 businesspeople and other economic agents. In the March 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. Stimulus plans were credited for contributing to a better than expected economic outlook by both the OECD [99] and the IMF, [] [] in reports published in June and July Both organisations warned global leaders that recovery was likely to be slow, so counter recessionary measures ought not be rolled back too early.

While the need for stimulus measures was broadly accepted among policy makers, there had been much debate over how to fund the spending. Some leaders and institutions, such as Angela Merkel [] and the European Central Bank , [] 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, supported Keynesian stimulus, others did not believe higher government spending would help the United States economy recover from the Great Recession.

Some economists, such as Robert Lucas , questioned the theoretical basis for stimulus packages. Keynes'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.

Austrian School economist Friedrich Hayek was Keynes's most prominent contemporary critic, with sharply opposing views on the economy. The world will be a very much poorer place without him. Lionel Robbins , former head of the economics department at the London School of Economics , who engaged in many heated debates with Keynes in the s, had this to say after observing Keynes in early negotiations with the Americans while drawing up plans for Bretton Woods: [42].

This went very well indeed. Keynes was in his most lucid and persuasive mood: and the effect was irresistible. At such moments, I often find myself thinking that Keynes must be one of the most remarkable men that have ever lived — the quick logic, the birdlike swoop of intuition, the vivid fancy, the wide vision, above all the incomparable sense of the fitness of words, all combine to make something several degrees beyond the limit of ordinary human achievement.

I am spellbound. This is the most beautiful creature I have ever listened to. Does he belong to our species? Or is he from some other order?

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There is something mythic and fabulous about him. I sense in him something massive and sphinx like, and yet also a hint of wings. Bertrand Russell [] named Keynes one of the most intelligent people he had ever known, commenting: []. Keynes's intellect was the sharpest and clearest that I have ever known. When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool.

Keynes's obituary in The Times included the comment: "There is the man himself — radiant, brilliant, effervescent, gay, full of impish jokes He was a humane man genuinely devoted to the cause of the common good. As a man of the centre described by some as having the greatest impact of any 20th-century economist, [38] Keynes attracted considerable criticism from both sides of the political spectrum.

In the s, Keynes was seen as anti-establishment and was mainly attacked from the right. In the "red s", many young economists favoured Marxist views, even in Cambridge, [25] 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 s and onwards, most of the attacks against Keynes have again been from the right. What we need therefore, in my opinion, is not a change in our economic programmes, which would only lead in practice to disillusion with the results of your philosophy; but perhaps even the contrary, namely, an enlargement of them.

Your greatest danger is the probable practical failure of the application of your philosophy in the United States. 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:. I should I should say that what we want is not no planning, or even less planning, indeed I should say we almost certainly want more. But the planning should take place in a community in which as many people as possible, both leaders and followers wholly share your moral position.

Moderate planning will be safe enough if those carrying it out are rightly oriented in their minds and hearts to the moral issue. Asked why Keynes expressed "moral and philosophical" agreement with Hayek's Road to Serfdom , Hayek stated: []. Because he believed that he was fundamentally still a classical English liberal and wasn't quite aware of how far he had moved away from it. His basic ideas were still those of individual freedom.

He did not think systematically enough to see the conflicts. He was, in a sense, corrupted by political necessity. According to some observers, [ who? While 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. More to Friedman's taste was the Tract on Monetary Reform , which he regarded as Keynes's best work because of its focus on maintaining domestic price stability. Joseph Schumpeter 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 a special case. After Keynes's death Schumpeter wrote a brief biographical piece 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's 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. President Harry S. 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.

Keynes sometimes explained the mass murder that took place during the first years of communist Russia on a racial basis, as part of the "Russian and Jewish nature", rather than as a result of the communist rule. After a trip to Russia, he wrote in his Short View of Russia that there is "beastliness on the Russian and Jewish natures when, as now, they are allied together". He also wrote that "out of the cruelty and stupidity of the Old Russia nothing could ever emerge, but Some critics, including Murray Rothbard , have sought to show that Keynes had sympathy with Nazism , and a number of writers described him as antisemitic.

Keynes's private letters contain portraits and descriptions, some of which can be characterized as antisemitic, others as philosemitic. Keynes was a supporter of Zionism , serving on committees supporting the cause. Allegations that he was racist or had totalitarian beliefs have been rejected by Robert Skidelsky and other biographers. As a lifelong pacifist he had initially favoured peaceful containment of Nazi Germany , yet he began to advocate 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 :. The intelligentsia of the Left were the loudest in demanding that the Nazi aggression should be resisted at all costs. When it comes to a showdown, scarce four weeks have passed before they remember that they are pacifists and write defeatist letters to your columns, leaving the defence of freedom and civilisation to Colonel Blimp and the Old School Tie, for whom Three Cheers.

Keynes has been characterised as being indifferent or even positive about mild inflation. However, Keynes was also aware of the dangers of inflation. Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency.

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Keynes was the principal author of a proposal — the so-called Keynes Plan — for an International Clearing Union. The two governing principles of the plan were that the problem of settling outstanding balances should be solved by "creating" additional "international money", and that debtor and creditor should be treated almost alike as disturbers of equilibrium.

In the event, though, the plans were rejected, in part because "American opinion was naturally reluctant to accept the principle of equality of treatment so novel in debtor-creditor relationships". The new system is not founded on free-trade liberalisation [] of foreign trade [] but rather on the regulation of international trade, in order to eliminate trade imbalances: the nations with a surplus would have an incentive to reduce it, and in doing so they would automatically clear other nations deficits. Every country would have an overdraft facility in its bancor account at the International Clearing Union.

He pointed out that surpluses lead to weak global aggregate demand — countries running surpluses exert a "negative externality" on trading partners, and posed, far more than those in deficit, a threat to global prosperity. In his Yale Review article "National Self-Sufficiency," [] [] he already highlighted the problems created by free trade. His view, supported by many economists and commentators at the time, was that creditor nations may be just as responsible as debtor nations for disequilibrium in exchanges and that both should be under an obligation to bring trade back into a state of balance.

Failure for them to do so could have serious consequences. In the words of Geoffrey Crowther , then editor of The Economist , "If the economic relationships between nations are not, by one means or another, brought fairly close to balance, then there is no set of financial arrangements that can rescue the world from the impoverishing results of chaos. These ideas were informed by events prior to the Great Depression when — in the opinion of Keynes and others — international lending, primarily by the U.

Influenced by Keynes, economics texts in the immediate post-war period put a significant emphasis on balance in trade. For example, the second edition of the popular introductory textbook, An Outline of Money , [] devoted the last three of its ten chapters to questions of foreign exchange management and in particular the "problem of balance". However, in more recent years, since the end of the Bretton Woods system in , with the increasing influence of Monetarist schools of thought in the s, and particularly in the face of large sustained trade imbalances, these concerns — and particularly concerns about the destabilising effects of large trade surpluses — have largely disappeared from mainstream economics discourse [] and Keynes' insights have slipped from view.

Keynes's early romantic and sexual relationships were exclusively with men. 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 Cambridge Apostles : "since [their] time, homosexual relations among the members were for a time common", wrote Bertrand Russell. Keynes was also involved with Lytton Strachey, [] though they were for the most part love rivals, not lovers.

Keynes had won the affections of Arthur Hobhouse , [] and as with Grant, fell out with a jealous Strachey for it.

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Political opponents have used Keynes's sexuality to attack his academic work. Keynes's friends in the Bloomsbury Group were initially surprised when, in his later years, he began pursuing affairs with women, [] demonstrating himself to be bisexual. In , Keynes wrote that he had fallen "very much in love" with Lydia Lopokova , a well-known Russian ballerina and one of the stars of Sergei Diaghilev 's Ballets Russes. Keynes later commented to Strachey that beauty and intelligence were rarely found in the same person, and that only in Duncan Grant had he found the combination.

Forster would later write in contrition about "Lydia Keynes, every whose word should be recorded": [] "How we all used to underestimate her". Keynes thought that the pursuit of money for its own sake was a pathological condition, and that the proper aim of work is to provide leisure. He wanted shorter working hours and longer holidays for all. Keynes was interested in literature in general and drama in particular and supported the Cambridge Arts Theatre financially, which allowed the institution to become one of the major British stages outside London.

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 its founding chairman in From the start, the two organisations that received the largest grants from the new body were the Royal Opera House and Sadler's Wells.

Like several other notable British authors of his time, Keynes was a member of the Bloomsbury Group. Eliot discussed religion at a dinner party, in the context of their struggle against Victorian era morality. Keynes was ultimately a successful investor, building up a private fortune.

His assets were nearly wiped out following the Wall Street Crash of , which he did not foresee, but he soon recouped. The sum had been amassed despite lavish support for various good causes and his ethic which made him reluctant to sell on a falling market, in cases where he saw such behaviour as likely to deepen a slump. In part on the basis of these papers, Keynes wrote of Newton as "the last of the magicians. Keynes was a lifelong member of the Liberal Party , which until the s had been one of the two main political parties in the United Kingdom, and as late as had often been the dominant power in government.

Keynes had helped campaign for the Liberals at elections from about , yet he always refused to run for office himself, despite being asked to do so on three separate occasions in From , when Lloyd George became leader of the Liberals, Keynes took a major role in defining the party's economic policy, but by then the Liberals had been displaced into third party status by the Labour Party.

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. Keynes was a proponent of eugenics. He served as director of the British Eugenics Society from to As late as , shortly before his death, Keynes declared eugenics to be "the most important, significant and, I would add, genuine branch of sociology which exists.

Keynes once remarked that "the youth had no religion save communism and this was worse than nothing. In Keynes had the following to say on Marxism: []. How can I accept the Communist doctrine, which sets up as its bible, above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia , who with all their faults, are the quality of life and surely carry the seeds of all human achievement?

Even if we need a religion, how can we find it in the turbid rubbish of the red bookshop? It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process of conversion which has changed all his values. Keynes was a firm supporter of women's rights and in became vice-chairman of the Marie Stopes Society which provided birth control education.

He also campaigned against job discrimination against women and unequal pay. He was an outspoken campaigner for reform of the laws against homosexuality. Throughout 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. In , Keynes suffered a series of heart attacks , which ultimately proved fatal. They began during negotiations for the Anglo-American loan in Savannah, Georgia , where he was trying to secure favourable terms for the United Kingdom from the United States, a process he described as "absolute hell".

Both of Keynes's parents outlived him: his father John Neville Keynes — by three years, and his mother Florence Ada Keynes — by twelve. Keynes's brother Sir Geoffrey Keynes — was a distinguished surgeon, scholar, and bibliophile. His nephews include Richard Keynes — , a physiologist, and Quentin Keynes — , an adventurer and bibliophile. Keynes had no children; his widow, Lydia Lopokova , died in From Wikipedia, the free encyclopedia. For other uses, see Keynes disambiguation. For his father, see John Neville Keynes. English economist.

The Right Honourable. CB FBA. Cambridge , Cambridgeshire , England. Tilton, near Firle , Sussex , England. Political economy Probability. King's College, Cambridge. Basic concepts. Fiscal Monetary Commercial Central bank. Related fields. Econometrics Economic statistics Monetary economics Development economics International economics.

Edward C. Sargent Paul Krugman N. Gregory Mankiw. See also. Macroeconomic model Publications in macroeconomics Economics Applied Microeconomics Political economy Mathematical economics. Main article: Heavenly Twins Sumner and Cunliffe. Main article: Keynesian Revolution.

Main article: Neo-Keynesian economics. Main article: Post-war displacement of Keynesianism. Main article: —09 Keynesian resurgence. The Return to Keynes.

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Harvard University Press. Oxford Dictionary of National Biography online ed. Oxford University Press. Subscription or UK public library membership required. May Econ Journal Watch. Keynes: The Return of the Master. Cambridge: Public affairs. In in one of the decisive intellectual achievements of postwar economics, Friedman not only showed why the apparent tradeoff embodied in the idea of the Phillips curve was wrong; he also predicted the emergence of combined inflation and high unemployment Retrieved 13 November Financial Times. Retrieved 23 January Retrieved 18 June The Economist. Retrieved 2 October The Bloomsbury Group.

Retrieved 26 May Pan MacMillan Ltd. St Faith's School Website. Archived from the original on 30 May Retrieved 28 April Deane, Phyllis The Life and Times of J. Neville Keynes: A Beacon in the Tempest. Edward Elgar Publishing. Skidelsky, Robert Felix, David Because each style has its own formatting nuances that evolve over time and not all information is available for every reference entry or article, Encyclopedia.

Keynes was undoubtedly the most famous and influential economist of the mid-twentieth century. His book The General Theory of Employment, Interest, and Money is often cited as the single most important book in economic theory published in the interwar period, and it could reasonably be said to have created modern macroeconomics. Despite his undoubted great influence on economics, his legacy is highly controversial.

Criticized from the right for advocating inflationary financing, and from the left for attempting to rescue capitalism rather than replace it, the demise of Keynesianism as the dominant force in mainstream economics is usually dated to the mids, when inflation combined with high unemployment to produce stagflation, something that Keynes had not predicted. Despite such unforeseen developments, his influence still remained active through a number of heterodox approaches to the subject, such as post-Keynesian economics and even new Keynesianism.

Like all truly great intellectuals, fresh interpretations of his work are periodically presented, and neglected aspects of it are continually rediscovered. Maynard Keynes as he was known to his friends was the son of John Neville Keynes — , also a well-known economist and the author of The Scope and Method of Political Economy He was soon involved in providing policy advice on financial affairs in India , which then developed into governmental service in the U.

Treasury regarding the financing of World War I. He was the main Treasury representative at the signing of the Peace Treaty at Versailles , and after the war he strongly criticized the level of the reparations demands made on Germany. In the early s, he argued that Britain should not return to the prewar gold standard system, and if it did, it should not be at prewar parity. In both these instances, his advice was ignored, but in retrospect his judgment has appeared correct to many commentators.

In addition to his economic works, Keynes published A Treatise on Probability , which provided a critique of the frequency conception of probability then in vogue. Instead of this approach, Keynes favored a logical conception in which probability was seen as being relative to human knowledge, rather than being taken as a given fact of nature.

He also published various essays on political matters and even some biographical sketches. In an essay on his early beliefs, he stressed the significance of the British philosopher G. Treasury, where he coordinated his activities closely with the U. He died in , a year after the war ended. Keynes is best known for introducing into the vocabulary of economists concepts such as the marginal efficiency of capital, liquidity preference, effective demand, the multiplier, and the propensity to consume.

He also developed more rigorous definitions of the basic elements of economic analysis, such as income, savings, and investment. However, it is important to realize that Keynes was not working in isolation; instead he actively participated in debates that occurred throughout the s and s among British economists such as D. Robertson — , Richard F. Kahn — , R.

Hawtrey — , and Joan Robinson — Keynes himself emphasized that the revolution was directed against the classical theory of employment, but his account of this theory through the work of the economist A. Pigou — was itself controversial. Keynes argued that the classical approach only allowed for the existence of frictional and voluntary unemployment, and denied the possibility of involuntary unemployment.

Given the context of the Great Depression of the s, Keynes implied that this approach was unrealistic, and set about showing how capitalism could generate significant levels of involuntary unemployment when certain conditions were met. Keynes presented effective demand aggregate demand backed by money as the key concept of his general theory. He asserted that the volume of total employment was determined by the interrelation of aggregate supply and aggregate demand. This was because when employment increased, aggregate real income also increased.

However, due to the psychological factors involved the propensity to consume , when income increased so also did consumption, but crucially by not as much as income. In order to cover this deficit, an increase in investment sufficient to absorb the excess was required, but there was no guarantee that the necessary level of increased investment would naturally follow.

Keynes outlined that the amount of investment was actually dependent on the inducement to invest, which in turn was determined by the relation between the marginal efficiency of capital and interest rates. Keynes defined the marginal efficiency of capital as being equal to the interest rate that would make the present value of the future returns from a capital good equal to its supply price, and hence it depended on expected returns.

Keynes further outlined how the marginal efficiency of capital declined as investment in any particular capital good increased. Given this declining schedule and with any given rate of interest, there was no reason to assume that actual investment would correspond to the amount required to cover the deficit between increased income and consumption.

Thus the level of effective demand required to ensure full employment was not necessarily created by the self-adjusting mechanisms of a market economy. Put another way, the economic system did not automatically generate full employment. To explain the unusual duration of the Great Depression , Keynes suggested that in the s the marginal efficiency of capital was actually much lower than it had been in the nineteenth century, and hence the rate of interest that would generate higher employment levels was unacceptable to many owners of accumulated wealth.

To explain the heightened amplitude of depressions, Keynes christened the ratio between an increment of investment and increased income the investment multiplier , and suggested that a multiplier greater than unity accounted for how relatively small fluctuations in investment could generate much larger fluctuations in employment. Keynes concluded from this analysis that investment was promoted by low rates of interest and that this would be facilitated by the disappearance of the rentier class within capitalism.

His first book was Indian Currency and Finance , which provided an analysis of the operation of the gold-exchange standard. This was followed by The Economic Consequences of the Peace , an attack on the terms of the Versailles Peace Treaty, and a Tract on Monetary Reform , dealing with the problems of postwar inflation. These books, although undoubtedly important in practical terms, were less significant in terms of providing innovations in pure theory.

Here Keynes emphasized the importance of the behavior of the banking system to understanding fluctuations; by controlling credit, banks necessarily controlled aggregate expenditure. Booms and slumps were thus the result of the oscillation of the terms of credit about their equilibrium position, defined as occurring when savings equaled investment. Disequilibrium was possible in this model as international influences adversely affected the domestic banking system, causing the terms of credit to move above or below their equilibrium level at any given time.

The difference between this type of analysis of trade cycles and that given in The General Theory was significant; in the latter, emphasis was transferred away from monetary factors to psychological propensities and expectations of future yields on investment goods. The abstract concepts that Keynes deployed with such aplomb were sometimes ambiguous, and his use of them produced much ongoing debate. Friedman concluded that Keynes was mistaken in his presentation of the nature of the propensity to consume, as the ratio between income and savings was the same for all levels of income, but depended on other factors, such as interest rates and the ratio of wealth to income.

Friedman later led the monetarist counterrevolution against the Keynesian approach. Since it was designed in part to explain the historical circumstances of the s, was its relevance limited only to the interwar period? Keynes also became involved in a debate over the importance of the new econometric methodology as developed by the Dutch economist Jan Tinbergen [ — ] to economic analysis. Keynes was highly critical of the extensive use of mathematical models in economics being promoted by the econometricians, but his reservations were quickly swept aside. Ironically, it was the success of the Keynesian IS-LM model that added some impetus to the drive for econometric modeling.

The Keynesian system was for many years after World War II hailed by the Left as proof of the inadequacies of capitalism as an economic system and the necessity of increased state control of the commanding heights of the economy. Keynes himself saw his work as a means of improving the internal mechanics of the free-market system, and he criticized state socialism as inefficient and as too restrictive of individual freedoms.

He declared support for significant inequalities of wealth and income, but not to such a degree that it would impede the entrepreneurial function. Yet he disputed the argument that enlightened self-interest always operated in the public interest, and he saw an important role for the directive intelligence of society organized as a whole exercising some control over private business. Barnett, Vincent. Europe-Asia Studies 53 1 : — Clarke, Peter. The Keynesian Revolution in the Making, — Oxford: Clarendon Press. Friedman, Milton.

A Theory of the Consumption Function. Hicks, J. Econometrica 5 2 : — Keynes, John Maynard. Laidler, David. Cambridge, U. Skidelsky, Robert. Both were thoroughly up-to-date in their day and remained standard texts for a number of years. John Nevile was a lifelong fellow of Pembroke College, Cambridge, and registrary chief administrative officer of Cambridge University from to She was an authoress and an ardent worker for social causes and in local government , eventually becoming the mayor of Cambridge.

For his degree he studied mathematics only and in was twelfth wrangler i. This was sufficiently distinguished but not eminently so.

The fact is that he did little work at academic studies when an undergraduate, devoting this time to wide reading, some political activity he was president of the Cambridge Union and, more particularly, to the cultivation of literary friends Lytton Strachey and others who were destined to play a notable part in the intellectual life of England. He spent the next year as a graduate at Cambridge, not working for a degree but enlarging his reading, including that in economics, in which he had instruction from Alfred Marshall and A. Pigou, and which he had also imbibed in early boyhood from his father.

In he took the British Civil Service examination and was second on the list for all England. There happened to be only one vacancy in the Treasury in that year, and he remained there for two years. During those years and in the three years that followed, he devoted the greater part of his time to work on the theory of probability.

His Treatise on Probability was not published until , owing to the interruption of the war, but had been almost completed by This was at once at work of great learning ideas. Its bibliography of the literature is one of the most comprehensive that has ever been made. In regard to the original ideas, his ambition was to provide a firm mathematical basis for the probability theory on lines comparable to those of the Principia Mathematica, in which Russell and Whitehead laid the foundations of symbolic deductive logic.

While Keynes was an innovator in expressing probability theory in terms of modern-type symbolism, and in this respect his book constituted a landmark, two of its central doctrines have not been widely accepted since. This approach was due to the influence of the Cambridge philosopher G. Moore but no longer finds favor. The Bayes-type approach demonstrates how favorable instances can increase the probability of a given premise.

For this reasoning to work, the premise must have some prior probability of its own. The trouble is that in the very beginning of the inductive process there are no empirical propositions with any intrinsic probability of their own. So how to make a start? This is, of course, the crux of the problem of induction.

This would enable one to assign a positive probability to the proposition that one or another of the ultimate properties was operating in a given case. The objection was then made that to get any significant probability for a conclusion it would not be enough to postulate a finite number of ultimate generator properties, but a specific number.

The impossibility of doing this is clearly a stumbling block for the Keynes-type approach. In he resigned from the India Office and went to Cambridge, without official appointment, on the invitation of Alfred Marshall to assist the new Department of Economics there. Shortly afterwards he was awarded a fellowship at Kings College, open to competition, on the strength of his thesis on probability. He had also been invited to serve on a royal commission on Indian finance and currency. He contributed much to the report and also appended an annex of this was, a revolutionary idea for a less-developed country.

He was in the British Treasury from to , in the later years as head of the department looking after foreign exchange controls. In he went to the Paris Peace Conference as principal representative of the British Treasury and deputy for the chancellor of the exchequer. In June he resigned, on the ground that the proposals put forward for German reparations payments were impractical and unjust.

In December he published The Economic Consequences of the Peace, which own him a worldwide reputation for its brilliant writing and character sketches, its humane and liberal outlook, and the cogency of its arguments about the German reparations problem. He returned to Kings Colege, Cambridge. For a period hi primary interest was in German reparations. A Revision of Treaty was published in Other economic matters began to engage his attention, namely the evils of deflation, which became severe both in the United States and the United Kingdom in , and the unemployment question. On the monetary side he published A Tract on Monetary Reform , which was a lucid exposition of monetary theory partly on traditional lines.

He departed from those line, however, in advocating that there should not be a return to a fixed parity between the pound and the dollar but that a floating exchange rate should be regarded normal. When, despite his advocacy, the Unite4d Kingdom returned to the gold standard in , he wrote a devastating pamphlet entitled The Economic Consequence of Mr.

On the side of unemployment he began at an early date to advocate public works, mainly in articles in The Nation. Orthodoxy claimed that public works would not decrease unemployment, n the ground that money spent on them would entail that private enterprise had that much less money to spend, so that there would be no net gain of employment at all. It was the intellectual challenge presented by this view which drove him to the conclusion that quite a considerable part of economics would have to be rethought, and to that he devoted his main powers for the next dozen years.

The fruits of his thinking were published in A Treatise on Money December , when his intellectual journey was half complete, and in The General Theory of Employment, Interest and Money January Note should also be made of his membership of the of the official Macmillan committee of enquiry into finance and industry. He gave that committee the benefit of a statement of his views on money which lasted for five days. A rescript of this is due eventually t0 be published in his collected works.

Of the two books, the Treatise is the more comprehensive volume and contains much vital material not to be found elsewhere. For knowledge of Keynes the General Theory is compulsory reading, because it contains his final synthesis; but this has had the unfortunate effect that the Treatise has not been read as much as it should be by those who wish to understand Keynes in depth over wide range of subjects.

Mention should be made of his influence during World War II in getting the British government first to compile, and later to publish, national income statistics, which give the factual material required for the practical application of his theories. Most countries have come to think it needful to compile such statistics. Keynes had a serious illness in and was never thereafter restored to full health.

In he was invited into the British Treasury in an honorary capacity. Although he did not have responsibilities such as he had in World War I , his advice was constantly sought on all matters relating to the economics of the war. Then he began, as early as , to acquire a position of leadership in matters relating to Anglo-American cooperation for postwar world reconstruction.

At this point mention should be made of his booklet The Means to Prosperity , which he published shortly before the World Economic Conference and the foundation of the International Monetary Fund. Prior to his illness he devoted much time to practical finance, on his own which he was bursar for many years, and of certain insurance and investment companies with which he was associated.

He was joint editor of the Economic Journal from to He also made important collection of old books and of modern paintings. He was the founder of the Arts Theatre in Cambridge. In he married Lydia Lopokova, the famous Russian ballerina. In his book collecting, he specialized in the philosophers and thinkers of the seventeenth and eighteenth centuries and, later, in the general English literature , including drama and poetry, of the sixteenth century.

He had an exceptionally important collection of Newton manuscripts. Alexander Hamilton was responsible for the original parity of the U. In Keynes was made a member of the House of Lords , where he sat on the Liberal benches. The Royal Society paid him the honor, rare for a nonscientist, of making him a fellow, doubtless in recognition of his basically scientific approach to all things.

He died in his country home, Tilton, 21 April , shortly after his return from a meeting in Savannah, which was concerned with details relating to the setting up of the International Monetary Fund and the International Bank for Reconstruction and Development. Harris, The New Economics London, Pigou in Proceedings of the British Academy, 32 , , with portrait.

John Maynard Keynes 1st Baron of Tilton , was an English economist who revolutionized economic theory and policy by linking employment and income to public and private expenditure. He is also known for his role in the creation of new international monetary institutions in World War II.

The Pre-Career Years John Maynard Keynes – 1883 to 1905

John Maynard Keynes was born on June 5, , the son of John Neville Keynes, registrar of the University of Cambridge and eminent logician and economist. John Maynard's mother, a charming and talented woman, was onetime mayor of Cambridge. He was educated at Eton and King's College, Cambridge, and began a career in the civil service , where he was assigned to the India Office from to There he acquired an intimate knowledge of the government service and an interest in Indian currency and finance that was to bear fruit a few years later.

In Keynes was elected fellow of King's College and returned to Cambridge. In he was chosen, in spite of his youth and inexperience, as editor of the Economic Journal, the publication of the Royal Economic Society and one of the leading professional journals. From that time until his duties were carried out with outstanding promptness and efficiency. In his first book, Indian Currency and Finance, was published shortly after he was appointed to the Royal Commission on Indian Currency and Finance.

His book has been referred to as the best in the English language on the gold exchange standard. With the outbreak of World War I Keynes entered the Treasury, first as an unofficial and unpaid assistant. Before the end of the war he held a position equivalent to an assistant secretary and was largely responsible for handling Interallied finances.

Background and early career

At the conclusion of the war Keynes went to the Paris Conference as principal representative of the Treasury and deputy for the chancellor of the Exchequer on the Supreme Economic Council. It soon became apparent to him that the economic terms of the treaty and particularly the reparations settlement were impossible of fulfillment. Although the book aroused tremendous controversy, subsequent events have demonstrated the substantial correctness of his position.

Having left the public service, Keynes returned to Cambridge as second bursar of King's College. In he assumed the first of a number of important company directorships. In his Tract on Monetary Reform appeared. From until his death he was first bursar of King's College and through his expert management made King's what a contemporary has described as "indecently rich. In Keynes married Lydia Lopokova, a Russian ballerina, who was as outstanding a person in her own way as he was in his.

Although he had for many years been a collector of rare books and fine art, he now became an active patron of the theater, helping in later years as treasurer of the Camargo Society to bring about a union of the resources of the Camargo, the Vic-Wells, the Rambert Ballet, and others. In he founded and generously financed the Cambridge Arts Theatre. Keynes's Treatise on Money, a two-volume work that generations of students have found full of brilliant insights but incomprehensible as a whole, was published in In it Keynes attempted with little success to break free of the shortcomings and limitations of the Cambridge version of the quantity theory of money.

In retrospect, one can see the germ of many of the ideas that distinguish his later work— but as isolated flashes of insight lacking the proper framework and, as a result, not leading to any very useful or interesting conclusions. Finally, in , came Keynes's General Theory of Employment, Interest and Money, a book that not only revolutionized economic theory but also had a direct impact on the lives of a large proportion of the world's population.

Here Keynes took issue with the classical theory which found in a competitive capitalist economy a set of mechanisms that automatically move the economy toward a state of full employment. The term "classical" is used here to mean the mainstream of orthodox economic theory beginning with Adam Smith and running through the work of Ricardo, Mill, Marshall, and others. These mechanisms functioned in the labor market and in the market for goods and services. In the labor market, competition among workers assures full employment on the condition that the real rate of wages responds to the forces of supply and demand.

In the market for goods and services, however, the question arises if there is any assurance that all of the output produced at full employment will find buyers. The classical economists found the answer to this question to be in the affirmative. To understand the rationale of their position, it is necessary to keep firmly in mind the truism that, in the aggregate, the value of output and income are identical.

It follows from that truism that if all output is to be purchased, expenditures must be exactly equal to income. Given this truism, how did the classical economists see this mechanism working? There are two types of expenditures made, those on goods and services for consumption purposes and those for goods and services purchased with an eye for resale or to be used to produce more goods and services.

The first type of expenditure is called consumption, and the second, investment. If that part of income that is not spent on consumers goods is called "saving," then income and expenditures will be equal if saving is equal to investment. Hence, expenditures are equal to the value of output. The classical economists believed that saving and investment were both functions of the rate of interest, with savers saving more and investors investing less as the rate of interest rises, and the reverse happening when the rate of interest falls.

The interest rate would always adjust in such a way as to assure that all of current output would be purchased. Keynes disagreed with both the labor market analysis and the goods market analysis of the classicists. He argued that changes in money wage rates do not result in corresponding changes in real wages because of their impact on the incomes and, therefore, on the expenditures of wage earners.

Economic Schools of Thought: Crash Course Economics #14

Lower money wages, he argued, would force lower demand for goods and services and therefore lower their prices. Real wages would be unchanged. With respect to the product market, Keynes held that saving is a function of the level of income rather than of the rate of interest. There is no reason to believe that the amount that investors will be willing to invest determined, according to Keynes, by the rate of interest and by the expectations about the future held by potential investors will turn out to be equal to the amounts that savers wish to save out of a full employment level of income.

Where savers wish to save more than investors wish to invest, part of current output will go unsold. This will lead producers to cut back on current output and therefore on employment and income. As income falls, saving will fall. Income will keep on falling until savers are willing to save no more than investors wish to invest. Since the system, as Keynes saw it, does not tend to seek full employment when left to itself, it is necessary for policy makers to do so. Basically, two possibilities exist: monetary authorities may induce investors to invest the desired amounts through their control over the rate of interest, or fiscal authorities may close the gap between investment and full employment levels of saving with government expenditures.

Keynes was somewhat pessimistic about the ability of monetary authorities to bring about the necessary changes in private investment expenditures. Under some circumstances the central bank can drive interest rates down by increasing the money supply. The public, finding itself with more money than it wishes to hold, will attempt to convert it into interest-earning assets. This will drive the prices of securities up and, consequently, interest rates down.

Once the interest rate is driven down to a level at which the public believes that it must rise again, holding securities entails the risk of taking a capital loss. Under these circumstances the public will not convert additional money balances into securities, and the interest rate will not be driven down any further.

This floor on interest rates is known as the liquidity trap and represents a severe limitation on the central bank 's ability to stimulate private investment. Keynes also saw another and perhaps more serious limitation to monetary policy. Private investors, he maintained, make their decisions not only on the basis of the interest rate but also on the basis of their expectations about costs and demand for their product in the future.

All of these expectations are lumped together for convenience's sake into what he called the marginal efficiency of capital. The important thing about the marginal efficiency of capital is that it is based, not upon known facts, but upon expectations about the future which must, of necessity, be very uncertain. The uncertainty means that the marginal efficiency is likely to be very unstable. Keynes regarded it as entirely possible that the marginal efficiency of capital could be so low that even a rate of interest of zero would not be sufficient to stimulate a full employment level of investment.

Thus, although in later years he was less pessimistic about the usefulness of monetary policy, Keynes was inclined to believe that fiscal policy would have to bear the main part of the burden of assuring full employment. Further, he was inclined to believe that in mature economies, such as those of the United States and western Europe, high levels of income had led the public to save large proportions of their income, while the factors that had historically provided expanding investment opportunities were disappearing.

This idea is known as the stagnation hypothesis and enjoyed a wide acceptance during the s and s. In July he was asked to serve as adviser to the chancellor of the Exchequer, and he was soon after elected to the Court of the Bank of England and was raised to the peerage as Lord Tilton in Through his work, national income and expenditure accounts were developed and utilized in the preparation of wartime budgets.

In addition to internal finance, he had special responsibility for intergovernmental finance, lend-lease, and mutual aid. This work required that he become a sort of special envoy to Washington and Ottawa in particular. In the closing days of the war, Keynes played a major role in negotiating the United States loan to Great Britain and in the establishment of the International Monetary Fund and the Bank for Reconstruction and Development.

Keynes died of a heart attack on Easter Sunday, April 21, , shortly after having returned from the inaugural meetings of the International Monetary Fund and the World Bank in Savannah, Ga. Harrod, who was a friend and an eminent economist in his own right. A shorter but highly readable biography is Seymour E. Robert Lekachman, The Age of Keynes , contains some material not found in the earlier volumes, including an up-to-date appraisal of Keynes's influence.

See also Lawrence R. Klein, The Keynesian Revolution 2d ed. Cambridge, United Kingdom, 5 June ; d. Firle, Sussex, United Kingdom, 21 April ,. For the original article on Keynes see DSB , vol. Keynes was one of the greatest economists of the twentieth century, theoretically and practically. He also made a pioneering contribution to the philosophy of probability, and advanced political ideas relevant to modern societies.

His energies were often focused on problems on a world scale, including World War I , the inflation of the s, the Great Depression of the s, World War II , and the post global trade and financial system. He was also a patron of the arts, an eloquent writer, a prolific correspondent, a longtime editor of the Economic Journal , an unflagging journalist, and a member of the Bloomsbury group of writers and artists.

Keynes was born into a middle-class family, with an academic father and a social activist mother. After Eton College, he graduated from Cambridge University with a degree in mathematics, not economics. He received his primary economics education from Alfred Marshall in preparation for the civil service examination, two years after which he began lecturing in economics at Cambridge. His first intellectual love at Cambridge, however, was philosophy. He became a follower of George Edward Moore , the Cambridge ethical philosopher, and was also influenced by Bertrand Russell.

The question Keynes sought to resolve was how to theorize rational but nonconclusive arguments. His solution, which conceived of probability as a logical relation between two sets of propositions the premises and the conclusion of an argument , cast probability theory as the general logic of argument in which deductive logic was a special case. Such probabilities, known by logical intuition, express the degree of belief that it is rational to have in the conclusion, given the information supplied by the premises.

Keynes developed these ideas into a distinctive theory of rational belief and action under uncertainty. On this theory, the rational is not necessarily identical with the true, and probabilities fall into heterogeneous noncomparable classes that limit their mathematical manipulation. His theory of rationality under uncertainty departs significantly from the theory of rationality deployed in mainstream economics. Keynes first made his name internationally with his book, The Economic Consequences of the Peace , a trenchant critique of the rationality and morality of the Versailles Treaty at the end of World War I.

His Tract on Monetary Reform of then explored the deleterious. In he produced A Treatise on Money , intended as his magnum opus on monetary theory. This remained within the quantity theory of money framework of his earlier work, but analyzed the price level in terms of efficiency wages and the gap between saving and investment with a view to embracing price level dynamics. Although original and insightful, the work came under considerable criticism, and Keynes set to work to remedy its inadequacies. To this point, Keynes was essentially an orthodox economist in the Marshallian tradition, though always interested in criticism and innovation to improve theory and policy.

The mass unemployment of the Great Depression , however, impelled him toward a new economic theory that rejected much orthodox thinking. This new approach, published in as The General Theory of Employment, Interest, and Money , inaugurated a revolution in economic theory and policy, put macroeconomics on a sounder footing as the study of the economic system as a whole, and encouraged the collection of aggregate economic statistics. Two main ideas informed the new theory. First was the concept of unemployment equilibrium, which posited that deficiencies in aggregate demand could cause the economy to settle into equilibria with unemployed labor.

The second was radical or nonprobabilistic uncertainty, which meant that much rational behavior was actually based on factors other than calculable forecasts, thus leading to suboptimal levels of private investment and aggregate demand. These ideas led to interdependency between real and monetary factors, which previous theory had kept separate. In policy terms, given that capitalism had no automatic tendency to full employment, state action would be required to achieve this goal, chiefly but not exclusively via investment in public works.

In How to Pay for the War , he outlined a plan of deferred pay to manage civilian demand so as to avoid inflation and strengthen social justice. In he proposed a scheme for an International Clearing Union with adjustment requirements on both creditor and debtor nations. With its demise, he contributed to the discussions that led to the Bretton Woods system for international finance and trade a system reflecting American more than British views , and negotiated the American loan of , which saved Britain from financial disaster.

Throughout the s he also promoted policies to generate high levels of postwar employment. He died in of a heart attack , mainly brought on by overwork. In the twenty-first century, Keynesian ideas still have considerable influence and powers of rejuvenation, although they are less widely accepted relative to the s and s, when they formed part of the economic mainstream.

Keynes sought a particular middle way between laissez-faire liberalism and state socialism. He favored planning but not central planning, individual liberty but not unfettered economic freedom, and greater social justice but not complete equality of outcomes. His vision of a better world was driven not by acquisitive materialism but by ethical ends for which a well-functioning economy was a prerequisite. For Keynes, economic prosperity was not to be pursued for its own sake, but only as a means to noneconomic activities promoting greater goodness and civilization.

Keynes was a marvelous but not always clear writer who created numerous memorable passages. Keynes left many legacies, but the most enduring of all is an undying commitment to reason and persuasion, and to the capacity of humans to make the world a better place. While some of this literature is suitable for the general reader, much of it requires more specialized knowledge.

London: Macmillan; New York : St. Contains all his writings published in his lifetime and much previously unpublished material. General readers could start with Essays in Persuasion vol. Moggridge, D. London: Routledge, A lengthy, single volume biography. John Maynard Keynes: A Biography. London: Macmillan, The first of a long three-volume biography; see below for the subsequent volumes.

New York : Penguin, A single volume condensation of the above three volumes. Houndmills, U. Cate, Thomas, ed. An Encyclopedia of Keynesian Economics. Cheltenham, U. Technical work. The Keynesian Revolution in the Making, — General work. Harcourt, G. Riach, eds. New York: Routledge, General work Stewart, Michael. Keynes and After. Harmondsworth, U. Trevithick, J. Involuntary Unemployment: Macroeconomics from a Keynesian Perspective.

London and New York: Harvester Wheatsheaf, Considered one of the most important economic theorists of the modern era, John Maynard Keynes — was a genius who used his extraordinary gift for mathematics to deepen his understanding of economics. He helped to revolutionize modern thought about the workings of the free-trade marketplace and modern industrial capitalism.

He is credited with helping to pull the United States and much of Western Europe out of the Great Depression and with creating a kind of capitalism that works with the federal government to stabilize the ups and downs of a market economy. His father was a lecturer at Cambridge University , England , and became the top administrative official at Cambridge. As young John grew up, his parents doted on him, and his mother kept a thorough file of his early achievements. Keynes was a brilliant student at Saint Faith's Preparatory School. Later, at Eton, he finished first in his class in the classics the study of the language and culture of ancient Greece and Rome and second in mathematics.

He later went on to Cambridge University to complete his formal education, where, at age sixteen, he decided to pursue the study of economics. His first job out of college was in India , working as a junior clerk for the British civil service for two years. Keynes then took a position back in England as an economics lecturer at King's College. In , at age twenty-eight, he was named editor of the prestigious Economic Journal published by the Royal Economic Society, a position he retained for the next 33 years. In his mids, Keynes married a ballerina, Lydia Lopokova, and they remained together until his death in They had no children.

Keynes worked on international aspects of the economy for the British Treasury office in , and in he began his own career speculating successfully on foreign exchange and commodities. Later that same year Keynes joined the board of directors of the National Mutual Life Insurance Company, where he became the board director in , a position he held until Throughout his life Keynes occupied a variety of influential posts where his economic and financial advice was sought.

President Franklin Delano Roosevelt — sought his advice. Outspoken and controversial, Keynes wrote books on all aspects of economics, beginning with his small classic titled Indian Currency and Finance , and ending with his last book, How to Pay for the War It was a shrewd analysis of how economics works in daily life. Keynes' book contained little on sociology, philosophy, or ideology. He supported capitalism and focused on resolving the question of how a capitalist economy could recover from a depression, which seemed to be an inevitable affliction in the free market system.

The answer Keynes proposed may have helped the capitalist world pull itself out of the Great Depression , as well as provided a way for capitalist societies to normalize after war. Keynes theorized that economic difficulties were not the result of overproduction, as was commonly believed, but rather of problems in the distribution of goods. He further stated that it was the shortage of money that prevented goods from being distributed properly during a depression. The solution was the government involvement.

Keynes believed that if the government put money into the economy, without taxing citizens, the economy would experience some temporary debt, but the stimulation would bring the stagnant capitalist economy back to life.