John Maynard Keynes
John Maynard Keynes, 1st Baron Keynes , was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in mathematics, he built on and greatly refined earlier work on the causes of business cycles. One of the most influential economists of the 20th century, he produced writings that are the basis for the school of thought known as Keynesian economics, and its various offshoots. His ideas, reformulated as New Keynesianism, are fundamental to mainstream macroeconomics. He is known as the "father of macroeconomics".
Keynes was educated at King's College at the University of Cambridge, where he graduated in 1904 with a B.A. in mathematics. During the Great Depression of the 1930s, Keynes spearheaded a revolution in economic thinking, challenging the 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. He argued that aggregate demand determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment, and since wages and labour costs are rigid downwards the economy will not automatically rebound to full employment. Keynes advocated the use of fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions. After the 1929 crisis, Keynes also turned away from a fundamental pillar of neoclassical economics: free trade. He criticized Ricardian comparative advantage theory, considering the theory's initial assumptions unrealistic, and became definitively protectionist. He detailed these ideas in his magnum opus, The General Theory of Employment, Interest and Money, published in early 1936. By the late 1930s, leading Western economies had begun adopting Keynes's policy recommendations. Almost all capitalist governments had done so by the end of the two decades following Keynes's death in 1946. As a leader of the British delegation, Keynes participated in the design of the international economic institutions established after the end of World War II but was overruled by the American delegation on several aspects.
His influence began to wane in the 1970s, partly as a result of the stagflation that plagued the British and American economies during that decade, and partly because of criticism of Keynesian policies by Milton Friedman and other monetarists, who disputed the ability of government to favourably regulate the business cycle with fiscal policy. The 2008 financial crisis sparked the 2008–2009 Keynesian resurgence. Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the 2008 financial crisis by President Barack Obama of the United States, Prime Minister Gordon Brown of the United Kingdom, and other heads of governments.
When Time magazine included Keynes among its Most Important People of the Century in 1999, it reported that "his radical idea that governments should spend money they don't have may have saved capitalism". The Economist has described Keynes as "Britain's most famous 20th-century economist". In addition to being an economist, Keynes was also a civil servant, a director of the Bank of England, and a part of the Bloomsbury Group of intellectuals.
Early life and education
John Maynard Keynes was born in Cambridge, England, on 5 June 1883, 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 who went on to become the town's second female mayor. Keynes was the firstborn and was followed by two more childrenMargaret Neville Keynes in 1885 and Geoffrey Keynes in 1887. Geoffrey became a surgeon and Margaret married the Nobel Prize-winning physiologist Archibald Hill.According to the reminiscences of his brother Geoffrey, their parents were loving and attentive. They attended a Congregational Church and remained in the same house throughout their lives, where the children were always welcome to return. Keynes received 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 his assets were 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".
In January 1889, at the age of five and a half, Keynes started at the kindergarten of the Perse School for Girls for five mornings a week. He quickly showed a talent for arithmetic, but his health was poor leading to several long absences. He was tutored at home by a governess, Beatrice Mackintosh, and his mother. In January 1892, at eight and a half, he started as a day pupil at St Faith's preparatory school. By 1894, Keynes was top of his class and excelling at mathematics. In 1896, St Faith's headmaster, Ralph Goodchild, wrote that Keynes was "head and shoulders above all the other boys in the school" and was confident that Keynes could get a scholarship to Eton.
In 1897, Keynes won a King's Scholarship to Eton College, where he displayed talent in a wide range of subjects, particularly mathematics, classics and history: in 1901, he was awarded the Tomline Prize for mathematics. 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 read 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 elected to the University Pitt Club and 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. While at the University of Cambridge, Keynes was president of the Cambridge Union Society and Cambridge University Liberal Club. He was said to be an atheist.
In May 1904, he received a first-class BA 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 for one term, which constituted his only formal education in the subject. He took civil service exams in 1906.
The economist Harry Johnson wrote that the optimism imparted by Keynes's early life is a 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 and 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 life, enabling them to confidently draw from different fields when addressing practical problems.
Career
In October 1906 Keynes began his Civil Service career 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, through a lectureship in economics at first funded personally by economists Alfred Marshall and Arthur Pigou. He became a fellow of King's College in 1909.By 1909 Keynes had also published his first professional economics article in The Economic Journal, about the effect of a recent global economic downturn on India. He founded the Political Economy Club, a weekly discussion group. Keynes's earnings rose further as he began to take on pupils for private tuition.
In 1911 Keynes was made the editor of The Economic Journal. By 1913 he had published his first book, Indian Currency and Finance. In that book, Keynes analysed in great detail the monetary arrangements of India, from the late 19th century onwards. The Indian Rupee notes were convertible into silver coin which in turn had growing convertibility into gold coin, pound sterling, at a ratio of 15:1. Keynes recommended policies to speed up the conversion of Rupee into gold – effectively recommending a gold exchange standard.
He was then appointed to the Royal Commission on Indian Currency and Financethe same topic as his bookwhere Keynes showed considerable talent at applying economic theory to practical problems. His written work was published under the name "J M Keynes", though to his family and friends he was known as Maynard..
First World War
The British Government called on Keynes's expertise during the First World War. While he did not formally rejoin 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 paymentsthe gold equivalent of banknotesbut with Keynes's help, the Chancellor of the Exchequer was persuaded that this would be a bad idea, as it would hurt the future reputation of the city if payments were suspended before it was 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 a 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.
On the introduction of military conscription in 1916, he applied for exemption as a conscientious objector, which was effectively granted conditional upon continuing his government work.
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 had 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.