John Maynard Keynes - Expensivity

Keynes’s Early Life and Education

John Maynard Keynes (1883–1946) was born in Cambridge in the United Kingdom. His father, John Neville Keynes, was a Cambridge don who lectured on economics and moral sciences.

The young Keynes was sent to a local private school, but his health was poor and he spent long periods of time, during which he was educated at home. In 1896, when the boy was 13, the headmaster of the school he was then attending told his parents that their son was “head and shoulders above all the other boys in the school” and that he should have no trouble winning a scholarship to attend Eton.

Keynes did indeed win such a scholarship and entered Eton—then, as now, Britain’s premier “public school” (top-tier, boys’, college-preparatory school)—the following year, in 1897. At Eton, he excelled at many subjects, notably mathematics, Classics and history. He also won a prestigious prize for mathematics.

In 1902, Keynes entered King’s College, Cambridge University, where he “read” (majored in) mathematics. He also had a strong inclination for philosophy, in general, and for the ethical teachings of the Cambridge don, G.E. Moore, in particular. On the other hand, the great economist Alfred Marshall tried to steer the young Keynes towards his own discipline.

Keynes continued to display brilliance in everything he attempted, and was invited to join the “Cambridge Apostles,” a secret society consisting of the intellectual elite among Cambridge University’s students and faculty, which functioned as an ultra-elite discussion group.

In 1904, Keynes received a “first-class” degree (summa cum laude) in mathematics.

Keynes’s Career

In 1906, Keynes entered the Civil Service as a clerk in the India Office. At first, he enjoyed the work, but soon came to find it monotonous. In 1908, he returned to Cambridge University on a lectureship funded by Alfred Marshall and Arthur Pigou out of their own pockets.

The next year, in 1909, Keynes became a “fellow” (roughly equivalent to an assistant professor) of King’s College.

That same year, 1909, Keynes published his first professional economics article on the effect of the then-global recession on India. He also founded the Political Economy Club for weekly discussion of economic issues.

In 1911, Keynes was appointed editor of The Economic Journal, one of the oldest and most-prestigious academic economics journals in the English-speaking world.

Two years later, in 1913, Keynes published his first book, Indian Currency and Finance. On the strength of his book, he was appointed to a similarly named government agency, the Royal Commission on Indian Currency and Finance, where his practical economic advice is considered to have been highly valuable in stabilizing the economic situation in India.

During the crisis of the summer of 1914, Keynes was brought into informal discussions under the auspices of the Office of the Chancellor of the Exchequer. He joined the Treasury in an official capacity in 1915.

Once again, his performance as a public servant—especially, the skill with which he accumulated scarce foreign currency reserves—was stellar, adding still more luster to his already resplendent reputation. For his wartime work, Keynes was awarded an official honor called “Companion of the Order of the Bath.”

In 1919, Keynes was appointed a member of the Treasury delegation that traveled to Versailles in France to hammer out a peace treaty with the other victorious Allies and the defeated Axis powers. There, Keynes met with his first political defeat. He foresaw the counterproductive consequences of the punitive reparations levied against the Germans by the Allies and argued vigorously against them. Unfortunately, his advice was ignored.

Later that same year, 1919, Keynes published his second book, The Economic Consequences of the Peace, which proved to be highly influential and helped to make his name a household word. In it, he repeats the arguments which had failed to carry the day at the peace conference itself. When Germany subsequently underwent terrible economic and political upheavals during the next two decades, Keynes’s predictions in the book came to appear more and more prophetic.

In 1922, Keynes followed up on his impassioned argument of 1919 with a new plea for A Revision of the Treaty. Like the earlier book, the later one had no practical effect.

In the meantime, Keynes had been working on pure mathematics, in the realm of probability theory. In 1921, he published the results of his research in the form of his monograph, A Treatise on Probability, which is still considered a milestone in the history of the subject.

Keynes’s next important public role was in the debate over the best way to combat the specter of hyper-inflation, which had taken hold in Weimar Republic Germany and threatened the rest of Europe.

Keynes argued vigorously, especially in a 1925 essay entitled “The Economic Consequences of Mr. Churchill” (Winston Churchill was then Chancellor of the Exchequer), that price stabilization should be the government’s priority, even at the price of causing currency depreciation. He explicitly called for Britain to leave the gold standard in order to maintain its ability to a pursue expansionary fiscal policy to fight unemployment, without creating additional inflationary pressure.

In several other semi-popular essays of this period—especially “The End of Laissez-Faire” first published in 1926 and “Economic Possibilities for Our Grandchildren” first published in 1930”—Keynes outlined his vision of using the government’s enormous economic power to stimulate consumption as a primary means of achieving lasting prosperity.

In other words, by this time “Keynesianism” as we now think of it was in full flood, at least at the theoretical level. To be sure, he was attacked from all sides—from his right, by Friedrich A. Hayek, Lionel Robbins, and others, and from his left, by the Marxists. Disputes between Keynes and both of these sets of opponents waxed bitter at times.

Nevertheless, with the advent of the Great Depression in 1929, Keynes’s ideas had increasing appeal and were widely adopted, notably by US President Franklin D. Roosevelt in the set of economic stimulus programs he implemented called the “New Deal.”

In 1931, Keynes published a collection of his semi-popular pieces of journalism. Entitled Essays in Persuasion, it included all three of the articles mentioned in the last few paragraphs.

Another important essay explaining his ideas to the general public, “The Means to Prosperity,” was first published in 1933. It was collected in a new section called “Later Essays” added to the revised edition of Essays in Persuasion, which appeared many years later, in 1978.

The year before the original appearance of Essays in Persuasion, in 1930, Keynes had also published a major theoretical treatise in two volumes entitled A Treatise on Money.

In 1933, Keynes collected many of his literary essays on distinguished historical figures and contemporaries, under the title Essays in Biography.

Finally, in 1936, Keynes produced his magnum opus. The General Theory of Employment, Interest and Money is his most ambitious attempt to prove at the theoretical level the workability of “Keynesianism” at the practical level.

It is interesting to note that Keynes himself was not always a doctrinaire Keynesian. In 1940, as World War II loomed, he published a small pamphlet entitled “How to Pay for the War; a Radical Plan for the Chancellor of the Exchequer” (later reprinted in the 1978 revised edition of Essays in Persuasion).

In this essay, Keynes argued that the war should be financed by raising taxes and requiring the compulsory purchase of government-sponsored savings instruments (like the US’s voluntary “war bonds”), rather than through deficit spending. The reason was that he feared that the usual effects of government stimulus would be distorted under wartime conditions, leading to rampant inflation.

As the war wound down, in 1944, the UK government sent Keynes to participate in the Bretton Woods conference, held at a ski resort of that name in New Hampshire in the US. There, several hundred delegates from the finance ministries of all the victorious allied powers gathered to plan out a new global financial system.

Keynes strongly supported most of the initiatives of the Bretton Woods system, such as the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which was a forerunner of today’s World Bank.

In the event, the Bretton Woods conference proved to be Keynes’s last hurrah. He died of a heart attack in 1946.

For several decades, Keynes’s ideas were eclipsed by the monetarist theory of Milton Friedman and others at the University of Chicago economics department (the “Chicago school”).

However, since the financial crisis of 2008, Keynesianism has come roaring back as the governments of the advanced industrial democracies have struggled with weak financial institutions and weaker economic performance.

Today, Keynes’s opposition from the right is all but dead. His legacy is now endangered mainly by the resurgence of Marxist economic thought, which he bitterly opposed back in the 1930s.

Keynes’s Ideas

Keynes revolutionized the theoretical study of macroeconomics (the study of the large-scale interactions between the economy and causal influences emanating from governmental, social, cultural, and other, non-economic institutions).

Keynesian macroeconomics focuses on the phenomenon of “aggregate demand”—the sum of all the cases of individual demand flowing from all the personal and institutional actors in the economy.

According to Keynes, aggregate demand by itself may fail to stimulate the productive capacity of the economy sufficiently to provide the corresponding aggregate supply needed to meet the demand. Rather, many other factors besides aggregate demand may affect overall employment and inflation levels in ways that are counterproductive from the point of view of meeting the aggregate demand. The result is the recession-phase of the ordinary business cycle or, in the worst-case scenario, a long-lasting economic depression.

When these countervailing causal factors are present, the government ought to step in and stimulate the productive capacity of the economy to meet the unsatisfied demand. Government stimulus may also be used to increase aggregate demand itself when it is deficient.

In practice, these recommendations mean that in modern industrial economies government officials ought to fine-tune the economy by injecting extra funds (which Keynes called “liquidity”) into the system when and where it is needed. Keynes also led the way in arguing that the means used by governments to raise this liquidity, including deficit spending, are ultimately of secondary importance.

In short, Keynes taught that Adam Smith’s “invisible hand” cannot be counted on to keep modern economies on an even keel, and therefore human calculation and central planning must step in to remedy the defects of the free market. Thus, Keynesianism is the theoretical justification for the “mixed economy,” in which free enterprise is partially directed by government planners.