John Maynard Keynes Totally Explained

Everything about John Maynard Keynes totally explained

John Maynard Keynes, 1st Baron Keynes CB ("cains") (5 June 1883 – 21 April 1946) was a British economist whose ideas, called Keynesian economics, had a major impact on modern economic and political theory as well as on many governments' fiscal policies. He advocated interventionist government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of economic recessions, depressions and booms. He is one of the fathers of modern theoretical macroeconomics.

Biography

Personal and marital life

Born at 14 Harvey Road, Cambridge, John Maynard Keynes was the son of John Neville Keynes, an economics lecturer at Cambridge University, and Florence Ada Brown, a successful author and a social reformer. His younger brother Geoffrey Keynes (1887–1982) was a surgeon and bibliophile and his younger sister Margaret (1890–1974) married the Nobel-prize-winning physiologist Archibald Hill.
   Keynes' early romantic and sexual relationships were almost all with men. Homosexuality wasn't unusual in the Bloomsbury group in which Keynes was avidly involved. One of his great loves was the artist Duncan Grant, whom he met in 1908, and he was also involved with the writer Lytton Strachey. Keynes states that "the theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state (eines totalen Staates) than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire."
   In this book Keynes put forward a theory based upon the notion of aggregate demand to explain variations in the overall level of economic activity, such as were observed in the Great Depression. The total income in a society is defined by the sum of consumption and investment; and 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. The book was indexed by Keynes's student, later the economist David Bensusan-Butt.
   The total amount of saving in a society is determined by the total income and thus, the economy could achieve an increase of total saving, even if the interest rates were lowered to increase the expenditures for investment. The book advocated activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works. The book is often viewed as the foundation of modern macroeconomics. Historians agree that Keynes influenced U.S. president Roosevelt's New Deal, but disagree as to what extent. Deficit spending of the sort the New Deal began in 1938 had previously been called "pump priming" and had been endorsed by President Herbert Hoover. Few senior economists in the U.S. agreed with Keynes in the 1930s. With time, however, his ideas became more widely accepted.
   In 1942, Keynes was a highly recognized economist and was raised to the House of Lords as Baron Keynes, of Tilton in the County of Sussex, where he sat on the Liberal benches. During World War II, Keynes argued in How to Pay for the War that the war effort should be largely financed by higher taxation, rather than deficit spending, in order to avoid inflation. As Allied victory began to look certain, Keynes was heavily involved, as leader of the British delegation and chairman of the World Bank commission, in the 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, involving a world central bank, the International Clearing Union, responsible for a common world unit of currency, the Bancor. The USA's greater negotiating strength, however, meant that the final outcomes accorded more closely to the less radical plans of Harry Dexter White.
   Keynes wrote Essays in Biography and Essays in Persuasion, the former giving portraits of economists and notables, whilst the latter presents some of Keynes' attempts to influence decision-makers during the Great Depression. Keynes was editor in chief for the Economic journal from 1912. He was also a member of the Liberal Party.

Economic thought

In his magnum opus, The General Theory of Employment, Interest, and Money (1936), Keynes laid the foundation for the branch of economics termed "Macroeconomics" today. Based on the methods devised by Alfred Marshall, he argued that macroeconomic relationships differ from their microeconomic counterparts because the ceteris paribus clauses applicable to different levels of aggregation differ. His innovation is to take, in his core argument, prices and wages as perfectly flexible and establish that the interaction of "aggregate demand" (in his sense) and "aggregate supply" (in his sense) may lead to stable unemployment equilibria. His work on employment went against the idea that the market ultimately settles at a state of full employment - a central tenet of Classical economists. Instead he argued that there exists a continuum of equilibria, the full employment equilibrium position being just one of them.(This idea underlies the choice of the title "General Theory": the classical theory being just a special case.)
   His main contribution can be seen in establishing an approach to macroeconomics that maintains its relationship to the underlying microeconomic behaviors, but assumes a form qualitatively different from microeconomic models. (This contrasts with the assumption made in New Classical Economics where macro relationships are modelled analogously to micro-relationships, →Robert Lucas, Jr.).
   He assumed that (marginal) labour productivity decreases with expanding employment. This is incompatible with the empirical findings summarized in Okun's Law. He combined this position with the marginal productivity theory of wages, implying that real wages decrease with increasing employment. This was shown to be empirically incorrect by the economist Dunlop, and Keynes accepted this. Keynes also suggested in the General Theory that inflation would occur only near "full employment" (in his sense), but it has been observed in many cases that inflation creeps up in states of severe underemployment (Stagflation). The assumption entertained by Keynes that inflation can only occur near full employment is still maintained in modern macroeconomics (→NAIRU). Keynes held that the cause of unemployment is a too high rate of savings, or insufficient investment expenditure. He conjectured that the amount of labour supplied is different when the decrease in real wages is due to a decrease in the money wage, than when it's due to an increase in the price level, assuming money wages stay constant. This conjecture relates to the "actual attitudes of workers" and is "not theoretically fundamental," although the New Keynesian economics emphasizes this point.
   In his Theory of Money, Keynes said that savings and investment were independently determined. The amount saved had little to do with variations in interest rates which in turn had little to do with how much was invested. Keynes thought that changes in saving depended on the changes in the predisposition to consume which resulted from marginal, incremental changes to income. Therefore, investment was determined by the relationship between expected rates of return on investment and the rate of interest.

Arts Council of Great Britain

Keynes' personal interest in Classical Opera and Dance focused on his support of the Royal Opera House, Covent Garden and the Ballet Company at Sadlers Wells. During the War as a member of CEMA (Council for the Encouragement of Music and the Arts) Keynes helped secure government funds to maintain both companies while their venues were shut. Following the War Keynes was instrumental in establishing the Arts Council of Great Britain and was the founding Chairman in 1946. Unsurprisingly from the start the two organizations that received the largest grant from the new body were the Royal Opera House and Sadlers Wells.

Death

Keynes died of myocardial infarction (heart attack) at his holiday home in Tilton, East Sussex, his heart problems being aggravated by the strain of working on post-war international financial problems. He died soon after he arranged a guarantee of an Anglo-American loan to Great Britain, a process he described as "absolute hell". Keynes' father, John Neville Keynes (1852 – 1949) outlived his son by three years. Keynes's brother Sir Geoffrey Keynes (1887 – 1982) was a distinguished surgeon, scholar and bibliophile. His nephews include Richard Keynes (born 1919) a physiologist; and Quentin Keynes (1921 – 2003) an adventurer and bibliophile.

Influence

Keynes' theories were so influential, even when disputed, that a subfield of Macroeconomics called Keynesian economics is further developing and discussing his theories and their applications. John Maynard Keynes had several cultural interests and was a central figure in the so-called Bloomsbury group, consisting of prominent artists and authors in Britain. His autobiographical essays Two Memoirs appeared in 1949.

Criticism

From Hayek

Friedrich von Hayek extensively critiqued Keynes's 1930 Treatise on Money, only to have Keynes assert that the Treatise no longer reflected his thinking. However, after reading Hayek's The Road to Serfdom Keynes said, "In my opinion it's a grand book ... Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement." Keynes was known, however, to open his letters with such complimentary language. He concluded the same letter with the prophecy, "What we need therefore, in my opinion, isn't 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,
Hayek explained the first section of the letter saying that this is "because Keynes believed that he was fundamentally still a classical English liberal and wasn't quite aware of how far he'd moved away from it. His basic ideas were still those of individual freedom. He didn't think systematically enough to see the conflicts."
The Keynes-Hayek conflict was but one battle in the Cambridge-LSE war. Hayek also felt that application of Keynes policies gives too much power to the state and leads to socialism.

From Friedman

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.. He and other monetarists have consequently argued that Keynesian economics can result in stagflation, the combination of low growth and high inflation that developed economies suffered in the early 1970s. More to Friedman's taste was the Tract on Monetary Reform (1923), which he regarded as Keynes's best work because of its focus on maintaining domestic price stability.

Winston Churchill was quoted as saying: "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions."

Bibliography

The Economic Consequences of the Peace (1919)

Tract on Monetary Reform (1923)

A Treatise On Probability

Essays in Persuasion (1931)

The General Theory of Employment, Interest, and Money (1936)Further Information

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