John Maynard Keynes: 5 June 1883 to 21 April 1946
John Maynard Keynes was born in Cambridge, Cambridgeshire, England, to an upper-middle-class family. His father, John Neville Keynes, was an economist and a lecturer in moral sciences at the University of Cambridge and his mother Florence Ada Keynes a local social reformer.
Keynes won a scholarship to Eton College in 1897, where he displayed talent in a wide range of subjects, particularly mathematics, classics and history. In 1902 Keynes left Eton for King's College, Cambridge after receiving a scholarship for this also to study mathematics. Alfred Marshall encouraged Keynes to become an economist, although Keynes's own inclinations drew him towards philosophy – especially the ethical system of G. E. Moore. Keynes became the President of the Cambridge Union Society and Cambridge University Liberal Club. In May 1904 he received a first class B.A. in mathematics. Keynes continued to involve himself with the university over the next two years. He took part in debates, further studied philosophy and attended economics lectures informally as a graduate student. He also studied for his 1905 Tripos and 1906 civil service exams.
Keynes's Civil Service career began in October 1906, as a clerk in the India Office. He enjoyed his work at first, but by 1908 had become bored and resigned his position to return to Cambridge and work on probability theory, at first privately funded only by two dons at the university – his father and the economist Arthur Pigou. In 1909 Keynes published his first professional economics article in the Economics Journal, about the effect of a recent global economic downturn on India.In 1909, Keynes accepted a lectureship in economics funded personally by Alfred Marshall. Keynes's earnings rose further as he began to take on pupils for private tuition, and on being elected a fellow. In 1911 Keynes was made editor of The Economic Journal. By 1913 he had published his first book, Indian Currency and Finance. He was then appointed to the Royal Commission on Indian Currency and Finance – the same topic as his book – where Keynes showed considerable talent at applying economic theory to practical problems.
The British Government called on Keynes's expertise during the First World War. In 1914, Keynes traveled to London at the government's request a few days before hostilities started. Bankers had been pushing for the suspension of specie payments – the convertibility of banknotes into gold – but with Keynes's help the Chancellor of the Exchequer (then Lloyd George) was persuaded that this would be a bad idea, as it would hurt the future reputation of the city if payments were suspended before absolutely necessary.
In January 1915 Keynes took up an official government position at the Treasury. Among his responsibilities were the design of terms of credit between Britain and its continental allies during the war, and the acquisition of scarce currencies. According to economist Robert Lekachman, Keynes's "nerve and mastery became legendary" because of his performance of these duties, as in the case where he managed to assemble – with difficulty – a small supply of Spanish pesetas. The secretary of the Treasury was delighted to hear Keynes had amassed enough to provide a temporary solution for the British Government. But Keynes did not hand the pesetas over, choosing instead to sell them all to break the market: his boldness paid off, as pesetas then became much less scarce and expensive. In the 1917 King's Birthday Honours, Keynes was appointed Companion of the Order of the Bath for his wartime work. Keynes was appointed financial representative for the Treasury to the 1919 Versailles peace conference. He was also appointed Officer of the Belgian Order of Leopold.
The three principal players at Versailles were Britain's Lloyd George, France's Clemenceau and America's President Wilson. Lloyd George was advised by Keynes and until the 1918 election he had some sympathy with Keynes's view of smaller reparation but while campaigning had found his speeches were only well received by the public if he promised to harshly punish Germany, and had therefore committed to extracting high payments. Clemenceau also pushed for high reparations; generally France argued for an even more severe settlement than Britain. Wilson initially favoured relatively lenient treatment of Germany – he feared too harsh conditions could foment the rise of extremism, and wanted Germany to be left sufficient capital to pay for imports. To Keynes's dismay, Lloyd George and Clemenceau were able to pressure Wilson to agree to very high repayments being imposed.
Keynes was disgusted with the Versailles Treaty both on moral and economic grounds, and he resigned from the Treasury.
In June 1919 he turned down an offer to become chairman of the British Bank of Northern Commerce, a job that promised a salary of £2000 in return for a morning per week of work.
Keynes's analysis on the predicted damaging effects of the treaty appeared in the highly influential book, The Economic Consequences of the Peace, published in 1919. This work has been described as Keynes's best book, where he was able to bring all his gifts to bear – his passion as well as his skill as an economist. In addition to economic analysis, the book contained pleas to the reader's sense of compassion:
Keynes's predictions of disaster were borne out when the German economy suffered the hyperinflation of 1923, and again by the collapse of the Weimar Republic and the outbreak of World War II. Only a fraction of reparations were ever paid. The Economic Consequences of the Peace gained Keynes international fame, but also caused him to be regarded as anti-establishment – it was not until after the outbreak of World War II that Keynes was offered a directorship of a major British Bank, or an acceptable offer to return to government with a formal job. However, Keynes was still able to influence government policy making through his network of contacts, his published works and by serving on government committees; this included attending high-level policy meetings as a consultant.
Keynes argued against a return to the gold standard after the war.
Keynes had completed his A Treatise on Probability before the war, but published it in 1921. The work was a notable contribution to the philosophical and mathematical underpinnings of probability theory, championing the important view that probabilities were no more or less than truth values intermediate between simple truth and falsity. Keynes developed the first upper-lower probabilistic interval approach to probability in chapters 15 and 17 of this book, as well as having developed the first decision weight approach with his conventional coefficient of risk and weight, c, in chapter 26. In addition to his academic work, the 1920s saw Keynes active as a journalist selling his work internationally and working in London as a financial consultant. In 1924 Keynes wrote an obituary for his former tutor Alfred Marshall which Schumpeter called "the most brilliant life of a man of science I have ever read." and Lytton Strachey rated it as one of Keynes's "best works".
In 1922 Keynes continued to advocate reduction of German reparations with A Revision of the Treaty. He attacked the post World War I deflation policies with A Tract on Monetary Reform in 1923 – a trenchant argument that countries should target stability of domestic prices, avoiding deflation even at the cost of allowing their currency to depreciate. Britain suffered from high unemployment through most of the 1920s, leading Keynes to recommend the depreciation of sterling to boost jobs by making British exports more affordable. From 1924 he was also advocating a fiscal response, where the government could create jobs by spending on public works. During the 1920s Keynes's pro stimulus views had only limited effect on policy makers and mainstream academic opinion – according to Hyman Minsky one reason was that at this time his theoretical justification was "muddled". The Tract had also called for an end to the gold standard. Keynes advised it was no longer a net benefit for countries such as Britain to participate in the gold standard, as it ran counter to the need for domestic policy autonomy. It could force countries to pursue deflationary policies at exactly the time when expansionary measures were called for to address rising unemployment. The Treasury and Bank of England were still in favour of the gold standard and in 1925 they were able to convince the then Chancellor Winston Churchill to re-establish it, which had a depressing effect on British industry. Keynes responded by writing The Economic Consequences of Mr. Churchill and continued to argue against the gold standard until Britain finally abandoned it in 1931.
Keynes had begun a theoretical work to examine the relationship between unemployment, money and prices back in the 1920s. The work, Treatise on Money, was published in 1930 in two volumes. A central idea of the work was that if the amount of money being saved exceeds the amount being invested – which can happen if interest rates are too high – then unemployment will rise. This is in part a result of people not wanting to spend too high a proportion of what employers pay out, making it difficult, in aggregate, for employers to make a profit.
He believed that budget deficits were a good thing, a product of recessions. He wrote, "For Government borrowing of one kind or another is nature's remedy, so to speak, for preventing business losses from being, in so severe a slump as to present one, so great as to bring production altogether to a standstill."
At the height of the Great Depression, in 1933, Keynes published The Means to Prosperity, which contained specific policy recommendations for tackling unemployment in a global recession, chiefly counter cyclical public spending. The Means to Prosperity contains one of the first mentions of the multiplier effect. While it was addressed chiefly to the British Government, it also contained advice for other nations affected by the global recession. A copy was sent to the newly elected President Roosevelt and other world leaders. The work was taken seriously by both the American and British governments, and according to Skidelsky, helped pave the way for the later acceptance of Keynesian ideas, though it had little immediate practical influence. In the 1933 London Economic Conference opinions remained too diverse for a unified course of action to be agreed upon.
The Great Depression with its periods of world wide economic hardship formed the backdrop against which Keynes's revolution took place.
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. Apart from Great Britain, Keynes's attention was primarily focused on the United States. In 1931, he received considerable support for his views on counter-cyclical public spending in Chicago, then America's foremost centre for economic views alternative to the mainstream. However, orthodox economic opinion remained generally hostile regarding fiscal intervention to mitigate the depression, until just before the outbreak of war. In late 1933 Keynes was persuaded by Felix Frankfurter to address President Roosevelt directly, which he did by letters and face to face in 1934, after which the two men spoke highly of each other. However according to Skidelsky, the consensus is that Keynes's efforts only began to have a more than marginal influence on US economic policy after 1939.
Keynes's magnum opus, The General Theory of Employment, Interest and Money was published in 1936. It was researched and indexed by one of Keynes's favourite students, later the economist David Bensusan-Butt. The work served as a theoretical justification for the interventionist policies Keynes favoured for tackling a recession. The General Theory challenged the earlier 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 own theory being the general one. Classical economists had believed in Say's law, which, simply put, states that "supply creates its own demand", and that in a free market workers would always be willing to lower their wages to a level where employers could profitably offer them jobs. An innovation from Keynes was the concept of price stickiness – the recognition that in reality workers often refuse to lower their wage demands even in cases where a classical economist might argue it is rational for them to do so. Due in part to price stickiness, it was established that the interaction of "aggregate demand" and "aggregate supply" may lead to stable unemployment equilibria – and in those cases, it is the state, and not the market, that economies must depend on for their salvation.
The General Theory argues that demand, not supply, is the key variable governing the overall level of economic activity. Aggregate demand, which equals total un-hoarded income in a society, is defined by the sum of consumption and investment. In a state of unemployment and unused production capacity, one can only enhance employment and total income by first increasing expenditures for either consumption or investment. Without government intervention to increase expenditure, an economy can remain trapped in a low employment equilibrium – the demonstration of this possibility has been described as the revolutionary formal achievement of the work.The book advocated activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works. "Let us be up and doing, using our idle resources to increase our wealth," he wrote in 1928. "With men and plants unemployed, it is ridiculous to say that we cannot afford these new developments. It is precisely with these plants and these men that we shall afford them."
The General Theory is often viewed as the foundation of modern macroeconomics. His ideas were soon to achieve widespread acceptance, with eminent American professors such as Alvin Hansen agreeing with the General Theory before the outbreak of World War II.
Keynes himself had only limited participation in the theoretical debates that followed the publication of the General Theory as he suffered a heart attack in 1937, requiring him to take long periods of rest. Hyman Minsky and other post-Keynesian economists have argued that as result of this, Keynes's ideas were diluted by those keen to compromise with classical economists or to render his concepts with mathematical models like the IS/LM model (which, they argue, distort Keynes's ideas). Keynes began to recover in 1939, but for the rest of his life his professional energies were largely directed towards the practical side of economics – the problems of ensuring optimum allocation of resources for the War efforts, post-War negotiations with America, and the new international financial order that was presented at Bretton Woods, New Hampshire.
During World War II, Keynes argued in How to Pay for the War, published in 1940, 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 channelling additional output towards the war efforts, would be fairer than punitive taxation and would have the advantage of helping to avoid a post war slump by boosting demand once workers were allowed to withdraw their savings. In September 1941 he was proposed to fill a vacancy in the Court of Directors of the Bank of England, and subsequently carried out a full term from the following April. In June 1942, Keynes was rewarded for his service with a hereditary peerage in the King's Birthday Honours. On 7 July his title was gazetted as "BARON KEYNES, of Tilton, in the County of Sussex" and he took his seat in the House of Lords on the Liberal Party benches.
As 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-1944 negotiations that established the Bretton Woods system. The Keynes-plan, concerning an international clearing-union argued for a radical system for the management of currencies. He proposed the creation of a common world unit of currency, the bancor, and new global institutions – a world central bank and the International Clearing Union. Keynes envisaged these institutions managing an international trade and payments system with strong incentives for countries to avoid substantial trade deficits or surpluses. The USA's greater negotiating strength, however, meant that the final outcomes accorded more closely to the more conservative plans of Harry Dexter White. According to US economist Brad Delong, on almost every point where he was overruled by the Americans, Keynes was later proved correct by events.
The two new institutions, later known as the World Bank and International Monetary Fund (IMF), were founded as a compromise that primarily reflected the American vision. There would be no incentives for states to avoid a large trade surplus; instead, the burden for correcting a trade imbalance would continue to fall only on the deficit countries, which Keynes had argued were least able to address the problem without inflicting economic hardship on their populations. Yet, Keynes was still pleased when accepting the final agreement, saying that if the institutions stayed true to their founding principles, "the brotherhood of man will have become more than a phrase."
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 1946, Keynes told Henry Clay, a professor of Social Economics and Advisor to the Bank of England of his hopes that Adam Smith's 'invisible hand' can help Britain out of the economic hole it is in: "I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago."
Keynesian Revolution
From the end of the Great Depression to the mid-1970s, Keynes provided the main inspiration for economic policy makers in Europe, America and much of the rest of the world.[49] While economists and policy makers had become increasingly won over to Keynes's way of thinking in the mid and late 1930s, it was only after the outbreak of World War II that governments started to borrow money for spending on a scale sufficient to eliminate unemployment. According to economist John Kenneth Galbraith (then a US government official charged with controlling inflation), in the rebound of the economy from wartime spending, "one could not have had a better demonstration of the Keynesian ideas."
The Keynesian Revolution was associated with the rise of modern liberalism in the West during the post-war period. Keynesian ideas became so popular that some scholars point to Keynes as representing the ideals of modern liberalism, as Adam Smith represented the ideals of classical liberalism.[60] After the war Winston Churchill attempted to check the rise of Keynesian policy-making in the United Kingdom, and used rhetoric critical of the mixed economy in his 1945 election campaign. Despite his popularity as a war hero Churchill suffered a landslide defeat to Clement Attlee whose government's economic policy continued to be influenced by Keynes's ideas.
The Neo-Keynesian IS/LM model is used to analyse the effect of demand shocks on the economy.
In the late 1930s and 1940s, economists (notably John Hicks, Franco Modigliani, and Paul Samuelson) attempted to interpret and formalise Keynes's writings in terms of formal mathematical models. In a process termed "the neoclassical synthesis", they combined Keynesian analysis with neoclassical economics to produce Neo-Keynesian economics, which came to dominate mainstream macroeconomic thought for the next 40 years.
By the 1950s, Keynesian policies were adopted by almost the entire developed world and similar measures for a mixed economy were used by many developing nations. By then, Keynes's views on the economy had become mainstream in the world's universities. Throughout the 1950s and 1960s, the developed and emerging free capitalist economies enjoyed exceptionally high growth and low unemployment.[61] [62] Professor Gordon Fletcher has written that the 1950s and 1960s, when Keynes's influence was at its peak, appear in retrospect as a Golden Age of Capitalism.
In late 1965 Time magazine ran a cover article with a title comment from Milton Friedman (later echoed by U.S. President Richard Nixon) that "We are all Keynesians now". The article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government." The article also states that Keynes was one of the three most important economists who ever lived, and that his General Theory was more influential than the magna opera of other famous economists, like Smith's The Wealth of Nations.[63]
Keynesian economics were officially discarded by the British Government in 1979, but forces had begun to gather against Keynes's ideas over 30 years earlier. Friedrich Hayek had formed the Mont Pelerin Society in 1947, with the explicit intention of nurturing intellectual currents to one day displace Keynesianism and other similar influences. Its members included Austrian School economist Ludwig von Mises along with the then young Milton Friedman. Initially the society had little impact on the wider world – Hayek was to say it was as if Keynes had been raised to sainthood after his death and that people refused to allow his work to be questioned. Friedman however began to emerge as a formidable critic of Keynesian economics from the mid-1950s, and especially after his 1963 publication of A Monetary History of the United States.
On the practical side of economic life, big government had appeared to be firmly entrenched in the 1950s but the balance began to shift towards private power in the 1960s. Keynes had written against the folly of allowing "decadent and selfish" speculators and financiers the kind of influence they had enjoyed after World War I. For two decades after World War II public opinion was strongly against private speculators, the disparaging label Gnomes of Zürich being typical of how they were described during this period. International speculation was severely restricted by the capital controls in place after Bretton Woods. Journalists Larry Elliott and Dan Atkinson say 1968 was a pivotal year when power shifted in the favour of private agents such as currency speculators. They pick out a key 1968 event as being when America suspended the conversion of the dollar into gold except on request of foreign governments, which they identify as when the Bretton Woods system first began to break down.
Criticisms of Keynes's ideas had begun to gain significant acceptance by the early 1970s as they were able to make a credible case that Keynesian models no longer reflected economic reality. Keynes himself had included few formulas and no explicit mathematical models in his General Theory. For commentators such as economist Hyman Minsky, Keynes's limited use of mathematics was partly the result of his scepticism about whether phenomena as inherently uncertain as economic activity could ever be adequately captured by mathematical models. Nevertheless, many models were developed by Keynesian economists, with a famous example being the Phillips curve which predicted an inverse relationship between unemployment and inflation. It implied that unemployment could be reduced by government stimulus with a calculable cost to inflation. In 1968 Milton Friedman published a paper arguing that the fixed relationship implied by the Philips curve did not exist.[67] Friedman suggested that sustained Keynesian policies could lead to both unemployment and inflation rising at once – a phenomenon that soon became known as stagflation. In the early 1970s stagflation appeared in both the US and Britain just as Friedman had predicted, with economic conditions deteriorating further after the 1973 oil crisis. Aided by the prestige gained from his successful forecast, Friedman led increasingly successful criticisms against the Keynesian consensus, convincing not only academics and politicians but also much of the general public with his radio and television broadcasts. The academic credibility of Keynesian economics was further undermined by additional criticism from other Monetarists trained in the Chicago school of economics, by the Lucas critique and by criticisms from Hayek's Austrian School.[49] So successful were these criticisms that by 1980 Robert Lucas was saying economists would often take offence if described as Keynesians.[68] Keynesian principles fared increasingly poorly on the practical side of economics – by 1979 they had been displaced by Monetarism as the primary influence on Anglo-American economic policy.[49] However many officials on both sides of the Atlantic retained a preference for Keynes, and in 1984 the Federal Reserve officially discarded monetarism, after which Keynesian principles made a partial comeback as an influence on policy making.[69] Not all academics accepted the criticism against Keynes – Minsky has argued that Keynesian economics had been debased by excessive mixing with neoclassical ideas from the 1950s, and that it was unfortunate the branch of economics had even continued to be called "Keynesian".[30] Writing in The American Prospect, Robert Kuttner argued it was not so much excessive Keynesian activism that caused the economic problems of the 1970s but the breakdown of the Bretton Woods system of capital controls, which allowed capital flight from regulated economies into unregulated economies in a fashion similar to Gresham's Law (where weak currencies undermine strong currencies).[70] Historian Peter Pugh has stated a key cause of the economic problems afflicting America in the 1970s was the refusal to raise taxes to finance the Vietnam War, which was against Keynesian advice.
A more typical response was to accept some elements of the criticisms while refining Keynesian economic theories to defend them against arguments that would invalidate the whole Keynesian framework – the resulting body of work largely composing New Keynesian economics. In 1992 Alan Blinder was writing about a "Keynesian Restoration" as work based on Keynes's ideas had to some extent become fashionable once again in academia, though in the mainstream it was highly synthesised with Monetarism and other neoclassical thinking. In the world of policy making, free-market influences broadly sympathetic to Monetarism remained very strong at government level – in powerful normative institutions like the World Bank, IMF and US Treasury, and in prominent opinion-forming media such as the Financial Times and The Economist.
The Keynesian resurgence of 2008–2009
Economist and ex-prime Minister of India Manmohan Singh spoke in favour of Keynesian fiscal stimuli at the 2008 G-20 Washington summit.
The global financial crisis of 2007–08 led to public skepticism about the free market consensus even from some on the economic right. In March 2008, Martin Wolf, chief economics commentator at the Financial Times, announced the death of the dream of global free-market capitalism. In the same month macroeconomist James K. Galbraith used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack against the consensus for monetarist economics and argued that Keynesian economics were far more relevant for tackling the emerging crises. Economist Robert Shiller had begun advocating robust government intervention to tackle the financial crises, specifically citing Keynes. Nobel laureate Paul Krugman also actively argued the case for vigorous Keynesian intervention in the economy in his columns for the New York Times. Other prominent economic commentators arguing for Keynesian government intervention to mitigate the financial crisis include George Akerlof, Brad Delong, Robert Reich, and Joseph Stiglitz. Newspapers and other media have also cited work relating to Keynes by Hyman Minsky,Robert Skidelsky, Donald Markwell and Axel Leijonhufvud.
A series of major bail-outs were pursued during the financial crisis, starting on 7 September with the announcement that the U.S. government was to nationalise the two government-sponsored enterprises which oversaw most of the U.S. subprime mortgage market – Fannie Mae and Freddie Mac. In October, the British Chancellor of the Exchequer referred to Keynes as he announced plans for substantial fiscal stimulus to head off the worst effects of recession, in accordance with Keynesian economic thought. Similar policies have been adopted by other governments worldwide. This is in stark contrast to the action permitted to Indonesia during its financial crisis of 1997, when it was forced by the IMF to close 16 banks at the same time, prompting a bank run. Much of the recent discussion reflected Keynes's advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the IMF and the World Bank, which many had argued should be reformed as a "new Bretton Woods" even before the crises broke out. IMF and United Nations economists advocated a coordinated international approach to fiscal stimulus. Donald Markwel argued that in the absence of such an international approach, there would be a risk of worsening international relations and possibly even world war arising from similar economic factors to those present during the depression of the 1930s.
By the end of December 2008, the Financial Times reported that "the sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades." In December 2008, Paul Krugman released his book, The Return of Depression Economics and the Crisis of 2008, arguing that economic conditions similar to what existed during the earlier part of the 20th century had returned, making Keynesian policy prescriptions more relevant than ever. In February 2009 Shiller and George Akerlof published Animal Spirits, a book where they argue the current US stimulus package is too small as it does not take into account Keynes's insight on the importance of confidence and expectations in determining the future behaviour of businessmen and other economic agents.
In a March 2009 speech entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People's Bank of China came out in favour of Keynes's idea of a centrally managed global reserve currency. Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's bancor. Zhou proposed a gradual move towards increased use of IMF special drawing rights (SDRs).[95][96] Although Zhou's ideas have not yet been broadly accepted, leaders meeting in April at the 2009 G-20 London summit agreed to allow $250 billion of special drawing rights to be created by the IMF, to be distributed globally. Stimulus plans have been credited for contributing to a better than expected economic outlook by both the OECD[97] and the IMF,[98][99] in reports published in June and July 2009. Both organisations warned global leaders that recovery is likely to be slow, so counter recessionary measures ought not be rolled back too early.
While the need for stimulus measures has been broadly accepted among policy makers, there has been much debate over how to fund the spending. Some leaders and institutions such as Angela Merkel[100] and the European Central Bank[101] have expressed concern over the potential impact on inflation, national debt and the risk that a too large stimulus will create an unsustainable recovery.
Among professional economists the revival of Keynesian economics has been even more divisive. Although many economists, such as George Akerlof, Paul Krugman, Robert Shiller, and Joseph Stiglitz, support Keynesian stimulus, others do not believe higher government spending will help the United States economy recover from the Great Recession. Some economists, such as Robert Lucas, questioned the theoretical basis for stimulus packages.[102] Others, like Robert Barro and Gary Becker, say that the empirical evidence for beneficial effects from Keynesian stimulus does not exist.[103] However, there is a growing academic literature that shows that fiscal expansion helps an economy grow in the near term, and that certain types of fiscal stimulus are particularly effective.[104][105]
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.
Friedrich Hayek, one of Keynes's most prominent critics
In 1931 Friedrich Hayek extensively critiqued Keynes's 1930 Treatise on Money. After reading Hayek's The Road to Serfdom, Keynes wrote to Hayek saying: "Morally and philosophically I find myself in agreement with virtually the whole of it" but concluded the same letter with the recommendation:
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... conclude rather differently. 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 own moral position. Moderate planning will be safe enough if those carrying it out are rightly oriented in their own minds and hearts to the moral issue.
Hayek explained the letter by saying:
Because Keynes 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.
According to some observers, Hayek felt that the post-World War II "Keynesian orthodoxy" gave too much power to the state and led toward socialism.
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.
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 was in fact a special case. He said the work expressed "the attitude of a decaying civilisation". After Keynes's death Schumpeter wrote a brief biographical piece called Keynes the Economist – on a personal level he was very positive about Keynes as a man, praising his pleasant nature, courtesy and kindness. He assessed some of Keynes biographical and editorial work as among the best he'd ever seen. Yet Schumpeter remained critical about Keynes's economics, linking Keynes's childlessness to what Schumpeter saw as an essentially short term view. He considered Keynes to have a kind of unconscious patriotism that caused him to fail to understand the problems of other nations. For Schumpeter "Practical Keynesianism is a seedling which cannot be transplanted into foreign soil: it dies there and becomes poisonous as it dies."
Austrian School economic commentator and journalist Henry Hazlitt's The Failure of the New Economics is a paragraph-by-paragraph refutation of The General Theory. In 1960 he published the book The Critics of Keynesian Economics where he gathered together the major criticisms of Keynes made up to that year.
President Harry 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 has been characterised as being indifferent or even positive about mild inflation. Keynes had indeed expressed a preference for inflation over deflation, saying that if one has to choose between the two evils it is "better to disappoint the rentier" than to inflict pain on working-class families. However, Keynes was also aware of the dangers of inflation. In The Economic Consequences of the Peace, Keynes had written:
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.
Personal life[edit]
Relationships[edit]
Keynes was ultimately a successful investor, building up a private fortune. His assets were nearly wiped out following the Wall Street Crash of 1929, which he did not foresee, but he soon recouped. At Keynes's death, in 1946, his net worth stood just short of £500,000 – equivalent to about £11 million ($16.5 million) in 2009. The sum had been amassed despite lavish support for various good causes and his personal ethic which made him reluctant to sell on a falling market in cases where he saw such behaviour as likely to deepen a slump.
Keynes built up a substantial collection of fine art, including works, not all of them minor, by Paul Cézanne, Edgar Degas, Amedeo Modigliani, Georges Braque, Pablo Picasso, and Georges Seurat (some of which can now be seen at the Fitzwilliam Museum). He enjoyed collecting books: for example, he collected and protected many of Isaac Newton's papers. It is in part on the basis of these papers that Keynes wrote of Newton as "the last of the magicians."
In 1931 Keynes went on to write the following 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.
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,[155] and at Bretton Woods, he worked to institute an international monetary system that would be beneficial for the world economy. Keynes suffered a series of heart attacks, which ultimately proved fatal, beginning during negotiations for an 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."[41][156] A few weeks after returning from the United States, Keynes died of a heart attack at Tilton, his farmhouse home near Firle, East Sussex, England, on 21 April 1946 at the age of 62.
Publications
1913 Indian Currency and Finance
1914 Ludwig von Mises's Theorie des Geldes (EJ)
1915 The Economics of War in Germany (EJ)
1919 The Economic Consequences of the Peace
1921 A Treatise on Probability
1922 The Inflation of Currency as a Method of Taxation (MGCRE)
1922 Revision of the Treaty
1923 A Tract on Monetary Reform
1925 Am I a Liberal? (N&A)
1926 The End of Laissez-Faire
1926 Laissez-Faire and Communism
1930 A Treatise on Money
1930 Economic Possibilities for our Grandchildren
1931 The End of the Gold Standard (Sunday Express)
1931 Essays in Persuasion
1931 The Great Slump of 1930
1933 The Means to Prosperity
1933 An Open Letter to President Roosevelt (New York Times)
1936 The General Theory of Employment, Interest and Money
1940 How to Pay for the War: A radical plan for the Chancellor of the Exchequer
http://en.wikipedia.org/wiki/John_Maynard_Keynes
