John Maynard Keynes
June 5, 1883 – April 21, 1946

His radical idea that governments should spend money they don't have may have saved capitalism
By ROBERT B. REICH for Time Magazine
 

He hardly seemed cut out to be a workingman's revolutionary. A Cambridge University don with a flair for making money, a graduate of England's exclusive Eton prep school, a collector of modern art, the darling of Virginia Woolf and her intellectually avant-garde Bloomsbury Group, the chairman of a life-insurance company, later a director of the Bank of England, married to a ballerina, John Maynard Keynes — tall, charming and self-confident — nonetheless transformed the dismal science into a revolutionary engine of social progress.

Before Keynes, economists were gloomy naysayers. "Nothing can be done," "Don't interfere," "It will never work," they intoned with Eeyore-like pessimism. But Keynes was an unswerving optimist. Of course we can lick unemployment! There's no reason to put up with recessions and depressions! The "economic problem is not — if we look into the future — the permanent problem of the human race," he wrote (liberally using italics for emphasis).

Born in Cambridge, England, in 1883, the year Karl Marx died, Keynes probably saved capitalism from itself and surely kept latter-day Marxists at bay.

His father John Neville Keynes was a noted Cambridge economist. His mother Florence Ada Keynes became mayor of Cambridge. Young John was a brilliant student but didn't immediately aspire to either academic or public life. He wanted to run a railroad. "It is so easy ... and fascinating to master the principles of these things," he told a friend, with his usual modesty. But no railway came along, and Keynes ended up taking the civil service exam. His lowest mark was in economics. "I evidently knew more about Economics than my examiners," he later explained.

Keynes was posted to the India Office, but the civil service proved deadly dull, and he soon left. He lectured at Cambridge, edited an influential journal, socialized with his Bloomsbury friends, surrounded himself with artists and writers and led an altogether dilettantish life until Archduke Francis Ferdinand of Austria was assassinated in Sarajevo and Europe was plunged into World War I. Keynes was called to Britain's Treasury to work on overseas finances, where he quickly shone. Even his artistic tastes came in handy. He figured a way to balance the French accounts by having Britain's National Gallery buy paintings by Manet, Corot and Delacroix at bargain prices.

His first brush with fame came soon after the war, when he was selected to be a delegate to the Paris Peace Conference of 1918-19. The young Keynes held his tongue as Woodrow Wilson, David Lloyd George and Georges Clemenceau imposed vindictive war reparations on Germany. But he let out a roar when he returned to England, immediately writing a short book, The Economic Consequences of the Peace.

The Germans, he wrote acerbically, could not possibly pay what the victors were demanding. Calling Wilson a "blind, deaf Don Quixote" and Clemenceau a xenophobe with "one illusion — France, and one disillusion — mankind" (and only at the last moment scratching the purple prose he had reserved for Lloyd George: "this goat-footed bard, this half-human visitor to our age from the hag-ridden magic and enchanted woods of Celtic antiquity"), an outraged Keynes prophesied that the reparations would keep Germany impoverished and ultimately threaten all Europe.

His little book sold 84,000 copies, caused a huge stir and made Keynes an instant celebrity. But its real import was to be felt decades later, after the end of World War II. Instead of repeating the mistake made almost three decades before, the U.S. and Britain bore in mind Keynes' earlier admonition. The surest pathway to a lasting peace, they then understood, was to help the vanquished rebuild. Public investing on a grand scale would create trading partners that could turn around and buy the victors' exports, and also build solid middle-class democracies in Germany, Italy and Japan.

Yet Keynes' largest influence came from a convoluted, badly organized and in places nearly incomprehensible tome published in 1936, during the depths of the Great Depression. It was called "The General Theory of Employment, Interest and Money."

Keynes' basic idea was simple. In order to keep people fully employed, governments have to run deficits when the economy is slowing. That's because the private sector won't invest enough. As their markets become saturated, businesses reduce their investments, setting in motion a dangerous cycle: less investment, fewer jobs, less consumption and even less reason for business to invest. The economy may reach perfect balance, but at a cost of high unemployment and social misery. Better for governments to avoid the pain in the first place by taking up the slack.

The notion that government deficits are good has an odd ring these days. For most of the past two decades, America's biggest worry has been inflation brought on by excessive demand. Inflation soared into double digits in the 1970s, budget deficits ballooned in the '80s, and now a Democratic President congratulates himself for a budget surplus that he wants to use to pay down the debt. But some 60 years ago, when 1 out of 4 adults couldn't find work, the problem was lack of demand.

Even then, Keynes had a hard sell. Most economists of the era rejected his idea and favoured balanced budgets. Most politicians didn't understand his idea to begin with. "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist," Keynes wrote. In the 1932 presidential election, Franklin D. Roosevelt had blasted Herbert Hoover for running a deficit, and dutifully promised he would balance the budget if elected. Keynes' visit to the White House two years later to urge F.D.R. to do more deficit spending wasn't exactly a blazing success. "He left a whole rigmarole of figures," a bewildered F.D.R. complained to Labor Secretary Frances Perkins. "He must be a mathematician rather than a political economist." Keynes was equally underwhelmed, telling Perkins that he had "supposed the President was more literate, economically speaking."

As the Depression wore on, Roosevelt tried public works, farm subsidies and other devices to restart the economy, but he never completely gave up trying to balance the budget. In 1938 the Depression deepened. Reluctantly, F.D.R. embraced the only new idea he hadn't yet tried, that of the bewildering British "mathematician." As the President explained in a fireside chat, "We suffer primarily from a failure of consumer demand because of a lack of buying power." It was therefore up to the government to "create an economic upturn" by making "additions to the purchasing power of the nation."

Yet not until the U.S. entered World War II did F.D.R. try Keynes' idea on a scale necessary to pull the nation out of the doldrums — and Roosevelt, of course, had little choice. The big surprise was just how productive America could be when given the chance. Between 1939 and 1944 (the peak of wartime production), the nation's output almost doubled, and unemployment plummeted — from more than 17% to just over 1%.

Never before had an economic theory been so dramatically tested. Even granted the special circumstances of war mobilization, it seemed to work exactly as Keynes predicted. The grand experiment even won over many Republicans. America's Employment Act of 1946 — the year Keynes died — codified the new wisdom, making it "the continuing policy and responsibility of the Federal Government ...to promote maximum employment, production, and purchasing power."

And so the Federal Government did, for the next quarter-century. As the U.S. economy boomed, the government became the nation's economic manager and the President its Manager in Chief. It became accepted wisdom that government could "fine-tune" the economy, pushing the twin accelerators of fiscal and monetary policy in order to avoid slowdowns, and applying the brakes when necessary to avoid overheating. In 1964 Lyndon Johnson cut taxes to expand purchasing power and boost employment. "We are all Keynesians now," Richard Nixon famously proclaimed. Americans still take for granted that Washington has responsibility for steering the economy clear of the shoals, although it's now Federal Reserve Chairman Alan Greenspan rather than the President who carries most of the responsibility.

Keynes had no patience with economic theorists who assumed that everything would work out in the long run. "This long run is a misleading guide to current affairs," he wrote early in his career. "In the long run we are all dead."

Were Keynes alive today he would surely admire the vigour of the U.S. economy, but he would also notice that some 40% of the global economy is in recession and much of the rest is slowing down: Japan, flat on its back; Southeast Asia, far poorer than it was just two years ago; Brazil, teetering; Germany, burdened by double-digit unemployment and an economic slowdown; and declining prices worldwide for oil and raw materials.

In light of all this, Keynes would be mystified that the International Monetary Fund is requiring troubled Third World nations to raise taxes and slash spending, that "euro" membership demands budget austerity, and that a U.S. President wants to hold on to budget surpluses. You can bet Keynes wouldn't be silent. Dapper and distinguished as he was, he'd enter the fray with both fists and a mighty roar.
 

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So influential was John Maynard Keynes in the middle third of the twentieth century that an entire school of modern thought bears his name. Many of his ideas were revolutionary; almost all were controversial. Keynesian economics serves as a sort of yardstick that can define virtually all economists who came after him.

Keynes was born in Cambridge and attended King’s College, Cambridge, where he earned his degree in mathematics in 1905. He remained there for another year to study under Alfred Marshall and Arthur Pigou, whose scholarship on the quantity theory of money led to Keynes’s Tract on Monetary Reform many years later. After leaving Cambridge, Keynes took a position with the civil service in Britain. While there, he collected the material for his first book in economics, Indian Currency and Finance, in which he described the workings of India’s monetary system. He returned to Cambridge in 1908 as a lecturer, then took a leave of absence to work for the British Treasury. He worked his way up quickly through the bureaucracy and by 1919 was the Treasury’s principal representative at the peace conference at Versailles. He resigned because he thought the Treaty of Versailles was overly burdensome for the Germans.

After resigning, he returned to Cambridge to resume teaching. A prominent journalist and speaker, Keynes was one of the famous Bloomsbury Group of literary greats, which also included Virginia Woolf and Bertrand Russell. At the 1944 Bretton Woods Conference, where the International Monetary Fund was established, Keynes was one of the architects of the postwar system of fixed exchange rates (see Foreign Exchange). In 1925 he married the Russian ballet dancer Lydia Lopokova. He was made a lord in 1942. Keynes died on April 21, 1946, survived by his father, John Neville Keynes, also a renowned economist in his day.

Keynes became a celebrity before becoming one of the most respected economists of the century when his eloquent book The Economic Consequences of the Peace was published in 1919. Keynes wrote it to object to the punitive reparations payments imposed on Germany by the Allied countries after World War I. The amounts demanded by the Allies were so large, he wrote, that a Germany that tried to pay them would stay perpetually poor and, therefore, politically unstable. We now know that Keynes was right. Besides its excellent economic analysis of reparations, Keynes’s book contains an insightful analysis of the Council of Four (Georges Clemenceau of France, Prime Minister David Lloyd George of Britain, President Woodrow Wilson of the United States, and Vittorio Orlando of Italy).

Keynes wrote: “The Council of Four paid no attention to these issues [which included making Germany and Austro-Hungary into good neighbors], being preoccupied with others—Clemenceau to crush the economic life of his enemy, Lloyd George to do a deal and bring home something which would pass muster for a week, the President to do nothing that was not just and right” (chap. 6, para. 2).

In the 1920s Keynes was a believer in the quantity theory of money (today called monetarism). His writings on the topic were essentially built on the principles he had learned from his mentors, Marshall and Pigou. In 1923 he wrote Tract on Monetary Reform, and later he published Treatise on Money, both on monetary policy. His major policy view was that the way to stabilize the economy is to stabilize the price level, and that to do that the government’s central bank must lower interest rates when prices tend to rise and raise them when prices tend to fall.

Keynes’s ideas took a dramatic change, however, as unemployment in Britain dragged on during the interwar period, reaching levels as high as 20 percent. Keynes investigated other causes of Britain’s economic woes, and The General Theory of Employment, Interest and Money was the result.

Keynes’s General Theory revolutionized the way economists think about economics. It was pathbreaking in several ways, in particular because it introduced the notion of aggregate demand as the sum of consumption, investment, and government spending; and because it showed (or purported to show) that full employment could be maintained only with the help of government spending. Economists still argue about what Keynes thought caused high unemployment. Some think he attributed it to wages that take a long time to fall. But Keynes actually wanted wages not to fall, and in fact advocated in the General Theory that wages be kept stable. A general cut in wages, he argued, would decrease income, consumption, and aggregate demand. This would offset any benefits to output that the lower price of labor might have contributed.

Why shouldn’t government, thought Keynes, fill the shoes of business by investing in public works and hiring the unemployed? The General Theory advocated deficit spending during economic downturns to maintain full employment. Keynes’s conclusion initially met with opposition. At the time, balanced budgets were standard practice with the government. But the idea soon took hold and the U.S. government put people back to work on public works projects. Of course, once policymakers had taken deficit spending to heart, they did not let it go.

Contrary to some of his critics’ assertions, Keynes was a relatively strong advocate of free markets. It was Keynes, not adam smith, who said, “There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them.”1 Keynes believed that once full employment had been achieved by fiscal policy measures, the market mechanism could then operate freely. “Thus,” continued Keynes, “apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialise economic life than there was before” (p. 379).

Little of Keynes’s original work survives in modern economic theory. His ideas have been endlessly revised, expanded, and critiqued. Keynesian economics today, while having its roots in The General Theory, is chiefly the product of work by subsequent economists including john hicks, james tobin, paul samuelson, Alan Blinder, robert solow, William Nordhaus, Charles Schultze, walter heller, and arthur okun. The study of econometrics was created, in large part, to empirically explain Keynes’s macroeconomic models. Yet the fact that Keynes is the wellspring for so many outstanding economists is testament to the magnitude and influence of his ideas.

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