Misplaced Pages

#744255

129-461: Heterodox Keynesian economics ( / ˈ k eɪ n z i ə n / KAYN -zee-ən ; sometimes Keynesianism , named after British economist John Maynard Keynes ) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy ) strongly influences economic output and inflation . In the Keynesian view, aggregate demand does not necessarily equal

258-399: A cul-de-sac (Hansen's term was "leakage"); the only culs-de-sac he acknowledged were imports and hoarding, although he also said that a rise in prices might dilute the multiplier effect. Jens Warming recognised that personal saving had to be considered, treating it as a "leakage" (p. 214) while recognising on p. 217 that it might in fact be invested. The textbook multiplier gives

387-578: 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

516-518: A consultant. 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

645-411: A culprit as Kahn and Samuelson, wrote that ... ... in connection with the multiplier (and indeed most of the time) what Keynes is referring to as "investment" really means any addition to spending for any purpose ... The word "investment" is being used in a Pickwickian, or Keynesian, sense. Kahn envisaged money as being passed from hand to hand, creating employment at each step, until it came to rest in

774-482: A demand to hoard, is not admitted by the simplified liquidity preference model of the General Theory . Once he rejects the classical theory that unemployment is due to excessive wages, Keynes proposes an alternative based on the relationship between saving and investment. In his view, unemployment arises whenever entrepreneurs' incentive to invest fails to keep pace with society's propensity to save ( propensity

903-446: A free market policy would. Under the classical theory, the wage rate is determined by the marginal productivity of labour , and as many people are employed as are willing to work at that rate. Unemployment may arise through friction or may be "voluntary", in the sense that it arises from a refusal to accept employment owing to "legislation or social practices ... or mere human obstinacy", but "...the classical postulates do not admit of

1032-554: A general glut was possible. Keynes argued that when a glut occurred, it was the over-reaction of producers and the laying off of workers that led to a fall in demand and perpetuated the problem. Keynesians therefore advocate an active stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems. According to the theory, government spending can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation . The Liberal Party fought

1161-526: A generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, – abhorrent and detestable, even if it was possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe. Also present was striking imagery such as "year by year Germany must be kept impoverished and her children starved and crippled" along with bold predictions which were later justified by events: If we aim deliberately at

1290-663: 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. Keynes's influence started 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

1419-520: 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 that 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

SECTION 10

#1732764763745

1548-537: A man of science I have ever read". Mary Paley Marshall was "entranced" by the memorial, while 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

1677-410: A marginal propensity to consume of 2/3, they will now spend $ 666.67 on new consumption goods. The producers of these goods will now have extra incomes... they in turn will spend $ 444.44 ... Thus an endless chain of secondary consumption respending is set in motion by my primary investment of $ 1000. Samuelson's treatment closely follows Joan Robinson 's account of 1937 and is the main channel by which

1806-497: A middle course between deflation and inflation. This novel interpretation was inspired by the desperate search for control over the economy which permeated the academic world after the Depression. 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

1935-626: A net basis, Germany received support equal to four times the amount of the post-Second World War Marshall Plan . Schuker also shows that, in the years after Versailles, Keynes became an informal reparations adviser to the German government, wrote one of the major German reparation notes, and supported hyperinflation on political grounds. Nevertheless, The Economic Consequences of the Peace gained Keynes international fame, even though it also caused him to be regarded as anti-establishment – it

2064-462: A newly created Committee of Economists, Keynes tried to use Kahn's emerging multiplier theory to argue for public works, "but Pigou's and Henderson's objections ensured that there was no sign of this in the final product". In 1933 he gave wider publicity to his support for Kahn's multiplier in a series of articles titled "The road to prosperity" in The Times newspaper. A. C. Pigou was at the time

2193-505: A political pamphlet seeking to "provide academically respectable economic arguments" for Lloyd George's policies. It was titled Can Lloyd George do it? and endorsed the claim that "greater trade activity would make for greater trade activity ... with a cumulative effect". This became the mechanism of the "ratio" published by Richard Kahn in his 1931 paper "The relation of home investment to unemployment", described by Alvin Hansen as "one of

2322-420: A profit. Another key theme of the book is the unreliability of financial indices for representing an accurate – or indeed meaningful – indication of general shifts in purchasing power of currencies over time. In particular, he criticised the justification of Britain's return to the gold standard in 1925 at pre-war valuation by reference to the wholesale price index . He argued that

2451-405: A recession Say's Law suggests government intervention. This government intervention can be used to prevent any further increase in savings in the form of a decreased interest rate. Decreasing the interest rate will encourage people to start spending and investing again, or so it is stated by Say's Law. The reason behind this is that when there is little investing, savings start to accumulate and reach

2580-543: A regulated market economy – predominantly private sector , but with an active role for government intervention during recessions and depressions . Keynesian economics developed during and after the Great Depression from the ideas presented by Keynes in his 1936 book, The General Theory of Employment, Interest and Money . Keynes' approach was a stark contrast to the aggregate supply -focused classical economics that preceded his book. Interpreting Keynes's work

2709-526: A single equation determining a single variable. The theoretical apparatus of supply and demand curves developed by Fleeming Jenkin and Alfred Marshall provided a unified mathematical basis for this approach, which the Lausanne School generalized to general equilibrium theory. For macroeconomics, relevant partial theories included the Quantity theory of money determining the price level and

SECTION 20

#1732764763745

2838-487: A slump as the 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

2967-426: A society, is defined by the sum of consumption and investment. In a state of unemployment and unused production capacity, one can enhance employment and total income only 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

3096-427: A somewhat lesser extent. Keynes adds that "this psychological law was of the utmost importance in the development of my own thought". Keynes viewed the money supply as one of the main determinants of the state of the real economy. The significance he attributed to it is one of the innovative features of his work, and was influential on the politically hostile monetarist school . Money supply comes into play through

3225-411: A stopping point in the flow of money. During the normal economic activity, it would be justified to have savings because they can be given out as loans but in this case, there is little demand for them, so they are doing no good for the economy. The supply of savings then exceeds the demand for loans and the result is lower prices or lower interest rates. Thus, the idea is that the money that was once saved

3354-565: A surgeon and Margaret married the Nobel Prize-winning physiologist Archibald Hill . According to the economic historian and biographer Robert Skidelsky , Keynes's 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

3483-426: 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

3612-782: 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. Lausanne School The term Lausanne School

3741-535: A war could support itself for an unlimited period if only money remained in the country ... For if money itself is "consumed", this simply means that it passes into someone else's possession, and this process may continue indefinitely. Multiplier doctrines had subsequently been expressed in more theoretical terms by the Dane Julius Wulff (1896), the Australian Alfred de Lissa (late 1890s),

3870-474: 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

3999-483: Is a contentious topic, and several schools of economic thought claim his legacy. Keynesian economics, as part of the neoclassical synthesis , served as the standard macroeconomic model in the developed nations during the later part of the Great Depression , World War II , and the post-war economic expansion (1945–1973). It was developed in part to attempt to explain the Great Depression and to help economists understand future crises. It lost some influence following

Keynesian economics - Misplaced Pages Continue

4128-473: Is now re-invested or spent, assuming lower interest rates appeal to consumers. To Keynes, however, this was not always the case, and it couldn't be assumed that lower interest rates would automatically encourage investment and spending again since there is no proven link between the two. 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

4257-407: Is on the state, not the market, that economies must depend for their salvation. In contrast, Keynes argued that demand is what creates supply and not the other way around. He questioned Say's Law by asking what would happen if the money that is being given to individuals is not finding its way back into the economy and is saved instead. He suggested the result would be a recession. To tackle the fear of

4386-405: Is one of Keynes's synonyms for "demand"). The levels of saving and investment are necessarily equal, and income is therefore held down to a level where the desire to save is no greater than the incentive to invest. The incentive to invest arises from the interplay between the physical circumstances of production and psychological anticipations of future profitability; but once these things are given

4515-476: 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 . Few senior American economists agreed with Keynes through most of the 1930s. Yet 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

4644-413: Is too high. Further, they argue that these economic fluctuations can be mitigated by economic policy responses coordinated between government and central bank . In particular, fiscal policy actions taken by the government and monetary policy actions taken by the central bank, can help stabilize economic output, inflation, and unemployment over the business cycle . Keynesian economists generally advocate

4773-486: The liquidity preference function, which is the demand function that corresponds to money supply. It specifies the amount of money people will seek to hold according to the state of the economy. In Keynes's first (and simplest) account – that of Chapter 13 – liquidity preference is determined solely by the interest rates r —which is seen as the earnings forgone by holding wealth in liquid form: hence liquidity preference can be written L ( r ) and in equilibrium must equal

4902-474: The Birmingham School of Thomas Attwood , and the American economists William Trufant Foster and Waddill Catchings , who were influential in the 1920s and 1930s. Underconsumptionists were, like Keynes after them, concerned with failure of aggregate demand to attain potential output, calling this "underconsumption" (focusing on the demand side), rather than " overproduction " (which would focus on

5031-459: 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

5160-435: The classical theory of the interest rate . In regards to employment, the condition referred to by Keynes as the "first postulate of classical economics" stated that the wage is equal to the marginal product, which is a direct application of the marginalist principles developed during the nineteenth century (see The General Theory ). Keynes sought to supplant all three aspects of the classical theory. Although Keynes's work

5289-399: The oil shock and resulting stagflation of the 1970s . Keynesian economics was later redeveloped as New Keynesian economics , becoming part of the contemporary new neoclassical synthesis , that forms current-day mainstream macroeconomics . The advent of the financial crisis of 2007–2008 sparked renewed interest in Keynesian policies by governments around the world. Macroeconomics is

Keynesian economics - Misplaced Pages Continue

5418-420: The productive capacity of the economy . It is influenced by a host of factors that sometimes behave erratically and impact production, employment, and inflation . Keynesian economists generally argue that aggregate demand is volatile and unstable and that, consequently, a market economy often experiences inefficient macroeconomic outcomes, including recessions when demand is too low and inflation when demand

5547-411: The quantity theory of money protects the classical school from the conclusion Keynes expected from it. Saving is that part of income not devoted to consumption , and consumption is that part of expenditure not allocated to investment , i.e., to durable goods. Hence saving encompasses hoarding (the accumulation of income as cash) and the purchase of durable goods. The existence of net hoarding, or of

5676-434: The velocity of circulation . In 1930, he published A Treatise on Money , intended as a comprehensive treatment of its subject "which would confirm his stature as a serious academic scholar, rather than just as the author of stinging polemics", and marks a large step in the direction of his later views. In it, he attributes unemployment to wage stickiness and treats saving and investment as governed by independent decisions:

5805-557: The "astronomically" high war compensation they wanted to demand from Germany. Keynes was forced to try to exert influence mostly from behind the scenes. The three principal players at the Paris conferences were Britain's Lloyd George, France's Georges Clemenceau and America's President Woodrow Wilson . It was only Lloyd George to whom Keynes had much direct access; until the 1918 election he had some sympathy with Keynes's view but while campaigning had found his speeches were well received by

5934-463: The "first proposition" that "schemes of capital development are of no use for reducing unemployment" and asked whether "it would be a misunderstanding of the Treasury view to say that they hold to the first proposition". Hopkins responded that "The first proposition goes much too far. The first proposition would ascribe to us an absolute and rigid dogma, would it not?" Later the same year, speaking in

6063-460: 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

6192-573: The 1929 General Election on a promise to "reduce levels of unemployment to normal within one year by utilising the stagnant labour force in vast schemes of national development". David Lloyd George launched his campaign in March with a policy document, We can cure unemployment, which tentatively claimed that, "Public works would lead to a second round of spending as the workers spent their wages." Two months later Keynes, then nearing completion of his Treatise on money , and Hubert Henderson collaborated on

6321-539: 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 (total spending in the economy) 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

6450-438: The 1933 London Economic Conference opinions remained too diverse for a unified course of action to be agreed upon. 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 its imperialist ambitions and its treatment of Jews. Apart from Great Britain, Keynes's attention

6579-578: The 1936 General Theory, sharing the Swedish discoveries. In 1923, Keynes published his first contribution to economic theory, A Tract on Monetary Reform , whose point of view is classical but incorporates ideas that later played a part in the General Theory . In particular, looking at the hyperinflation in European economies, he drew attention to the opportunity cost of holding money (identified with inflation rather than interest) and its influence on

SECTION 50

#1732764763745

6708-532: The Belgian Order of Leopold . Keynes's experience at Versailles was influential in shaping his future outlook, yet it was not a successful one. Keynes's main interest had been in trying to prevent Germany's compensation payments being set so high it would traumatise innocent German people, damage the nation's ability to pay and sharply limit its ability to buy exports from other countries – thus hurting not just Germany's economy but that of

6837-431: The British, while on security grounds, 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 include pensions in

6966-534: 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. John Maynard Keynes

7095-623: The German/American Nicholas Johannsen (same period), and the Dane Fr. Johannsen (1925/1927). Kahn himself said that the idea was given to him as a child by his father. As the 1929 election approached "Keynes was becoming a strong public advocate of capital development" as a public measure to alleviate unemployment. Winston Churchill, the Conservative Chancellor, took the opposite view: It is

7224-540: The Great Depression of the 1930s, that capitalism caused war. He argued that if capitalism were managed domestically and internationally (with coordinated international Keynesian policies, an international monetary system that did not pit the interests of countries against one another, and a high degree of freedom of trade), then this system of managed capitalism could promote peace rather than conflict between countries. His plans during World War II for post-war international economic institutions and policies (which contributed to

7353-657: The Paretian School, which were based on the works of Pareto. Italian economic historians have adopted Luigi Einaudi's description that the age of the Lausanne School in Italy should be called "Italian school". The school is distinguished from the work of Alfred Marshall by the way it maintains the necessity of considering the interaction of all parts of the economy simultaneously so that the behavior that occurs within any part of it can be understood. Marshall, on

7482-467: 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 appeals to the reader's sense of compassion : I cannot leave this subject as though its just treatment wholly depended either on our pledges or on economic facts. The policy of reducing Germany to servitude for

7611-485: 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

7740-648: The ability of government to favourably regulate the business cycle with fiscal policy . The 2007–2008 financial crisis sparked the 2008–2009 Keynesian resurgence . Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the 2007–2008 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

7869-420: The assumption that if a surplus of goods or services exists, they would naturally drop in price to the point where they would be consumed. Given the backdrop of high and persistent unemployment during the Great Depression, Keynes argued that there was no guarantee that the goods that individuals produce would be met with adequate effective demand, and periods of high unemployment could be expected, especially when

SECTION 60

#1732764763745

7998-474: The capacity of the producers to satisfy those needs, everything that is produced would eventually be consumed once the appropriate price was found for it. This perception is reflected in Say's law and in the writing of David Ricardo , which states that individuals produce so that they can either consume what they have manufactured or sell their output so that they can buy someone else's output. This argument rests upon

8127-402: 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". During the Great Depression of

8256-421: The circumstances of its publication were such that his suggestions shaped the course of the 1930s. In addition, Keynes introduced the world to a new interpretation of taxation: since the legal tender is now defined by the state, inflation becomes "taxation by currency depreciation". This hidden tax meant a) that the standard of value should be governed by deliberate decision; and (b) that it was possible to maintain

8385-467: The claim that the effect of public works is at the expense of expenditure elsewhere, admitting that this might arise if the revenue is raised by taxation, but says that other available means have no such consequences. As an example, he suggests that the money may be raised by borrowing from banks, since ... ... it is always within the power of the banking system to advance to the Government the cost of

8514-531: The collapse of the Weimar Republic and the outbreak of the Second World War. However, historian Ruth Henig claims that "most historians of the Paris peace conference now take the view that, in economic terms, the treaty was not unduly harsh on Germany and that, while obligations and damages were inevitably much stressed in the debates at Paris to satisfy electors reading the daily newspapers,

8643-516: The conference was a treaty which disgusted Keynes both on moral and economic grounds and led to his resignation 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 £2,000 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

8772-447: The cost of European reconstruction on the United States. Lloyd George agreed it might be acceptable to the British electorate. However, America was against the plan; the US was then the largest creditor, and by this time Wilson had started to believe in the merits of a harsh peace and thought that his country had already made excessive sacrifices. Hence despite his best efforts, the result of

8901-527: 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 policymakers and mainstream academic opinion – according to Hyman Minsky one reason

9030-494: The cost of the roads. The demonstration relies on "Mr Meade's relation" (due to James Meade ) asserting that the total amount of money that disappears into culs-de-sac is equal to the original outlay, which in Kahn's words "should bring relief and consolation to those who are worried about the monetary sources" (p. 189). A respending multiplier had been proposed earlier by Hawtrey in a 1928 Treasury memorandum ("with imports as

9159-808: The creation at Bretton Woods of the International Monetary Fund and the World Bank , and later to the creation of the General Agreement on Tariffs and Trade and eventually the World Trade Organization ) were aimed to give effect to this vision. Although Keynes has been widely criticised – especially by members of the Chicago school of economics  – for advocating irresponsible government spending financed by borrowing, in fact he

9288-425: The direction of his subsequent work. During 1933, he wrote essays on various economic topics "all of which are cast in terms of movement of output as a whole". At the time that Keynes wrote the General Theory , it had been a tenet of mainstream economic thought that the economy would automatically revert to a state of general equilibrium: it had been assumed that, because the needs of consumers are always greater than

9417-405: The economy was contracting in size. He saw the economy as unable to maintain itself at full employment automatically, and believed that it was necessary for the government to step in and put purchasing power into the hands of the working population through government spending. Thus, according to Keynesian theory, some individually rational microeconomic-level actions such as not investing savings in

9546-413: 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 (the foundation of free trade), considering

9675-734: 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 . 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. His written work

9804-464: The externally fixed money supply M̂ . John Maynard Keynes Heterodox John Maynard Keynes, 1st Baron Keynes CB , FBA ( / k eɪ n z / KAYNZ ; 5 June 1883 – 21 April 1946), was an English economist and philosopher 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

9933-454: 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 Joseph Schumpeter called "the most brilliant life of

10062-476: The former varying positively with the interest rate, the latter negatively. The velocity of circulation is expressed as a function of the rate of interest. He interpreted his treatment of liquidity as implying a purely monetary theory of interest. Keynes's younger colleagues of the Cambridge Circus and Ralph Hawtrey believed that his arguments implicitly assumed full employment , and this influenced

10191-431: 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

10320-447: 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

10449-437: The goods and services produced by the economy, if taken collectively by a large proportion of individuals and firms, can lead to outcomes wherein the economy operates below its potential output and growth rate. Prior to Keynes, a situation in which aggregate demand for goods and services did not meet supply was referred to by classical economists as a general glut , although there was disagreement among them as to whether

10578-407: The government), rather than deficit spending , 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

10707-416: The great landmarks of economic analysis". The "ratio" was soon rechristened the "multiplier" at Keynes's suggestion. The multiplier of Kahn's paper is based on a respending mechanism familiar nowadays from textbooks. Samuelson puts it as follows: Let's suppose that I hire unemployed resources to build a $ 1000 woodshed. My carpenters and lumber producers will get an extra $ 1000 of income... If they all have

10836-442: The ideas that became the basis for Keynesian economics in his main work, The General Theory of Employment, Interest and Money (1936). It was written during the Great Depression , when unemployment rose to 25% in the United States and as high as 33% in some countries. It is almost wholly theoretical, enlivened by occasional passages of satire and social commentary. The book had a profound impact on economic thought, and ever since it

10965-431: The impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing. Keynes's followers assert that his predictions of disaster were borne out when the German economy suffered the hyperinflation of 1923 , and again by

11094-452: The impression that making society richer is the easiest thing in the world: the government just needs to spend more. In Kahn's paper, it is harder. For him, the initial expenditure must not be a diversion of funds from other uses, but an increase in the total expenditure: something impossible – if understood in real terms – under the classical theory that the level of expenditure is limited by the economy's income/output. On page 174, Kahn rejects

11223-455: The incentive is independent of income and depends solely on the rate of interest r . Keynes designates its value as a function of r as the "schedule of the marginal efficiency of capital ". The propensity to save behaves quite differently. Saving is simply that part of income not devoted to consumption, and: ... the prevailing psychological law seems to be that when aggregate income increases, consumption expenditure will also increase but to

11352-451: The index understated the effects of changes in the costs of services and labour. Keynes was deeply critical of the British government's austerity measures during the Great Depression . He believed that budget deficits during recessions were a good thing and a natural product of an economic slump. 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

11481-518: The intention was quietly to give Germany substantial help towards paying her bills, and to meet many of the German objections by amendments to the way the reparations schedule was in practice carried out". Only a small fraction of reparations was ever paid. In fact, historian Stephen A. Schuker demonstrates in American 'Reparations' to Germany, 1919–33 , that the capital inflow from American loans substantially exceeded German out payments so that, on

11610-437: The multiplier has influenced Keynesian theory. It differs significantly from Kahn's paper and even more from Keynes's book. The designation of the initial spending as "investment" and the employment-creating respending as "consumption" echoes Kahn faithfully, though he gives no reason why initial consumption or subsequent investment respending should not have exactly the same effects. Henry Hazlitt , who considered Keynes as much

11739-430: The multiplier, the paradox of thrift ), had been advanced by authors in the 19th and early 20th centuries. (E.g. J. M. Robertson raised the paradox of thrift in 1892 .) Keynes's unique contribution was to provide a general theory of these, which proved acceptable to the economic establishment. An intellectual precursor of Keynesian economics was underconsumption theories associated with John Law , Thomas Malthus ,

11868-460: The only leakage"), but the idea was discarded in his own subsequent writings. Soon afterwards the Australian economist Lyndhurst Giblin published a multiplier analysis in a 1930 lecture (again with imports as the only leakage). The idea itself was much older. Some Dutch mercantilists had believed in an infinite multiplier for military expenditure (assuming no import "leakage"), since ... ...

11997-471: The orthodox Treasury dogma, steadfastly held ... [that] very little additional employment and no permanent additional employment can, in fact, be created by State borrowing and State expenditure. Keynes pounced on a flaw in the Treasury view . Cross-examining Sir Richard Hopkins , a Second Secretary in the Treasury, before the Macmillan Committee on Finance and Industry in 1930 he referred to

12126-538: 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

12255-482: The other hand, preferred to solve economic problems using mathematics as the instrument, with the theorist drawing out conclusions instead of coming up with solutions through the process of verbal reasoning. The Lausanne School attempted to answer the question of whether the welfare of an economy can be measured. Its theorists such as Walras proposed that it can be done through a notion of justice in exchange called "commutative justice", which required all traders to face

12384-407: The possibility of the third category," which Keynes defines as involuntary unemployment . Keynes raises two objections to the classical theory's assumption that "wage bargains ... determine the real wage". The first lies in the fact that "labour stipulates (within limits) for a money-wage rather than a real wage". The second is that classical theory assumes that, "The real wages of labour depend on

12513-480: The public only if he promised to harshly punish Germany, and had therefore committed his delegation to extracting high payments. Lloyd George did, however, win some loyalty from Keynes with his actions at the Paris conference by intervening against the French to ensure the dispatch of much-needed food supplies to German civilians. Clemenceau also pushed for substantial reparations, though not as high as those proposed by

12642-410: The reparations bill. Towards the end of the conference, Keynes came up with a plan that he argued would not only help Germany and other impoverished central European powers but also be good for the world economy as a whole. It involved the radical writing down of war debts, which would have had the possible effect of increasing international trade all round, but at the same time thrown over two-thirds of

12771-497: The rest of his life his professional energies were directed largely 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 the Bretton Woods Conference . In the General Theory and later, Keynes responded to the socialists who argued, especially during

12900-401: 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

13029-403: The roads without in any way affecting the flow of investment along the normal channels. This assumes that banks are free to create resources to answer any demand. But Kahn adds that ... ... no such hypothesis is really necessary. For it will be demonstrated later on that, pari passu with the building of roads, funds are released from various sources at precisely the rate that is required to pay

13158-548: The same price, which did not change, for a given product. This free competition is said to produce "maximum welfare", allowing for an effective evaluation of questions of welfare. Hans Mayer argued against Lausanne School, citing that its assumptions are unrealistic and that the utility of a good cannot be measured, infinitely divided, nor indefinitely substituted. Members of the Lausanne School include Basile Samsonoff, Marie Kolabinska, and Pierre Boven, who were all students of Pareto. This economic history -related article

13287-491: The sole economics professor at Cambridge. He had a continuing interest in the subject of unemployment, having expressed the view in his popular Unemployment (1913) that it was caused by "maladjustment between wage-rates and demand" – a view Keynes may have shared prior to the years of the General Theory . Nor were his practical recommendations very different: "on many occasions in the thirties" Pigou "gave public support [...] to State action designed to stimulate employment". Where

13416-401: The study of the factors applying to an economy as a whole. Important macroeconomic variables include the overall price level, the interest rate , the level of employment, and income (or equivalently output) measured in real terms . The classical tradition of partial equilibrium theory had been to split the economy into separate markets, each of whose equilibrium conditions could be stated as

13545-420: 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

13674-534: The supply side), and advocating economic interventionism . Keynes specifically discussed underconsumption (which he wrote "under-consumption") in the General Theory, in Chapter 22, Section IV and Chapter 23, Section VII . Numerous concepts were developed earlier and independently of Keynes by the Stockholm school during the 1930s; these accomplishments were described in a 1937 article, published in response to

13803-515: The suspension of specie payments – the gold equivalent of banknotes  – 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 it was necessary. In January 1915 Keynes took up an official government position at

13932-542: 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. Among others, Hyman Minsky and Post-Keynesian economists have argued that as a result, 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

14061-426: 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

14190-437: The two men differed is in the link between theory and practice. Keynes was seeking to build theoretical foundations to support his recommendations for public works while Pigou showed no disposition to move away from classical doctrine. Referring to him and Dennis Robertson , Keynes asked rhetorically: "Why do they insist on maintaining theories from which their own practical conclusions cannot possibly follow?" Keynes set forward

14319-425: The wage bargains which labour makes with the entrepreneurs," whereas, "If money wages change, one would have expected the classical school to argue that prices would change in almost the same proportion, leaving the real wage and the level of unemployment practically the same as before." Keynes considers his second objection the more fundamental, but most commentators concentrate on his first one: it has been argued that

14448-473: The wider world. Unfortunately for Keynes, conservative powers in the coalition that emerged from the 1918 coupon election were able to ensure that both Keynes himself and the Treasury were largely excluded from formal high-level talks concerning reparations. Their place was taken by the Heavenly Twins  – the judge Lord Sumner and the banker Lord Cunliffe , whose nickname derived from

14577-599: Was a firm believer in balanced budgets and regarded the proposals for programmes of public works during the Great Depression as an exceptional measure to meet the needs of exceptional circumstances. During the Second World War , 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

14706-453: 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 Franklin D. Roosevelt and other world leaders. The work was taken seriously by both the American and British governments, and according to Robert Skidelsky , helped pave the way for the later acceptance of Keynesian ideas, though it had little immediate practical influence. In

14835-588: Was born in Cambridge , England, in 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. Keynes was the firstborn and was followed by two more children – Margaret Neville Keynes in 1885 and Geoffrey Keynes in 1887. Geoffrey became

14964-407: Was crystallized and given impetus by the advent of the Great Depression , it was part of a long-running debate within economics over the existence and nature of general gluts . A number of the policies Keynes advocated to address the Great Depression (notably government deficit spending at times of low private investment or consumption), and many of the theoretical ideas he proposed (effective demand,

15093-526: 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

15222-593: 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. Before leaving Cambridge, Keynes became the president of the Cambridge Union Society and Cambridge University Liberal Club . He

15351-465: Was first coined by the mathematician Hermann Laurent in his article Petit traite d'economie politique mathematique ( Small Treatise on Mathematical Political Economy ). The central feature of the Lausanne School was its development of general equilibrium theory . Laurent's article presented a simplified version of this theory. Lausanne School is also associated with the Italian School and

15480-403: Was not until after the outbreak of the Second World War 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

15609-640: 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. In October 1906 Keynes began his Civil Service career as

15738-436: 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 theory being the general one. Classical economists had believed in Say's law , which, simply put, states that " supply creates its demand ", and that in a free-market workers would always be willing to lower their wages to

15867-420: 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 began to have a more than marginal influence on US economic policy only after 1939. Keynes's magnum opus , The General Theory of Employment, Interest and Money

15996-469: 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 center 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

16125-406: Was published in 1936. It was researched and indexed by one of Keynes's favourite students, and later economist, David Bensusan-Butt . The work served as a theoretical justification for the interventionist policies Keynes favoured for tackling a recession. Although Keynes stated in his preface that his General Theory was only secondarily concerned with the "applications of this theory to practice,"

16254-463: Was published there has been debate over its meaning. Keynes begins the General Theory with a summary of the classical theory of employment, which he encapsulates in his formulation of Say's Law as the dictum " Supply creates its own demand ". He also wrote that although his theory was explained in terms of an Anglo-Saxon laissez faire economy, his theory was also more general in the sense that it would be easier to adapt to "totalitarian states" than

16383-509: Was published under the name "J M Keynes", though to his family and friends he was known as Maynard. (His father, John Neville Keynes, was also always known by his middle name). 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

16512-416: 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

16641-512: 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

#744255