154-613: The General Theory of Employment, Interest and Money is a book by English economist John Maynard Keynes published in February 1936. It caused a profound shift in economic thought, giving macroeconomics a central place in economic theory and contributing much of its terminology – the " Keynesian Revolution ". It had equally powerful consequences in economic policy, being interpreted as providing theoretical support for government spending in general, and for budgetary deficits, monetary intervention and counter-cyclical policies in particular. It
308-443: A quantification capturing preferences by assigning greater quantities to states, goods, services, or applications that are of higher priority. But marginalism and the concept of marginal utility predate the establishment of this convention within economics. The more general conception of utility is that of use or usefulness , and this conception is at the heart of marginalism; the term "marginal utility" arose from translation of
462-426: A border or margin . The location of the margin for any individual corresponds to his or her endowment , broadly conceived to include opportunities. This endowment is determined by many things including physical laws (which constrain how forms of energy and matter may be transformed), accidents of nature (which determine the presence of natural resources), and the outcomes of past decisions made both by others and by
616-474: A good or service is the specific use to which an agent would put a given increase, or the specific use of the good or service that would be abandoned in response to a given decrease. Marginalism assumes, for any given agent, economic rationality and an ordering of possible states-of-the-world, such that, for any given set of constraints, there is an attainable state which is best in the eyes of that agent. Descriptive marginalism asserts that choice amongst
770-451: A partial derivative The law of diminishing marginal utility, also known as a Gossen 's First Law, is that ceteris paribus , as additional amounts of a good or service are added to available resources, their marginal utilities are decreasing. This law is sometimes treated as a tautology , sometimes as something proven by introspection, or sometimes as a mere instrumental assumption, adopted only for its perceived predictive efficacy. It
924-466: A change in the price level while wages stay fixed. Keynes acknowledges that this is undesirable in Point (1) of Section II. In Chapter 9 he provides a homiletic enumeration of the motives to consume or not to do so, finding them to lie in social and psychological considerations which can be expected to be relatively stable, but which may be influenced by objective factors such as 'changes in expectations of
1078-578: 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
1232-419: A considerable degree by the facts about which we feel somewhat confident, even though they may be less decisively relevant to the issue than other facts about which our knowledge is vague and scanty. For this reason the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations; our usual practice being to take the existing situation and to project it into
1386-439: A considerable measure of continuity and stability in our affairs, so long as we can rely on the maintenance of the convention .’ He notes a practical problem: ‘Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.’ He suggests that: ‘The introduction of a substantial Government transfer tax on all transactions might prove
1540-518: 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
1694-994: A curve of marginal pecuniary costs objectively determined by physical processes, with an upward slope determined by diminishing returns . A more thorough-going marginalism represents the supply curve as a complementary demand curve – where the demand is for money and the purchase is made with a good or service. The shape of that curve is then determined by marginal rates of substitution of money for that good or service. By confining themselves to limiting cases in which sellers or buyers are both "price takers" – so that demand functions ignore supply functions or vice versa – Marshallian marginalists and neoclassical economists produced tractable models of "pure" or "perfect" competition and of various forms of "imperfect" competition , which models are usually captured by relatively simple graphs. Other marginalists have sought to present what they thought of as more realistic explanations, but this work has been relatively uninfluential on
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#17327652405051848-526: 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
2002-420: A goat for anything less than two sheep, then her If she will not trade a sheep for anything less than two goats, then her However, if she would trade one gram of banana for one ounce of ice cream and vice versa , then When indifference curves (which are essentially graphs of instantaneous rates of substitution) and the convexity of those curves are not taken as given, the "law" of diminishing marginal utility
2156-663: 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
2310-520: 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
2464-537: 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
2618-497: 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
2772-626: 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
2926-591: A notion of diminishing marginal utility can be found in Aristotle 's Politics , wherein he writes external goods have a limit, like any other instrument, and all things useful are of such a nature that where there is too much of them they must either do harm, or at any rate be of no use There has been marked disagreement about the development and role of marginal considerations in Aristotle's' value theory. A great variety of economists concluded that there
3080-420: 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
3234-583: A prospective buyer has some marginal rate of substitution of money for the good or service in question. Given the "law" of diminishing marginal utility, or otherwise given convex indifference curves, the rates are such that the willingness to forgo money for the good or service decreases as the buyer would have ever more of the good or service and ever less money. Hence, any given buyer has a demand schedule that generally decreases in response to price (at least until quantity demanded reaches zero). The aggregate quantity demanded by all buyers is, at any given price, just
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#17327652405053388-405: 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
3542-500: A result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Keynes proposes two theories of liquidity preference (i.e. the demand for money): the first as a theory of interest in Chapter 13 and the second as a correction in Chapter 15. His arguments offer ample scope for criticism, but his final conclusion
3696-436: A result of Keynes's choice of units, the assumption of sticky wages, though important to the argument, is largely invisible in the reasoning. If we want to know how a change in the wage rate would influence the economy, Keynes tells us on p. 266 that the effect is the same as that of an opposite change in the money supply. The key notion of expectations is introduced in Chapter 5. Short-term expectations are 'concerned with
3850-428: A return, and men who assume financial risks have been known to incur losses as a result instead of profits. Keynes goes on to claim that the demand for money is a function of the interest rate alone on the grounds that: The rate of interest is... the "price" which equilibrates the desire to hold wealth in the form of cash with the available quantity of cash. Frank Knight commented that this seems to assume that demand
4004-487: 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
4158-426: 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
4312-406: A stock or flow of a good or service whose marginal utility is less than would be that of some other good or service for which he or she could trade, then it is in his or her interest to effect that trade. As one thing is traded-away and another is acquired, the respective marginal gains or losses from further trades are now changed. On the assumption that the marginal utility of one is diminishing, and
4466-411: 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
4620-565: 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
4774-426: 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
The General Theory of Employment, Interest and Money - Misplaced Pages Continue
4928-471: A theory of how these interacted. In Della Moneta (1751), Abbé Ferdinando Galiani , a pupil of Genovesi, attempted to explain value as a ratio of two ratios, utility and scarcity , with the latter component ratio being the ratio of quantity to use. Anne Robert Jacques Turgot , in Réflexions sur la formation et la distribution de richesse (1769), held that value derived from the general utility of
5082-459: A utility function whose slope is continually or continuously decreasing. In the latter case, if the function is also smooth, then the law may be expressed as Neoclassical economics usually supplements or supplants discussion of marginal utility with indifference curves , which were originally derived as the level curves of utility functions, or can be produced without presumption of quantification, but are often simply treated as axiomatic. In
5236-766: 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. Marginalism Marginalism
5390-434: A value in wage units is equal to its price in money terms divided by W, the wage (in money units) per man-hour of labour. Therefore it is a unit expressed in hours of labour. Keynes generally writes a subscript w on quantities expressed in wage units, but in this account we omit the w. When, occasionally, we use real terms for a value which Keynes expresses in wage units we write it in lower case (e.g. y rather than Y). As
5544-474: 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
5698-479: Is a repudiation of Say's Law . The classical view for which Keynes made Say a mouthpiece held that the value of wages was equal to the value of the goods produced, and that the wages were inevitably put back into the economy sustaining demand at the level of current production. Hence, starting from full employment, there cannot be a glut of industrial output leading to a loss of jobs. As Keynes put it on p. 18, " supply creates its own demand ". Say's Law depends on
5852-432: Is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. It states that the reason why the price of diamonds is higher than that of water, for example, owes to the greater additional satisfaction of the diamonds over the water. Thus, while the water has greater total utility, the diamond has greater marginal utility . Although
6006-423: Is at least r. By construction this depends on r alone and is a decreasing function of its argument; it is illustrated in the diagram, and we shall write it as I (r). This schedule is a characteristic of the current industrial process which Irving Fisher described as representing the 'investment opportunity side of interest theory'; and in fact the condition that it should equal S(Y,r) is the equation which determines
6160-454: Is avoidably sacrificed to satisfy a want of lower priority. In the absence of complementarity across the uses, this will imply that the priority of use of any additional amount will be lower than the priority of the established uses, as in this famous example: However, if there is a complementarity across uses, then an amount added can bring things past a desired tipping point, or an amount subtracted cause them to fall short. In such cases,
6314-467: Is based on the interaction between demands for saving, investment, and liquidity (i.e. money). Saving and investment are necessarily equal, but different factors influence decisions concerning them. The desire to save, in Keynes's analysis, is mostly a function of income: the wealthier people are, the more wealth they will seek to put aside. The profitability of investment, on the other hand, is determined by
The General Theory of Employment, Interest and Money - Misplaced Pages Continue
6468-468: Is equal to the value of current output, that current investment is equal to the value of that part of current output which is not consumed, and that saving is equal to the excess of income over consumption... the equality of saving and investment necessarily follows. This statement incorporates Keynes's definition of saving, which is the normal one. Book III of the General Theory is given over to
6622-400: Is invoked to explain diminishing marginal rates of substitution – a willingness to accept fewer units of good or service A {\displaystyle A} in substitution for B {\displaystyle B} as one's holdings of A {\displaystyle A} grow relative to those of B {\displaystyle B} . If an individual has
6776-440: Is itself quantified, then it becomes possible to speak of the ratio of the marginal utility of the change in g {\displaystyle g\,} to the size of that change: (where " c.p. " indicates that the only independent variable to change is g {\displaystyle g\,} ). Mainstream neoclassical economics will typically assume that is well defined, and use "marginal utility" to refer to
6930-485: Is less than the total output, then the economy has to contract until equality is achieved. Keynes thus denied that full employment was the natural result of competitive markets in equilibrium. In this he challenged the conventional ('classical') economic wisdom of his day. In a letter to his friend George Bernard Shaw on New Year's Day, 1935, he wrote: I believe myself to be writing a book on economic theory which will largely revolutionize — not I suppose, at once but in
7084-425: Is not quite any of these things, although it may have aspects of each. The law does not hold under all circumstances, so it is neither a tautology nor otherwise proveable; but it has a basis in prior observation. An individual will typically be able to partially order the potential uses of a good or service. If there is scarcity , then a rational agent will satisfy wants of highest possible priority, so that no want
7238-591: Is not surprising to find many presentations that fail to recognize a more general approach. Under the special case in which usefulness can be quantified, the change in utility of moving from state S 1 {\displaystyle S_{1}} to state S 2 {\displaystyle S_{2}} is Moreover, if S 1 {\displaystyle S_{1}} and S 2 {\displaystyle S_{2}} are distinguishable by values of just one variable g {\displaystyle g\,} which
7392-473: 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
7546-407: 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
7700-415: Is pervaded with an air of mistrust for the rationality of free-market decision-making. Keynes denied that an economy would automatically adapt to provide full employment even in equilibrium, and believed that the volatile and ungovernable psychology of markets would lead to periodic booms and crises. The General Theory is a sustained attack on the classical economics orthodoxy of its time. It introduced
7854-529: 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
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#17327652405058008-555: Is sensible for producers to base their expectations on the assumption that the most recently realized results will continue, except in so far as there are definite reasons for expecting a change.' However (see Chapter 12) long-term expectations are liable to sudden revision. Thus the factor of long-term expectations cannot be even approximately eliminated or replaced by realized results.' Briefly, short-run expectations are typically 'mathematical' in character, long-run expectations less so. The relationship between saving and investment, and
8162-413: Is simply a function of the marginal utility that it has for any one individual nor for some ostensibly typical individual. Rather, individuals are willing to trade based upon the respective marginal utilities of the goods that they have or desire (with these marginal utilities being distinct for each potential trader), and prices thus develop constrained by these marginal utilities. Perhaps the essence of
8316-506: Is simply an inverse function of price. The upshot from these reasonings is that: 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
8470-528: Is that liquidity preference is a function mainly of income and the interest rate. The influence of income (which really represents a composite of income and wealth) is common ground with the classical tradition and is embodied in the Quantity Theory ; the influence of interest had also been noted earlier, in particular by Frederick Lavington (see Hicks's Mr Keynes and the "Classics" ). Thus Keynes's final conclusion may be acceptable to readers who question
8624-419: Is the marginal usefulness of any given quantity that matters, rather than the usefulness of a class or of a totality . For most people, water was sufficiently abundant that the loss or gain of a gallon would withdraw or add only some very minor use if any, whereas diamonds were in much more restricted supply, so that the loss or gain was much greater. That is not to say that the price of any good or service
8778-533: Is the rate of substitution at the margin; in other words, given some constraint. When goods and services are discrete , the least favorable rate at which an agent would trade A for B will usually be different from that at which she would trade B for A: When the goods and services are continuously divisible in the limiting case and the marginal rate of substitution is the slope of the indifference curve (multiplied by − 1 {\displaystyle -1} ). If, for example, Lisa will not trade
8932-463: Is the wage rate in real terms). A system can be analysed on the assumption that W is fixed (i.e. that wages are fixed in money terms) or that W/p is fixed (i.e. that they are fixed in real terms) or that N is fixed (e.g. if wages adapt to ensure full employment). All three assumptions had at times been made by classical economists, but under the assumption of wages fixed in money terms the 'first postulate' becomes an equation in two variables (N and p), and
9086-444: Is therefore often told that "marginal" is synonymous with "very small", though in more general analysis this may not be operationally true and would not in any case be literally true. Frequently, economic analysis concerns the marginal values associated with a change of one unit of a resource, because decisions are often made in terms of units; marginalism seeks to explain unit prices in terms of such marginal values. The marginal use of
9240-459: 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
9394-557: 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
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#17327652405059548-460: 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
9702-539: 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
9856-438: 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
10010-532: 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
10164-431: 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
10318-534: 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
10472-481: The German "Grenznutzen", which literally means border use , referring directly to the marginal use, and the more general formulations of marginal utility do not treat quantification as an essential feature. On the other hand, none of the early marginalists insisted that utility were not quantified, some indeed treated quantification as an essential feature, and those who did not still used an assumption of quantification for expository purposes. In this context, it
10626-540: 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
10780-467: 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
10934-541: 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
11088-648: 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
11242-409: The absence of complementarity of goods or services, diminishing marginal utility implies convexity of indifference curves, although such convexity would also follow from quasiconcavity of the utility function. The rate of substitution is the least favorable rate at which an agent is willing to exchange units of one good or service for units of another. The marginal rate of substitution (MRS)
11396-456: The arguments along the way. However he shows a persistent tendency to think in terms of the Chapter 13 theory while nominally accepting the Chapter 15 correction. Chapter 13 presents the first theory in rather metaphysical terms. Keynes argues that: It should be obvious that the rate of interest cannot be a return to saving or waiting as such. For if a man hoards his savings in cash, he earns no interest, though he saves just as much as before. On
11550-432: The banknotes up again" (...), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing". Book IV discusses
11704-468: 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
11858-511: The central concept of marginalism is that of marginal utility, marginalists, following the lead of Alfred Marshall , drew upon the idea of marginal physical productivity in explanation of cost . The neoclassical tradition that emerged from British marginalism abandoned the concept of utility and gave marginal rates of substitution a more fundamental role in analysis. Marginalism is an integral part of mainstream economic theory. For issues of marginality, constraints are conceptualized as
12012-421: 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
12166-526: The class to which a good belonged, from comparison of present and future wants, and from anticipated difficulties in procurement. Like the Italian mercantilists, Étienne Bonnot de Condillac saw value as determined by utility associated with the class to which the good belongs, and by estimated scarcity. In De commerce et le gouvernement (1776), Condillac emphasized that value is not based upon cost but that costs were paid because of value. This last point
12320-447: The classical relation between wages and the marginal productivity of labour, referring to it on page 5 as the "first postulate of classical economics" and summarising it as saying that "The wage is equal to the marginal product of labour". The first postulate can be expressed in the equation y'(N) = W/p, where y(N) is the real output when employment is N, and W and p are the wage rate and price rate in money terms (and hence W/p
12474-431: The classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to
12628-531: 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,
12782-432: The concepts of the consumption function , the principle of effective demand and liquidity preference , and gave new prominence to the multiplier and the marginal efficiency of capital . The central argument of The General Theory is that the level of employment is determined not by the price of labour, as in classical economics , but by the level of aggregate demand . If the total demand for goods at full employment
12936-516: 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
13090-553: The consequences of this had not been taken into account by the classical school. Keynes proposed a 'second postulate of classical economics' asserting that the wage is equal to the marginal disutility of labour. This is an instance of wages being fixed in real terms. He attributes the second postulate to the classics subject to the qualification that unemployment may result from wages being fixed by legislation, collective bargaining, or 'mere human obstinacy' (p6), all of which are likely to fix wages in money terms. Keynes's economic theory
13244-404: The contrary, the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period. To which Jacob Viner retorted that: By analogous reasoning he could deny that wages are the reward for labor, or that profit is the reward for risk-taking, because labor is sometimes done without anticipation or realization of
13398-447: 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
13552-527: 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
13706-429: The course of the next ten years — the way the world thinks about its economic problems. I can't expect you, or anyone else, to believe this at the present stage. But for myself I don't merely hope what I say,— in my own mind, I'm quite sure. The first chapter of The General Theory (only half a page long) has a similarly radical tone: I have called this book the General Theory of Employment, Interest and Money , placing
13860-808: 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
14014-413: 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
14168-734: 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
14322-409: The emphasis on the prefix general . The object of such a title is to contrast the character of my arguments and conclusions with those of the classical theory of the subject, upon which I was brought up and which dominates the economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past. I shall argue that the postulates of
14476-405: The end of the chapter on the multiplier, he uses his much quoted "digging holes" metaphor, against laissez-faire . In his provocation Keynes argues that "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig
14630-491: The existence of distortions impeding transition to equilibrium. The classical position had generally been to view the distortions as the culprit and to argue that their removal was the main tool for eliminating unemployment. Keynes on the other hand viewed the market distortions as part of the economic fabric and advocated different policy measures which (as a separate consideration) had social consequences which he personally found congenial and which he expected his readers to see in
14784-403: The factors influencing their demands, play an important role in Keynes's model. Saving and investment are considered to be necessarily equal for reasons set out in Chapter 6 which looks at economic aggregates from the viewpoint of manufacturers. The discussion is intricate, considering matters such as the depreciation of machinery, but is summarised on p. 63: Provided it is agreed that income
14938-475: The facts of experience. Keynes's main theory (including its dynamic elements) is presented in Chapters 2-15, 18, and 22, which are summarised here. A shorter account will be found in the article on Keynesian economics . The remaining chapters of Keynes's book contain amplifications of various sorts and are described later in this article . The first book of The General Theory of Employment, Interest and Money
15092-454: 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
15246-431: 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
15400-426: The future, modified only to the extent that we have more or less definite reasons for expecting a change. He goes on thus: ‘In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention ’. He notes that ‘our existing knowledge does not provide a sufficient basis for a calculated mathematical expectation.’ ‘Nevertheless the above conventional method of calculation will be compatible with
15554-447: 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
15708-407: 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
15862-645: The highest level of generality, a marginal cost is a marginal opportunity cost . In most contexts, marginal cost refers to marginal pecuniary cost, that is to say marginal cost measured by forgone money. A thorough-going marginalism sees marginal cost as increasing under the law of diminishing marginal utility, because applying resources to one application reduces their availability to other applications. Neoclassical economics tends to disregard this argument, but to see marginal costs as increasing in consequence of diminishing returns . Marginalism and neoclassical economics typically explain price formation broadly through
16016-431: 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
16170-451: 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
16324-401: The individual. A value that holds true given particular constraints is a marginal value . A change that would be affected as or by a specific loosening or tightening of those constraints is a marginal change. Neoclassical economics usually assumes that marginal changes are infinitesimals or limits . Although this assumption makes the analysis less robust, it increases tractability. One
16478-445: The inducement to invest, with the key ideas being presented in Chapter 11. The 'marginal efficiency of capital' is defined as the annual revenue which is expected to be yielded by an extra increment of capital as a proportion of its cost. The 'schedule of the marginal efficiency of capital' is the function which, for any rate of interest r, gives us the level of investment which will take place if all opportunities are accepted whose return
16632-518: 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
16786-461: The interaction of curves or schedules of supply and demand . In any case buyers are modelled as pursuing typically lower quantities, and sellers offering typically higher quantities, as price is increased, with each being willing to trade until the marginal value of what they would trade-away exceeds that of the thing for which they would trade. Demand curves are explained by marginalism in terms of marginal rates of substitution. At any given price,
16940-490: The interest rate from income in classical theory . Keynes is seeking to reverse the direction of causality (and omitting r as an argument to S()). He interprets the schedule as expressing the demand for investment at any given value of r, giving it an alternative name: "We shall call this the investment demand-schedule..." (p136). He also refers to it as the 'demand curve for capital' (p178). For fixed industrial conditions, we conclude that 'the amount of investment... depends on
17094-399: The interest rate r on the relative attractiveness of saving and consumption, but regards it as 'complex and uncertain' and leaves it out as a parameter. His seemingly innocent definitions embody an assumption whose consequences will be considered later . Since Y is measured in wage units, the proportion of income saved is considered to be unaffected by the change in real income resulting from
17248-464: The lack of downwards flexibility of wages by constructing an economic model in which the money supply and wage rates were externally determined (the latter in money terms), and in which the main variables were fixed by the equilibrium conditions of various markets in the presence of these facts. Many of the quantities of interest, such as income and consumption, are monetary. Keynes often expresses such quantities in wage units (Chapter 4): to be precise,
17402-495: The mainstream of economic thought. The law of diminishing marginal utility is said to explain the paradox of water and diamonds, most commonly associated with Adam Smith , although it was recognized by earlier thinkers. Human beings cannot even survive without water, whereas diamonds, in Smith's day, were ornamentation or engraving bits. Yet water had a very small price, and diamonds a very large price. Marginalists explained that it
17556-517: The marginal propensity to consume is 90%, then 'the multiplier k is 10; and the total employment caused by (e.g.) increased public works will be ten times the employment caused by the public works themselves' (pp116f). Formally Keynes writes the multiplier as k=1/S'(Y). It follows from his 'fundamental psychological law' that k will be greater than 1. Keynes's account is not clear until his economic system has been fully set out (see below ). In Chapter 10 he describes his multiplier as being related to
17710-419: The marginal utility of a good or service might actually be increasing . Without the presumption that utility is quantified, the diminishing of utility should not be taken to be itself an arithmetic subtraction . It is the movement from use of higher to lower priority, and may be no more than a purely ordinal change. When quantification of utility is assumed, diminishing marginal utility corresponds to
17864-399: The most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.’ To account for the apparent ‘foolishness’ on which economic progress seemed to rely, Keynes suggests that: Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as
18018-467: The one introduced by R. F. Kahn in 1931. The mechanism of Kahn's multiplier lies in an infinite series of transactions, each conceived of as creating employment: if you spend a certain amount of money, then the recipient will spend a proportion of what he or she receives, the second recipient will spend a further proportion again, and so forth. Keynes's account of his own mechanism (in the second para of p. 117) makes no reference to infinite series. By
18172-444: The operation of a market economy. If there is unemployment (and if there are no distortions preventing the employment market from adjusting to it) then there will be workers willing to offer their labour at less than the current wage levels, leading to downward pressure on wages and increased offers of jobs. The classics held that full employment was the equilibrium condition of an undistorted labour market, but they and Keynes agreed in
18326-538: 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
18480-509: The other is not increasing, all else being equal, an individual will demand an increasing ratio of that which is acquired to that which is sacrificed. One important way in which all else might not be equal is when the use of the one good or service complements that of the other. In such cases, exchange ratios might be constant. If any trader can better his or her own marginal position by offering an exchange more favorable to other traders with desired goods or services, then he or she will do so. At
18634-408: The price which a manufacturer can expect to get for his "finished" output at the time when he commits himself (sic) to starting the process which will produce it'. Long-term expectation 'is concerned with what the entrepreneur can hope to earn in the shape of future returns if he (sic) purchases (or perhaps manufactures) "finished" output as an addition to his capital equipment.' Keynes note that:'It
18788-411: The propensity to consume, which is introduced in Chapter 8 as the desired level of expenditure on consumption (for an individual or aggregated over an economy). The demand for consumer goods depends chiefly on the income Y and may be written functionally as C(Y). Saving is that part of income which is not consumed, so the propensity to save S(Y) is equal to Y–C(Y). Keynes discusses the possible influence of
18942-480: 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
19096-456: The rate of interest already performs another function in the economy, that of equating demand and supply of money, and that it cannot adjust to maintain two separate equilibria. In his view it is the monetary role which wins out. This is why Keynes's theory is a theory of money as much as of employment: the monetary economy of interest and liquidity interacts with the real economy of production, investment and consumption. Keynes sought to allow for
19250-421: The rate of interest' as John Hicks put it in ' Mr. Keynes and the "Classics" '. In Chapter 12, Keynes writes: It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain. [Footnote: By “very uncertain’ I do not mean the same thing as improbable”. Cf. my Treatise on Probability , chap. 6, on “The Weight of Arguments”.] It is reasonable, therefore, to be guided to
19404-424: The relation between the present and the future level of income' (p95). The marginal propensity to consume , C'(Y), is the gradient of the purple curve, and the marginal propensity to save S'(Y) is equal to 1–C'(Y). Keynes states as a 'fundamental psychological law' (p96) that the marginal propensity to consume will be positive and less than unity. Chapter 10 introduces the famous 'multiplier' through an example: if
19558-459: The relation between the return available to capital and the interest rate. The economy needs to find its way to an equilibrium in which no more money is being saved than will be invested, and this can be accomplished by contraction of income and a consequent reduction in the level of employment. In the classical scheme it is the interest rate rather than income which adjusts to maintain equilibrium between saving and investment; but Keynes asserts that
19712-410: 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
19866-497: 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
20020-401: 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
20174-442: The same light. The distortions which have prevented wage levels from adapting downwards have lain in employment contracts being expressed in monetary terms; in various forms of legislation such as the minimum wage and in state-supplied benefits; in the unwillingness of workers to accept reductions in their income; and in their ability through unionisation to resist the market forces exerting downward pressure on them. Keynes accepted
20328-428: The specific means by which various anticipated specific states-of-the-world (outcomes) might be affected is governed only by the distinctions amongst those specific outcomes; prescriptive marginalism asserts that such choice ought to be so governed. On such assumptions, each increase would be put to the specific, feasible, previously unrealized use of greatest priority, and each decrease would result in abandonment of
20482-420: 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
20636-419: The sum of the quantities demanded by individual buyers, so it too decreases as price increases. Both neoclassical economics and thorough-going marginalism could be said to explain supply curves in terms of marginal cost; however, there are marked differences in conceptions of that cost. Marginalists in the tradition of Marshall and neoclassical economists tend to represent the supply curve for any producer as
20790-515: 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
20944-542: 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
21098-426: 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
21252-443: The use of lowest priority amongst the uses to which the good or service had been put. The marginal utility of a good or service is the utility of its marginal use . Under the assumption of economic rationality, it is the utility of its least urgent possible use from the best feasible combination of actions in which its use is included. In 20th century mainstream economics , the term " utility " has come to be formally defined as
21406-473: 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
21560-419: Was some sort of inter-relationship between utility and rarity that effected economic decisions, and in turn informed the determination of prices. Eighteenth-century Italian mercantilists , such as Antonio Genovesi , Giammaria Ortes , Pietro Verri , Cesare Beccaria , and Giovanni Rinaldo , held that value was explained in terms of the general utility and of scarcity, though they did not typically work-out
21714-599: 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
21868-453: 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
22022-588: 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
22176-526: 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
22330-593: 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
22484-403: 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
22638-640: 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
22792-484: 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
22946-420: 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
23100-469: 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
23254-406: 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,"
23408-509: 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
23562-416: 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
23716-512: 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
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