Who Was John Maynard Keynes And What Was His Economic Thought?
These questions are of vital importance today to the extent that our societies are going through economic crises that have no solution and social divisions that deepen the instability of the political and economic systems.
Faced with this context, many again see Keynes’s answers that help to face the situation and offer a new paradigm for the social structure.
- Short biography of Keynes
- Education of John Maynard Keynes
- Keynes's economic ideas
- Market failures
- The commitment to a just peace
- Birth of macroeconomics
- Bretton Woods Institutions
- Business cycles
- Reception of John Maynard Keynes' work among scholars
- Keynes books
- Influence of Keynesian thought
- The thought of John Maynard Keynes in the 21st century
Short biography of Keynes
John Maynard Keynes was born in Cambridge on July 5, 1883 (United Kingdom) and died on April 21, 1946, in Sussex (United Kingdom).
He can be considered perhaps the most important economist of the 20th century for his intellectual contributions to providing a solution to the Great Depression that followed the crash of 1929, while his ideas were the foundation for the design of the architecture of the financial system and that prevailed in the West after the Second World War.
Education of John Maynard Keynes
John Maynard Keynes’s education was very careful and he delved extensively into economic matters with the help of his mentor Alfred Marshall.
After a brief period in India working for the British administrative service, in 1909 he entered King’s College, Cambridge as a professor; From there he would exercise enormous influence over political leaders, ministers, bankers, businessmen, and society in general, until the day of his death.
Keynes’s economic ideas
The economic ideas of John Maynard Keynes emphasize the scarcity of aggregate demand in developed economies. This lack of demand leads businesses to have fewer sales and the economy, in general, to enter a state of crisis, with slow growth, recession, and unemployment.
One of the elements that have been taken into account is that as countries become more technologically and industrially developed, people tend to save, which weakens household consumption and economic activity.
Processes such as automation of labor can lead to less labor being needed in certain sectors of the economy, leaving many people unemployed and unable to participate in the economy through personal spending. When there is less personal spending, there is less aggregate demand and consequently periods of economic crisis.
Following the ideas of Thomas Malthus, John Maynard Keynes concludes that private spending should be stimulated by public investment in periods when the economy goes into recession.
For this, the State must incur a public deficit, through loans that it will use to invest in infrastructure, social programs, and other activities that generate employment and encourage people to spend more to boost the economy.
Keynes’ ideas. A recipe to overcome poverty in developing countries?
In developing economies, ideas of increased public spending as a means of stimulating the economy have been received in a mixed fashion. In much of the world, there is an idea that economic stability and control of public spending can help attract foreign direct investment.
On the other hand, it is feared that incurring deficit spending, could be seen by credit rating agencies as a form of waste and, consequently, could drive away investment. In developing economies, foreign investment can be critical to help break cycles of poverty and boost national GDP.
However, many economies have developed important spending policies in key sectors of the economy, which have stimulated development. Still, Keynesian policies have not been conceived as a way for developing economies to overcome poverty, but rather as a way for economies to overcome crisis events.
In this sense, it is important to point out that although deficit public spending can provide important support to a national economy during a crisis, this will not be enough to lift an underdeveloped country out of poverty. On many occasions, overcoming poverty will imply the need for direct foreign aid, the development of investment projects in critical areas such as science and technology, and aggressive plans in sectors such as health and education.
Keynes’s ideas point to the conception that the market is not a reality that arises spontaneously in the economy. The market is actually a social construction that emerges and evolves according to the laws that society gives it. Thus, the market can respond to the regulations, stimuli, and brakes imposed by entities such as the state or central banks. According to Keynes, in times of crisis, it is clear that the market performs basic tasks such as generating full employment or safeguarding the purchasing power of the currency. Consequently, it is necessary that in such periods the national states can act by intervening in the market so that economic activity recovers its dynamism and market failures are overcome.
The commitment to a just peace
After the First World War, the great world powers sign the Treaty of Versailles, in which they impose harsh economic conditions on Germany such as reparation costs to the victorious countries and the prohibition of having a strong army. Keynes knew well in advance that the conditions imposed on Germany would generate resentment in society, political instability, and the rise of a populist regime that would lead Europe into a second great war.
Keynesian ideas were quite influential in Europe during the Second World War, in which conditions completely changed and an ambitious plan for economic recovery ( Marshall Plan ) was launched. Since then the most influential European countries (Germany, UK, France, Italy) have not been involved in major wars with each other.
One of Keynes’s most important writings during the interwar period was The Economic Consequences of the Peace (1919). There he anticipated that the way in which peace had been imposed on the vanquished side would not only harm Germany but also harm the economic reconstruction of all of Europe. In this sense, a weak Germany would not only be a bad trading partner with little demand for goods and services from its neighbors but could end up falling under the spell of an authoritarian regime, as it actually did.
Birth of macroeconomics
One of the fundamental works of Keynes’s works is General Theory of Employment, Interest, and Money published in 1935. Through this work he lays the foundations for studying the economic activities of a country that constitute the national income as a whole, giving an Introduction to macroeconomics as a branch of economics study.
Bretton Woods Institutions
In the 1940s Keynes directly influenced the UK economy. He worked as a director of the Bank of England and adviser to the Treasury. In 1944 he was in charge of the British commission at the Bretton Woods Conference, and there he learned how to shape institutions such as the International Monetary Fund, the World Bank, and the GATT and lay the foundations of the world economic system.
Keynes’s economic ideas try to explain how the expectations of businessmen and consumers shape business cycles. When they believe the economy will get better, they invest and spend more, fueling growth. When they think the economy will go into recession, they will spend less and invest less. So expectations reinforce the behavior of business cycles.
When consumer and business expectations are misaligned, excess supply leads to deflation or excess demand causing inflation can occur. State investment is necessary to avoid failures in market cycles and reverse their negative effects.
Reception of John Maynard Keynes’ work among scholars
The economic thought of John Maynard Keynes only began to achieve almost universal acceptance in the last years of his life.
On a personal level, Keynes’s charm was such that he was generally well received wherever he went, even those who found themselves on the wrong side of his occasionally sharp tongue rarely held a grudge.
Keynes’s speech at the close of the Bretton Woods negotiations was greeted with a standing ovation rare in international relations, as delegates acknowledged the scale of his achievements despite the difficulties.
The Austrian school economist Friedrich Hayek was the most prominent contemporary critic of Keynes, with widely opposing views on economics. However, after Keynes’s death, he wrote: “He was the really great man I knew, and for whom he had boundless admiration. The world will be a much poorer place without him.”
Lionel Robbins, former head of the economics department at the London School of Economics, who was involved in many heated debates with Keynes in the 1930s, said this after observing Keynes in early negotiations with the Americans as he drew up plans for Bretton Woods. :
This went very well indeed. Keynes was in his most lucid and persuasive frame of mind: and the effect was irresistible. In such moments I often find myself thinking that Keynes must be one of the most remarkable men who ever lived: the quick logic, the rush of intuition, the vivid fantasy, the broad vision, and above all the incomparable sense of physical fitness. , of words, all combine to do something several degrees beyond the limit of ordinary human achievement. — Lionel Robbins
Douglas LePan, a Canadian High Commission official, wrote:
I am spellbound. This is the most beautiful creature I have ever heard of. Does it belong to our species? Or is it of another order? There is something mythical and fabulous about him. I feel in him something massive and sphinx-like, but also a touch of wings. —- Douglas Le Pan
Bertrand Russell named Keynes one of the most intelligent people he had ever met and commented:
Keynes’s intellect was the sharpest and clearest I have ever known. When I argued with him, I felt like I was taking my life in his hands, and I rarely left his presence without feeling like a fool. ——– Bertrand Russell
Keynes’s obituary in The Times included the comment:
“There is the man himself: radiant, bright, effervescent, cheerful, full of mischievous jokes… He was a man genuinely dedicated to the cause of the greater good.”
As a man of the center described by some as having the most impact of any 20th-century economist, Keynes drew considerable criticism from both sides of the political spectrum.
In the 1920s, Keynes was seen as anti-establishment and was attacked mainly from the right.
In the ‘red 1930s,’ many young economists favored Marxist views, even at Cambridge, and while Keynes was mainly engaged in trying to persuade them of the merits of a more progressive policy, the most vociferous criticism against him came from the left. , who saw him as a supporter of capitalism.
From the 1950s onwards, most of the attacks on Keynes have again been from the right.
In 1931, Friedrich Hayek widely criticized Keynes’s 1930 Treatise on Money.
After reading Hayek’s The Road to Serfdom, Keynes wrote to Hayek ” Morally and philosophically I find myself in agreement with practically everything “, but concluded the letter with the recommendation:
Therefore, what we need, in my opinion, is not a change in our economic programs, which would only lead in practice to disappointment with the results of your philosophy; but perhaps even the opposite, that is, an extension of them. Its greatest danger is the probable practical failure of the application of his philosophy in the United States.
On the pressing issue of the time, whether deficit spending could lift a country out of depression, Keynes responded to Hayek’s criticism as follows:
It should… conclude quite differently. I must say that what we want is not any planning, or even less planning, in fact, I must say that we almost certainly want more. But the planning must take place in a community in which as many people as possible, both leaders and followers, fully share its moral position. Moderate planning will be safe enough if those who carry it out are rightly oriented in their minds and hearts to the moral issue.
When asked why Keynes expressed “moral and philosophical” agreement with the Way of Servitude, Hayek said:
Because he believed that he was still fundamentally a classical English liberal and was not very aware of how far he had strayed from this philosophy. His basic ideas remained those of individual freedom. He didn’t think systematically enough to see the conflicts. He was, in a sense, corrupted by political necessity. —–Friedrich Hayek
According to some observers, Hayek felt that the post-World War II “Keynesian orthodoxy” gave too much power to the state and that such policies would lead to socialism.
Criticism of Milton Friedman
Although Milton Friedman described The General Theory as “a great book,” he argues that its implicit separation of nominal from real magnitudes is neither possible nor desirable.
Friedman argues that macroeconomic policy can only reliably influence the nominal.
Consequently, he and other monetarists have argued that Keynesian economics can lead to stagflation, the combination of low growth and high inflation that developed economies suffered from in the early 1970s.
More to Friedman’s taste was the Treatise on Monetary Reform (1923), which he considered Keynes’s best work due to its focus on maintaining domestic price stability.
Joseph Schumpeter was an economist of the same age as Keynes and one of his main rivals.
He was one of the first reviewers to argue that Keynes’s General Theory was not a general theory, but rather a special case.
He said the work expressed “the attitude of a decomposing civilization . ”
After Keynes’s death, Schumpeter wrote a short biographical piece on Keynes:
On a personal level, he was very positive about Keynes as a man, praising his pleasant nature, courtesy, and friendliness. He rated some of Keynes’s biographical and editorial works among the best he had seen. However, Schumpeter remained critical of Keynes’s economics, linking Keynes’s childlessness to what Schumpeter saw as an essentially short-term view. He considered that Keynes had a kind of unconscious patriotism that made him not understand the problems of other nations.
For Schumpeter, “practical Keynesianism is a seedling that cannot be transplanted into foreign soil: it dies there and becomes poisonous as it dies.”
Criticism of Harry Truman
President Harry S. Truman was skeptical of Keynesian theories: ” No one can convince me that the government can spend a dollar it doesn’t have,” he told Leon Keyserling, a Keynesian economist who chaired Truman’s Council of Economic Advisers.
The influence of Keynes’s thought was so wide that it led to the naming of an entire school of thought guided by his central ideas. This school considers that the State plays a very important role in stimulating the aggregate demand of the economy through public spending. When the economy is in recession due to excess supply and wages are falling, aggregate demand can be increased through the money supply and fiscal policy (public spending and tax reduction), in this way, wages improve again, people spend more again, and the movement of the economy as whole recovers.
1913 Currency and Finance in India
1914 Ludwig von Mises ‘ Theory of Money ( EJ)
1915 The Economy of the War in Germany (EJ)
1919 The economic consequences of the peace
1921 Treatise on Probability
1922 Currency Inflation as a Tax Method (MGCRE)
1922 Revision of the Treaty
1923 Brief Treatise on Currency Reform
1925 Am I a Liberal? (N&A)
1926 The End Of Laissez Faire
1926 Let Do and Communism
1930 Treaty of money
1930 The economic possibilities of our grandchildren
1931 The End of the Gold Standard (Sunday Express) /
1931 Essays in Persuasion
1933 Open Letter to President Roosevelt (New York Times)
1940 How to Pay for War
Influence of Keynesian thought
The influence of Keynesianism extended quite a bit during the 20th century until the American and European crises of the 1970s.
Since then, the neoliberals and followers of economic orthodoxy (the Chicago Schools and the Austrian School) have taken the scene, calling for less public spending, deficit reduction, deregulation of the economy, and a state of minimum size, something that worked relatively well in the countries developed until the economic crisis of 2008.
Since the subprime mortgage crisis and state interventions to bail out the big banks, the role of Keynesianism in economics is back. States have increased their investment in the economy, and those economies where the State intervenes more through taxes and social incentives (such as the Nordic ones) are much more solid than the rest.
In popular culture, we can see how Keynesianism has influenced. Even in popular music like hip hop, we see characterizations of him confronting Hayek (his most important intellectual antagonist of him and which we will talk about another time).
The thought of John Maynard Keynes in the 21st century
The 2008 global financial crisis led to public skepticism about the free market consensus, including from some about economic law.
In March 2008, Martin Wolf, the Financial Times’s leading economics commentator, announced the death of the dream of global free-market capitalism. In the same month, macroeconomist James K. Galbraith used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack on the monetarist economics consensus, arguing that Keynesian economics was much more relevant to addressing emerging crises.
The economist Robert J. Shiller had begun to advocate robust government intervention to address financial crises, specifically citing Keynes.
Nobel laureate Paul Krugman also actively made a case for vigorous Keynesian intervention in the economy in his columns for The New York Times.
Other prominent economic commentators who have advocated Keynesian government intervention to mitigate the financial crisis include George Akerlof, J. Bradford DeLong, Robert Reich, and Joseph Stiglitz.
Newspapers and other outlets have also cited Keynes-related works by Hyman Minsky, Robert Skidelsky, Donald Markwell, and Axel Leijonhufvud.
The implementation of Keynesian theory in the 21st century
A series of major financial bailouts were carried out during the financial crisis, beginning on September 7 with the announcement that the US government was going to nationalize the two government-sponsored companies that oversaw most of the US mortgage market. US high risk: Fannie Mae and Freddie Mac.
In October, Alistair Darling, the British Chancellor of the Exchequer, referred to Keynes when he announced plans for substantial fiscal stimulus to stave off the worst effects of the recession, in keeping with Keynesian economic thinking.
Other governments around the world adopted similar policies, in stark contrast to the action imposed on Indonesia during the 1997 Asian financial crisis, when the IMF forced it to close 16 banks at the same time, triggering a bank run.
Much of the post-crisis discussion reflected Keynes’s advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the IMF and World Bank, which many argued should be reformed as a “new Bretton Woods .”, and they should have been even before the crises broke out.
The IMF and United Nations economists advocated a coordinated international approach to fiscal stimulus.
Donald Markwell argued that in the absence of such an international approach, there would be a risk of worsening international relations and possibly even world war stemming from economic factors similar to those present during the depression of the 1930s.
In late December 2008, the Financial Times reported that ” the sudden resurgence of Keynesian politics is a stunning reversal of the orthodoxy of recent decades .”
In December 2008, Paul Krugman released his book The Return of Depression Economics and the 2008 Crash, arguing that economic conditions similar to those that existed during the early part of the 20th century had returned, making policy prescriptions for Keynesians more relevant than ever.
In February 2009, Robert J. Shiller and George Akerlof published Animal Spirits, a book arguing that the 2009 US stimulus package was too small, as it failed to take into account Keynes’s view of the importance of trust. and expectations to determine the future behavior of entrepreneurs and other economic agents.
The Reform of the international monetary system inspired by John Maynard Keynes
In the March 2009 speech titled Reforming the International Monetary System, Zhou Xiaochuan, Governor of the People’s Bank of China, spoke in favor of Keynes’s idea of a centrally managed global reserve currency.
Zhou argued that it was unfortunate that part of the reason for the collapse of the Bretton Woods system was the inability to adopt Keynes‘s bancor (exposed reserve currency in theoretical developments).
Zhou proposed a gradual move toward greater use of the IMF’s special drawing rights (SDRs).
Although Zhou’s ideas had not been widely accepted, leaders meeting in April at the London G20 summit in 2009 agreed to allow the IMF to create $250 billion in special drawing rights to be distributed globally.
Stimulus plans based on Keynesian thinking
In the midst of the 2008 financial crisis, stimulus plans based on Keynesian ideas were credited with contributing to a better-than-expected economic outlook by both the OECD and the IMF, in reports published in June and July 2009.
Still, in the midst of the economic crisis, these programs were not implemented on a wide scale, so the economic recovery of advanced nations turned out to be much slower than expected.
While the need for stimulus measures was widely accepted among policymakers, there was much debate about how to finance the spending. Some leaders and institutions, such as Angela Merkel and the European Central Bank, raised concerns about the potential impact on inflation, the national debt, and the risk that too much stimulus would create an unsustainable recovery.
In this sense, the liberal economic orthodoxy prevailed and the deficit spending programs did not have the expected scope. However, the fact that Keynesian policies will prosper in the midst of the crisis, even to a limited extent, has revived the debate on the importance of the role of the state in crisis situations, as well as of deficit spending policies.
Response from the academy to Keynesian thought in the 21st century.
Among professional economists, the revival of Keynesian economics has been even more divisive.
Although many economists, such as George Akerlof, Paul Krugman, Robert Shiller, and Joseph Stiglitz, supported the Keynesian stimulus, others did not believe that increased government spending would help the United States economy recover from the Great Recession.
Some economists, such as Robert Lucas, questioned the theoretical basis for stimulus packages, while others, such as Robert Barro and Gary Becker, say that there is no empirical evidence for the beneficial effects of Keynesian stimulus.
However, there is a growing academic literature showing that fiscal expansion helps an economy grow in the short term and that certain types of fiscal stimulus are particularly effective.
Keynes’s ideas return to the ring amid the economic crisis of 2020
Following the global coronavirus outbreak, COVID-19, originating in China, many economies were forced to shut down and isolate their citizens. This led to a prolonged and acute economic crisis, which according to the International Monetary Fund is configured as the worst global economic crisis since the Great Depression.
Governments around the world were forced to carry out large economic bailouts of small businesses and direct money transfers to their citizens in order to deal with the crisis. This economic policy move is regarded as a grand return to the policies of Keynesianism. The focus of the bailouts and stimulus programs was based on two major initiatives: The first, a lax monetary policy, with low-interest rates, and the second, an expansionary fiscal policy, with large deficit spending by governments in order to stimulate the economy so that it could provide jobs in a much more accelerated way.
For its part, the IMF headed by Kristalina Georgieva and Gita Gopinath, the entity’s chief economist, has stressed the importance of states spending actively during periods of crisis in order to stimulate citizens’ consumption and the reactivation of the economy. This perspective of the IMF, which goes against what had been the way of thinking of the entity during much of the previous decades, has been welcomed by a large part of the developing economies.
With information from Wikipedia.