Introducing John Maynard Keynes

Introducing John Maynard Keynes

Let me tell you about John Maynard Keynes, the early 20th-century British economist who's best known as the founder of Keynesian economics and the father of modern macroeconomics. One key aspect of his ideas is that governments need to step in and influence economies, particularly by ramping up spending to boost demand when recessions hit.

In his groundbreaking book, 'The General Theory of Employment, Interest, and Money'—one of the most influential economics texts ever—Keynes pushed for government intervention to tackle high unemployment.

Education and Early Career

Keynes's interest in economics stemmed largely from his father, John Neville Keynes, who lectured in economics at Cambridge University. His mother, one of the first female graduates from Cambridge, was involved in charitable work for the underprivileged.

Born into a middle-class family, he got scholarships to elite schools like Eton College and Cambridge University, where he graduated with a degree in mathematics in 1904. He was outstanding in math but had almost no formal economics training.

Early on, Keynes worked on probability theory and lectured in economics as a fellow at King's College, Cambridge. His government roles included positions in the British Civil Service and Treasury, plus appointments to royal commissions on currency and finance, such as his 1919 role as the Treasury’s financial representative at the Versailles peace conference ending World War I.

Advocacy of Government Intervention in the Economy

Keynes's father supported laissez-faire economics, which favors free-market capitalism without government interference. Keynes himself believed in free-market principles and invested actively in the stock market during his Cambridge days.

But after the 1929 stock market crash sparked the Great Depression, he concluded that unrestricted free-market capitalism was flawed and needed reform to work better and compete with systems like communism.

This led him to advocate for government intervention to reduce unemployment and fix recessions. Beyond job programs, he argued for increased government spending to cut unemployment, even if it created a budget deficit.

What Is Keynesian Economics?

Keynesian economics, based on John Maynard Keynes's theories, stresses that governments should actively manage their economies rather than leaving everything to the free market. He specifically recommended government spending to soften business cycle downturns.

The core idea is that demand, not supply, drives the economy. Back then, traditional thinking said supply creates demand, but Keynes said aggregate demand—total spending by the private sector and government—determines supply and all economic outcomes, from production to employment.

Another key principle is that to escape a recession, governments should increase demand by injecting capital into the economy. Essentially, spending is the path to recovery.

These ideas underpin Keynes's view that demand is crucial, so governments should spend even if it means debt, stimulating consumer demand, production, and full employment.

Criticism of Keynesian Economics

Though widely adopted post-World War II, Keynesian economics has faced criticism since its 1930s introduction.

A big critique is the idea of big government—the growth of federal programs needed for active economic participation. Rivals like the Austrian School argue that recessions and booms are natural, government intervention worsens recovery, and federal spending discourages private investment.

The most prominent critic was Milton Friedman, an American economist famous for free-market advocacy. Seen as the top economist of the 20th century's second half, just as Keynes was for the first, Friedman pushed monetarism, which challenged key Keynesian elements.

Keynes prioritized fiscal policy—government spending and taxes to affect the economy—over monetary policy, which controls money supply. Friedman and monetarists said governments should stabilize economies by managing money supply growth. They favored money control, while Keynesians favored government spending.

For instance, Keynes thought interventionist governments could ease recessions via fiscal policy to support demand, consumption, and jobs, but Friedman criticized deficits and called for free markets, smaller government, deregulation, and steady money supply growth.

Keynesian vs. Laissez-Faire Economics

Keynesian economics, with its push for government intervention, starkly contrasts laissez-faire economics, which says minimal government involvement in the economy benefits business and society.

Examples of Keynesian Economics

The Great Depression in the 1930s shaped Keynes's theories and led to broad adoption of his policies. In the U.S., President Franklin Roosevelt's New Deal programs mirrored Keynesian ideas by providing federal oversight to a free-enterprise system. The government stimulated the economy massively, creating agencies for jobs and price stabilization, plus deficit spending on public housing, slum clearance, railroads, and public works.

During the 2007–2009 Great Recession, President Barack Obama applied Keynesian steps by bailing out indebted companies and taking over Fannie Mae and Freddie Mac. In 2009, he signed the $831-billion American Recovery and Reinvestment Act for job preservation and creation, including tax cuts, unemployment benefits, and spending on healthcare, infrastructure, and education.

In 2020's COVID-19 pandemic, under Presidents Trump and Biden, the U.S. government provided relief, loan forgiveness, and extensions, plus supplemented unemployment and sent three rounds of tax-free stimulus checks to taxpayers.

Legacy

Since the 1930s, Keynesian economics has waxed and waned in popularity, with theories evolving beyond Keynes's time. But his school of thought has permanently marked modern nations: governments must play a role in business, even in capitalist systems.

Who Said Keynesian Economics Was Spending Your Way out of a Recession?

Milton Friedman attacked the Keynesian focus on consumption as the recovery key, calling it trying to 'spend your way out of a recession.' He believed government spending and debt cause inflation, reducing money's value, unless matched by growth. The 1970s stagflation—high unemployment, low production, high inflation, and interest rates—illustrated this.

Was Keynes a Socialist?

It's hard to label Keynes a socialist. He was interested in socialist regimes and supported government involvement in economics, rejecting unchecked business cycles or unfettered private enterprise. But he didn't advocate government takeover of industries; he wanted central authorities to stimulate, not control, production. Toward his life's end, he leaned back toward free-market ideas, telling a friend in 1946 he was relying on Adam Smith’s invisible hand to fix post-war Britain's economy.

What Did Keynes Mean by 'In the Long Run, We Are All Dead'?

When critics said Keynesian public financing and deficits would cause long-term default, Keynes replied, 'In the long run, we are all dead.' He meant governments should fix short-run problems instead of waiting for markets to self-correct over time, when 'we are all dead.'

Did Keynes Predict the Rise of Nazi Germany?

At the 1919 Versailles Conference, Keynes criticized the harsh economic sanctions on Germany, warning they'd lead to European catastrophe. He left in protest, resigned from the Treasury, and wrote 'The Economic Consequences of the Peace,' arguing the treaty's dangers. The book became a bestseller, shifting opinion on the treaty's unfairness. As 1930s turmoil fueled fascism and World War II, his warnings proved prophetic.

The Bottom Line

John Maynard Keynes and his economics revolutionized the 1930s and shaped mid-20th-century post-war economies. Attacked in the 1970s, they resurged in the 2000s and remain debated. A core principle is government injecting capital to boost demand and spending for recession recovery. Keynes was the top economist of the 20th century's first half; his critic Friedman, advocating monetarism, was for the second. Keynes's key legacy is that governments must contribute to economic well-being, though the extent and method are still questioned.