John Maynard Keynes
John Maynard Keynes (1883-1946) was an English economist, whose conceptual ideas had a huge influence on the way of perceiving macroeconomics and monetary policy. He gained a lot in studies of operating markets and other systems in terms of economies’ behavior. He is mainly known as the influential figure of modern macroeconomics and the founder of Keynesian economics. One of the distinguishing features of Keynesian economics stands out the idea that governmental activity should play an essential role in an economical course by enhancing its expenses to create demand in conditions of a recession. In his foundational work, The General Theory of Employment, Interest, and Money— researched one of the most powerful economics books in history—he stands for the government's interventional manner as an efficient method to solve a high level of unemployment.
Early life and education
John Maynard Keynes himself came out of a middle-class family. His curiosity in economic studies arose primarily due to his father. John Neville Keynes was an Economic lecturer at Cambridge University. Keynes’ mother, being one of the first Cambridge’s female graduates, worked in charity for the unprivileged group of people.
He got grants to a couple of elite England schools – Cambridge University and Eton College, where he obtained a bachelor’s degree in mathematics in 1904. A peculiar fact – he was quite successful in mathematics throughout the years of academic career, though he had no education in an economical specialization.
During the early years, Keynes considered probability theory and gave lectures in Economics at Cambridge University. His job ranged from the British Treasury and British Civil Service right to royal commissions on currency and finance. In 1919 Keynes was appointed as the Treasury’s representative at the conference that ended World War I, what is also known as the Versailles peace.
Stand for government intervention
There is no doubt, the father of John Maynard Keynes influenced his son a lot, however, they went separate ways – John Neville advocated laissez-faire economics, where the main idea of the theory grounded on free-market capitalism. Thus, Keynes’ father was convinced of an active investment role during his time at Cambridge.
When a stock market collapse helped ignite the Great Depression in 1929, Keynes realized that the idea of an unhindered free-market was inherently flawed and required reformulation, not only in order to work better but also to surpass other systems, which it competes with, like communism.
Eventually Keynes began playing for interventional methods against unemployment and economic decline.
Besides governmental jobs programs, he also claimed the necessity of spending more to decrease unemployment, even if it leads to low budget rates.
Meaning of Keynesian economics
John Maynard Keynes created a theory, known as Keynesian economics, where the key role of economic processes in a country is given to a government, instead of letting an uncontrollable free-market reign. In particular, Keynes stood for federal expenditures to minimize downturns in trade cycles.
The fundamentals of Keynesian theory are laid in the driving economic force of demand. He considers supply to be not that significant as it, whereas classical economics was built on principles of supply rather than demand.
Because overall demand — the total expenditure and goods / service consumption by the private business and the government — creates supply. Total spending defines all results in economics, from the production of products to the employment rate.
Another based rule of Keynesian economics means that the perfect way to take the economy out of a recessive tendency is to raise demand by pouring it with money. In general, spending (consumption) is the right way to economic revival.
This couple of principles is the basis of Keynes’ concept that demand is so significant that, even if a government has to dig into debts to spend, it must do so. Consumer demand is boosted with the government stimulating, which in its turn urges on production and provides proper employment.
Critical view on Keynesian economics
Despite the fact that the economic model of Keynes was excessively accepted after the 40s, Keynesian economics has incurred a lot of critical statements since the concept was first submitted a decade before in the 30s.
One of the main critical remarks appeals to the idea of a large government — the extension of federal authorities’ activity that should be implemented to let the government take the initiative in the economy. Competitive theorists such as those from Chicago, who do research at the School of Economics, claim that recessive and ascending tendencies simply represent the phases of the whole business cycle. Thus, according to their principles, a distinct interventive manner of governments may only impair the process of recovery, and their federal and local spending only hamper private investment.
The critical statement of Milton Friedman was the most famous among others who perceived Keynesian economics quite skeptically. The American author is known as an advocate of free-market. In short, he was a highly respected personality in economics of the second part of the 20th century – as John Maynard Keynes was the most reputable economist before, in the first half. Friedman played for monetarism, which disproved major parts of Keynes’ economic system.
John Maynard Keynes supposed that fiscal policy was far more important than monetary policy. He believed that government expenditure and tax policy, which have an influence upon economic conditions have bigger weight in a comparison with control of the total supply of available capital to customers, businesses and banks – whereas Friedman and other advocates of monetarism thought that a government may sustain stability in the economy by checking rates of the money supply. In other words, monetarists stood for the control of capital, when Keynesian supporters stood for government spending.
For instance, while Keynes was convinced that government intervention could balance recession by providing fiscal policy to maintain total demand, stimulate spending and raise low employment rates, Friedman blamed excessive expenditure for triggering deficit and spoke out for a free-market comeback, as well as for limited government’s activity and decontrol in major economy areas – in addition to the solid growth of money.
Comparison of Keynesian and laissez-faire economics
Keynesian economics is markedly different from the free-market concept. John Maynard Keynes strongly believed that the government does have rights and power to guide the national economy, especially when it comes to stabilizing the overall economy. To the contrary, laissez-faire philosophy argues that less the government affects economics, the better for economic affairs and the country in general.
The beginning of the Great Depression in the 30s of the past century strongly affected the perception of Keynes’ principles and helped to adopt some of his fundamentals.
In order to handle the crisis in the States, President Franklin Roosevelt released the New Deal, a bunch of governmental programs that clearly reflected the ideas of Keynes where even the capitalistic system of free enterprises needs federal supervision.
By confirming the rules of the New Deal, the U.S. government interfered to spur the economy on an extraordinary level. It included creation of new recruitment agencies specialized on offering different kinds of jobs for unemployed people and balancing the cost for customer goods. The president also accepted Keynes’ methods of excessive deficit expenditure to boost demand, which included programs for railroad building, public housing, slum clearance and other profound works.
Great recession expenditure
In reply to the Great Recession of 2007-2009, President Barack Obama adopted some measures that kept Keynesian economics. At that time the federal government helped mired in debt companies in some industry branches. It also took custody of Fannie Mae and Freddie Mac, the two big market makers, home loans and mortgage guarantors.
Stimulus Checks during COVID-19
In response to the coronavirus pandemic in 2020, the American government first under the leadership of Donald Trump and then Joseph Biden provided some options such as loan extension programs, loan-forgiveness and relief. The government also added weekly unemployment compensation and gave taxpayers immediate aid by three tax-free stimulus checks.
The fame of Keynesian economics after the 30s has risen and faded away, and his principles have been obviously reassessed since his days. Anyway the economic school of thought he created has left one memorable mark on next generations: the concept that governments have an important part to take in business — even in economies of capitalism.
Keynesian economics as a way out of a recession
Milton Friedman was the one who attacked the key idea of consumption in Keynes' theory, criticizing the method of excessive spending as a way to cope with a recession. The monetarist was sure that government expenditure and debt accumulation only lead to inflation in the long term — raised product prices lower the money and wage value - which may turn out to be a disaster if it won’t be supplemented by economic growth.
The stagflation in the 70s was an illustrative example to the statement : It was a paradoxical period with high unemployment rates and low level of production, but raised inflation and interest rates as well.
Keynes and socialism
It is hardly possible/ seems unlikely to classify Keynes as a socialist.
On the one side, John Maynard Keynes showed some interest in socialism regimes and stood for the role of the government in various economic processes. He sincerely didn’t believe in business cycles going through ascendancy and decline without government activity — or in allowing private enterprise to operate freely.
On the other side, Keynes did not advocate for the government to actually take over industry and run it. He expected central authorities to encourage, but not necessarily control production methods.
According to some evidence, he was returning to a more conventional view of free-market capitalism by the end of his life. Keynes was searching for ways to get Britain out of a hole in the economy.
Not a long time before his death (Keynes died in 1946) he shared the insight with his friend, Henry Clay, that he perceived himself rather leaning on a method, which he had “attempted to exclude from economic philosophy 20 years ago": the invisible hand of Adam Smith (the naturally occurring pattern of a free-market system to balance itself via the laws of demand and supply).
Famous Keynes’ quote
When critics claimed that total support of public financing and deficit spending would come to default in the long term, Keynes' famous response to it was “In the long run, we are all dead.” In particular, his statement appealed to governments, which should cope with problems and find better solutions in the near term rather than expect market forces to fix issues over the long run.
Prediction of the nazi Germany rise
During the Versailles Peace Conference of 1919, John Maynard Keynes was an ardent critic of the devastating economic measures some significant figures were about to establish on Germany. When his perplexing alerts that these radical sanctions would likely lead to a political and economic catastrophe for whole Europe went neglected, he quitted the conference early as protest.
After his return to the UK, he retired from the British Treasury and explained his arguments about all the horrifying consequences of a peace treaty aimed to completely collapse Germany in The Economic Consequences of the Peace.
In 1920 Keynes published his book, which became a bestseller within a year — it entirely convinced a community to revise an unfair position of the Treaty of Versailles. As the turmoil in economics and politics in the 1930s boosted the fascism ascendancy that blew up into World War II, Keynes’ gloomy words began to be prophetic as well.
John Maynard Keynes and his invented economic system were groundbreaking in the 1930s and had a big influence on the form of the post-World War II economy in the mid-20th century. Keynes’ economics came under crippling criticism in the 1970s, saw some rebirth in the 2000s, and is still quite controversial and discussed nowadays.
The central idea of Keynes’ economics implies that the efficient way to take an economy out of a recession is to raise demand by providing the economy with money. In general, spending (consumption) is the right way to economic revival.
Just as Keynes was regarded as the most powerful economist of the first half of the 20th century, his well-known critic, Milton Friedman, a monetarist, was deemed the most influential economist of the second half.
Keynes left one remarkable legacy: the idea that governments do have an important part in the lives of different industries and people. The question is — where are these boundaries and limits of the government’s role and how best to implement that role.