The British John Maynard Keynes (1883 – 1946) remains the greatest brilliant and influential economist of the twentieth century. His revolutionary discourse written during the Great Depression of the 1039s, The General Theory of Employment, Interest and Money, overturned the conventional free market wisdom of the time and proposed that a healthy economy and full employment depend on the total spending of consumers, business investors and governments. Frightened by mass unemployment, governments throughout the capitalism world pursued Keynesian policies until the 1970s when a new economic theory, Monetarism, became fashionable. As monetarism failed to prevent the world entering another major recession, it is time to look at Keynesian remedies again.
Maynard grew up in a solid middle-class intellectual environment and was soon showing signs of precociousness. At the age of 5, he corrected his aunt’s English. He was brilliant at maths. In 1902, Keynes went to King’s College, Cambridge. Keynes’ great political hero was the Whig writer and philosopher Edmund Burke (1729-97). He then joined a junior clerk in the military department of the India Office and moved on to teaching Economics at Cambridge, despite the fact he had never taken an Economics degree. In October 1911 he become editor of the Economic Journal and in 1912 was elected a member of the selected Political Economy Club. Soon after, came the First World War and changed everything.
With the outbreak of War in 1914, Keynes moved int the Treasury and was soon advising at the highest level. It could be argued that he was instrumental in bringing the Americans into the War by persuading the British Government to maintain convertibility in early 1917. In 1919, at the Paris Peace Conference in Versailles, Keynes was in charge of financial matters and chased reparation payments of £24 billion from Germany to repay Britain debt with United States. However, the US rejected the offer. Keynes then resigned his position to write The Economic Consequences of the Peace. After the war, he returned to Cambridge to lecturer on the Theory of Money and later on the Monetary Theory of Production.
During the 1920’s, Keynes argued against Britain’s return to the Gold Standard and he published A Tract on Monetary Reform, arguing that Britain should not go back to the pre-War Gold Standard System. Its central theme is that monetary policy should be used to stabilise the price level and also the demand for money. By varying the amount of credit available to business, the fluctuations in the business cycle could be ironed out. Price stability was everything. However, he lost his battle with Britan’s Government and in 1925 he wrote The Economic Consequences of Mr.Churchill.
The World depression provided the background for Keynes’ seminal work. The General Theory of Employment, Interest and Money, published in 1936. It is not easy reading. For Keynes, the level of output determins the level of employment. This in turn is determined by the level of effective demand, or the level of purchases of goods and services. The purchases will eithr be consumption or investment.
It is generally accepted that 3 major economies tried Keynesian solutions in the 1930s. Sweden, Germany and the US were influenced by economists moving along the same road as Keynes. In 1932, Sweden returned a Labour government commited to a programme of public investment.
Keynes’ small book How to Pay for the War ws already looking ahead whereas his General Theory had attemped to solve the problem of deficient demand. How to Pay for the War addressed the new problem of excess demand. By the end of the war, Keynesian ideas were fully accepted at the Treasury Already in 1944, the Government had published a White Paper on Employment policy. Keyness ideas were also accepted in the US as a preventative to the horrors of the 1920s. Most of these negotiations exhausted Keynes, who had suffered a serious heart attack as early as 1937. On 20 April 1946, he died at his Sussex farmhouse, Tilton, in the arms of his beloved Lydia. His ashes were scattered on the Downs above Tilton.
Keynes’s conjectures were:
1. 0 < MPC < 1
Where MPC is the marginal propensity to consume.
2. Average propensity to consume (APC) falls as income rises. (APC = C/Y )
3. Income is the main determinant of consumption. It might have other factors but income will be the main one.
Keynes, JM (1923). A Tract on Monetary Reform.
Pugh P & Garrat, C (1993). Keynes for Beginners. Published in Australia by Allen & Unwin Pty. Ltd.