John Maynard Keynes' philosophy is difficult to summarize. His famous treatise, "The General Theory of Employment, Money, and Interest," is a complex tapestry of unfinished thoughts and intuitive hunches that manages to be simultaneously brilliant and paradoxical. It's also difficult to read and comprehend, except perhaps that Keynes disagreed with Say's law of markets and felt that savings were unnecessary.
Keynes was not necessarily a rigorous academic. His primary concern was British public policy. Keynes' chief biographer and ardent follower, Lord Robert Skidelsky, said that Keynes "invented 'Theory' to justify what he wanted to do." F.A. Hayek, a friend of Keynes as well as his chief intellectual rival, told the New York Times in 1982 that Keynes was intelligent, but he understood little about economics.
Hayek also highlighted the strange nature with which Keynes spoke and wrote about economics. Many capable writers have parsed through Keynes' writings, notably Skidelsky, Henry Hazlitt and Hunter Lewis, and made his thoughts easier to understand. Modern economists can impart several critical lessons from Keynes.
Government Spending Can Affect Short-Term Aggregate Production
Keynes' policy prescriptions often call for government stimulus, including deficit spending, to combat involuntary unemployment. He was also the first widely published economist in the English-speaking world to aggregate supply and demand factors in the economy.
Keynes has been validated for the short term, at least according to his own definitions of success. Government spending and projects can temporarily boost gross domestic product (GDP), roughly correlating with declines in measured unemployment rates. In the long run, however, there is very little correlation between government spending and productivity or growth in income per capita.
Prices Don't Adjust Evenly
The phrase "sticky wages" is an integral part of Keynes's economic lexicon. He thought it unlikely that wages would adjust downward to alleviate unemployment, since employees are unlikely to accept wage reductions and employers are unlikely to offer them. In other words, markets do not always clear in the way that general equilibrium models suggest.
Even though Keynes argued that labor markets function differently than other markets, most economists now generally accept that all prices can be susceptible to slow adjustments under adverse circumstances.
Economics and Politics Are Inextricably Connected
John Maynard Keynes was a life-long civil servant and public thinker, and his writings were almost always designed to influence present British policy. He understood that once accepted by academia, politicians have a much easier time promoting a new economic theory. He was a noted critic of the Versailles Peace Conference, saying it was too harsh on Germany and arguing correctly that it would lead to terrible long-term consequences.
Keynes used economics as a weapon in the public debate. He strongly supported the Labor Party's public works programs and opposed Britain's post-World War I return to the gold standard. He understood that government officials would ultimately have to endorse his economic views for them to be implemented. In fact, in the German edition of "The General Theory," Keynes admitted his ideas were "much more easily adapted to the conditions of a totalitarian state" so that politics couldn't get in the way.
The Economy Can Operate Without Full Employment for a Time
One overlapping theme in "The General Theory" was that the economy can have varying levels of unemployment. It was a direct challenge to the views of classical economists, such as David Ricardo and Jean-Baptiste Say, who asserted that a glut in the labor market would be fixed automatically by the market. In technical language, Keynes didn't believe that the wage rate's utility would balance labor to create equilibrium in the labor market.
Few economists disagree with Keynes' feelings about the wage rate and labor, but some disagree on the mechanism. Left-wing Keynesians believe that the free market creates underemployment due to excessive savings and a lack of liquidity, while right-wing economists counter that mistaken government policies create shortages in the labor market. Either way, it's widely agreed that full employment is no guarantee in a mixed economy.
Inflation Is Unjust and Leads to Over-Stimulation of Industrial Activity
Keynes's 1923 work, "A Tract on Monetary Reform," called inflation an evil that must be shunned. This is one of the largest disparities between Keynes and his later acolytes, most of whom considered inflation benign or a minor issue. But Hayek vilifies Keynes, asserting that he knew well the evils of inflation. Keynes also felt that inflation helped rich investors at the expense of the poor.
As with many issues, Keynes was inconsistent on inflation and monetary policy. However, he generally felt that prices should remain stable. He argued that "inflation leads to the over-stimulation of industrial activity" and "overexertion in good times," echoing many Austrian economists, who argue that economic booms and busts are caused by money supply manipulations.