John Maynard Keynes (1883–1946) was an early 20th-century British economist, best known as the founder of Keynesian economics and the father of modern macroeconomics, the study of how economies—markets and other systems that operate on a large scale—behave. One of the hallmarks of Keynesian economics is that governments should actively try to influence the course of economies, especially by increasing spending to stimulate demand in the face of recession.
In his seminal work, The General Theory of Employment, Interest, and Money—considered one of the most influential economics books in history—he advocates government intervention as a solution to high unemployment.
- British economist John Maynard Keynes is the founder of Keynesian economics.
- Keynesian economics argues that demand drives supply and that healthy economies spend or invest more than they save.
- To create jobs and boost consumer buying power during a recession, Keynes held that governments should increase spending, even if it means going into debt.
- Critics attack Keynesian economics for promoting deficit spending, stifling private investment, and causing inflation.
Education and Early Career
Keynes’ early interest in economics was due in large part to his father, John Neville Keynes, an Economics lecturer at Cambridge University. His mother, one of Cambridge's first female graduates, was active in charitable works for the underprivileged.
Born into a middle-class family, he received scholarships to two of the most elite schools in England, Eton College and Cambridge University, where he earned an undergraduate degree in mathematics in 1904. Of note, throughout his academic career, he excelled at mathematics—and he had almost no formal training in economics.
Early in his career, Keynes worked on probability theory and lectured in Economics as Fellow of King's College at Cambridge University. Government roles ranged from official positions in the British Civil Service and the British Treasury to appointments to royal commissions on currency and finance, including his 1919 appointment as the Treasury’s financial representative at the Versailles peace conference that ended World War I.
Advocacy of Government Intervention in the Economy
Keynes' father was an advocate of laissez-faire economics, an economic philosophy of free-market capitalism that opposes government intervention. Keynes himself was a conventional believer in the principles of the free market (and an active investor in the stock market) during his time at Cambridge.
However, after the 1929 stock market crash triggered the Great Depression, Keynes came to believe that unrestricted free-market capitalism was essentially flawed and needed to be reformulated, not only to function better in its own right but also to outperform competitive systems like communism.
As a result, he began advocating for government intervention to curb unemployment and correct economic recession. In addition to government jobs programs, he argued that increased government spending was necessary to decrease unemployment—even if it meant a budget deficit.
What Is Keynesian Economics?
The theories of John Maynard Keynes, known as Keynesian economics, center around the idea that governments should play an active role in their countries' economies, instead of just letting the free market reign. Specifically, Keynes advocated federal spending to mitigate downturns in business cycles.
The most basic principle of Keynesian economics is that demand—not supply—is the driving force of an economy. At the time, conventional economic wisdom held the opposite view: that supply creates demand. Because aggregate demand—the total spending for and consumption of goods and services by the private sector and the government—drives supply, total spending determines all economic outcomes, from the production of goods to the employment rate.
Another basic principle of Keynesian economics is that the best way to pull an economy out of a recession is for the government to increase demand by infusing the economy with capital. In short, consumption (spending) is the key to economic recovery.
These two principles are the basis of Keynes' belief that demand is so important that, even if a government has to go into debt to spend, it should do so. According to Keynes, the government boosting the economy in this way will stimulate consumer demand, which in turn spurs production and ensures full employment.
Criticism of Keynesian Economics
Although widely adopted after World War II, Keynesian economics has attracted plenty of criticism since the ideas were first introduced in the 1930s.
One major criticism deals with the concept of big government—the expansion of federal initiatives that must occur to enable the government to participate actively in the economy. Rival economic theorists, like those of the Chicago School of Economics, argue that: economic recessions and booms are part of the natural order of business cycles; direct government intervention only worsens the recovery process, and federal spending discourages private investment.
The most famous critic of Keynesian economics was Milton Friedman, an American economist best known for his advocacy of free-market capitalism. Considered the most influential economist of the second half of the 20th century—as Keynes was the most influential economist of the first half—Friedman advocated monetarism, which refuted important parts of Keynesian economics.
In contrast to Keynes’ position that fiscal policy—government spending and tax policies to influence economic conditions—is more important than monetary policy—control of the overall supply of money available to banks, consumers, and businesses—Friedman and fellow monetarists held that governments could foster economic stability by targeting the growth rate of the money supply. In short, Friedman and monetarist economists advocate the control of money in the economy, while Keynesian economists advocate government expenditure.
For example, while Keynes believed that an interventionist government could moderate recessions by using fiscal policy to prop up aggregate demand, spur consumption, and reduce unemployment, Friedman criticized deficit spending and argued for a return to the free market, including smaller government and deregulation in most areas of the economy—supplemented by a steady increase of the money supply.
Keynesian vs. Laissez-Faire Economics
With its advocacy of government intervention in the economy, Keynesian economics is in sharp contrast to laissez-faire economics, which argues that the less the government is involved in economic affairs, the better for business and society as a whole.
Examples of Keynesian Economics
The New Deal
The onset of the Great Depression in the 1930s significantly influenced Keynes’ economic theories and led to the widespread adoption of several of his policies.
To address the crisis in the U.S., President Franklin Roosevelt enacted the New Deal, a series of government programs that directly reflected the Keynesian principle that even a free-enterprise capitalist system requires some federal oversight.
With the New Deal, the U.S. government intervened to stimulate the national economy on an unprecedented scale, including creating several new agencies focused on providing jobs to unemployed Americans and stabilizing the price of consumer goods. Roosevelt also adopted Keynes' policy of expanded deficit spending to stimulate demand, including programs for public housing, slum clearance, railroad construction, and other massive public works.
Great Recession Spending
In response to the Great Recession of 2007–2009, President Barack Obama took several steps that reflected Keynesian economic theory. The federal government bailed out debt-ridden companies in several industries. It also took into conservatorship Fannie Mae and Freddie Mac, the two major market makers and guarantors of mortgages and home loans.
In 2009, President Obama signed the American Recovery and Reinvestment Act, an $831-billion government stimulus package designed to save existing jobs and create new ones. It included tax cuts/credits and unemployment benefits for families; it also earmarked expenditures for healthcare, infrastructure, and education.
COVID-19 Stimulus Checks
In the wake of the COVID-19 pandemic of 2020, the U.S. government under President Donald Trump and President Joseph Biden offered a variety of relief, loan-forgiveness, and loan-extension programs.
The U.S. government also supplemented weekly state unemployment benefits and sent American taxpayers direct aid in the form of three separate, tax-free stimulus checks.
Since the 1930s, the popularity of Keynesian economics has risen and fallen, and the theories have undergone considerable revision since Keynes' day. However, the economic school of thought he founded has left one indelible stamp on modern nations: the idea that governments have a role to play in business—even in capitalist economies.
Who Said Keynesian Economics Was Spending Your Way out of a Recession?
It was Milton Friedman who attacked the central Keynesian idea that consumption is the key to economic recovery as trying to "spend your way out of a recession." Unlike Keynes, Friedman believed that government spending and racking up debt eventually leads to inflation—a rise in prices that lessens the value of money and wages—which can be disastrous unless accompanied by underlying economic growth. The stagflation of the 1970s was a case in point: It was paradoxically a period with high unemployment and low production, but also high inflation and high-interest rates.
Was Keynes a Socialist?
It is difficult to pigeonhole Keynes as a socialist.
On the one hand, he showed an interest in socialist regimes and advocated the presence of government in economic affairs. He emphatically did not believe in letting business cycles go through boom and bust without intervention—or in letting private enterprise operate unfettered.
On the other hand, Keynes stopped short of advocating that governments actually take over and run industries. He wanted central authorities to stimulate, but not necessarily control, methods of production.
There is also evidence that he was returning to more traditional free-market capitalism towards the end of his life, as he was considering ways to get post-war Britain out of an economic hole. Shortly before his death in 1946, he told his friend, Secretary of State Henry Clay, that he found himself relying more on a solution he had “tried to eject from economic thinking twenty years ago": Adam Smith’s invisible hand (the natural tendency of a free-market economy to self-correct via the laws of supply and demand).
What Did Keynes Mean by “In the Long Run, We Are All Dead”?
When critics argued that Keynesian support of public financing and deficit spending would lead to default in the long run, Keynes' famous retort was that “In the long run, we are all dead.” In context, his point was that governments should solve problems in the short run rather than wait for market forces to correct problems over the long run—“when we are all dead.”
Did Keynes Predict the Rise of Nazi Germany?
During the 1919 Versailles Peace Conference, Keynes was an outspoken critic of the crippling economic measures certain senior statesmen wanted to impose on Germany. When his warnings that these harsh sanctions would likely result in economic and political catastrophe for Europe went unheeded, he left the conference early in protest.
As soon as he returned to the U.K., he resigned from the British Treasury and summarized his arguments about the dangers of a peace treaty designed to permanently crush Germany in The Economic Consequences of the Peace.
Within a year of its publication in 1920, Keynes’ book had become a bestseller that strongly influenced public opinion that the Treaty of Versailles was unfair. As the political and economic turmoil of the 1930s fueled the rise of fascism that exploded into World War II, Keynes’ early warnings began to sound prophetic as well.
The Bottom Line
John Maynard Keynes and Keynesian economics were revolutionary in the 1930s and did much to shape post-World War II economies in the mid-20th century. His theories came under attack in the 1970s, saw a resurgence in the 2000s, and are still debated today.
A core principle of Keynesian economics is that the best way to pull an economy out of a recession is for the government to increase demand by infusing the economy with capital. In short, consumption (spending) is the key to economic recovery.
Just as Keynes was considered the most influential economist of the first half of the 20th century, his most famous critic, Milton Friedman, an advocate of monetarism, was considered the most influential economist of the second half.
Keynes left one significant legacy: the concept that governments have a role to play in the economic well-being of industries and people. The questions that remain are how big the government's role should be and how best to execute that role.