Who Was John Maynard Keynes?
John Maynard Keynes was an early 20th-century British economist, known as the father of Keynesian economics. His career included academic roles and government service.
One of the hallmarks of Keynesian economics is that governments should actively try to influence the course of their nations' economies—especially to increase spending and lower taxes in order to stimulate demand in the face of recession. His theories also address the causes of long-term unemployment. In his seminal 1936 work, The General Theory of Employment, Interest, and Money, Keynes became an outspoken proponent of full employment and government intervention.
- 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.
- Among other beliefs, Keynes held that governments should increase spending and lower taxes when faced with a recession, in order to create jobs and boost consumer buying power.
- Another basic principle of Keynesian economics is that government spending is necessary to maintain full employment, even if a government has to go into debt.
- Keynesian economics is attacked by critics for promoting deficit spending, stifling private investment, and causing inflation.
Understanding John Maynard Keynes
John Maynard Keynes was born in 1883. His 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.
Keynes' father was an advocate of laissez-faire economics, and during his time at Cambridge—after studying math, he joined the teaching staff in 1909—Keynes himself was a conventional believer in the principles of the free market. He was an active investor in the stock market, as well.
However, after the 1929 stock market crash and the resulting Great Depression, Keynes became more radical. He came to believe that complete free-market capitalism was inherently untenable and that it needed to be reformulated—not only to function better on its own but to fight off competitors like communism.
As a result, he began advocating for government intervention as a way to curb unemployment and resulting recessions. He argued that a government jobs program, increased government spending, and an increase in the budget deficit would decrease high unemployment rates.
Principles of Keynesian Economics
The most basic principle of Keynesian economics is that if the level of investment throughout a country or a society exceeds its savings rate, it will promote economic and business growth. Conversely, if the savings rate is higher than its investment rate, it will cause a slowdown and eventually a recession. This is the basis of Keynes' belief that an increase in spending would, in fact, decrease unemployment and help economic recovery.
Keynesian economics also advocates that it's actually demand—and not supply—that drives production. At the time, conventional economic wisdom held the opposite: that supply creates demand.
With this in mind, Keynesian economics argues that economies are boosted when there is a healthy amount of output driven by sufficient amounts of economic expenditures. Keynes believed that unemployment was caused by a lack of expenditures within an economy, which decreased aggregate demand. Continuous decreases in spending during a recession result in further decreases in demand, which in turn incites higher unemployment rates, which results in even less spending as the amount of unemployed people increases.
So, how does all this apply in the real world? It means 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—by spending, in short. If it has to borrow money—go into debt and increase the deficit—to do so, it should. If a government spends, it encourages others, and gives them the means, to do so too. This stokes demand, which stimulates production. In short, consumption is the key to economic recovery.
With its advocacy of government intervention in the economy, Keynesian economics is a sharp contrast to laissez-faire economics, which argues the less the government is involved in economic affairs, the better-off business—and by extension, society as a whole—will be.
Criticism of Keynesian Economics
Even though they became popular and widely adopted after World War II, Keynes' theories and Keynesian economics ideas also attracted plenty of criticism, both when they were first introduced and in subsequent years.
Some critiques deal with Keynes's methodology. In contrast to contemporary economists' approach, Keynes' work contains few mathematical models or formulas (ironic, given that he graduated from college with a degree in mathematics.) He also tended to make assumptions and predict outcomes that weren't backed by any real-world evidence. His recommendations were highly theoretical, in other words.
A more fundamental criticism deals with the concept of "big government"—the expansion of federal initiatives, which is necessary if the government is to participate so actively in the economy. Federal spending just discourages private investment, antagonists argue. Rival economic theorists, like those of the Austrian School of Economics and the Chicago School of Economics, believe economic recessions and booms are a part of the natural order of business cycles and that direct government intervention only worsens the recovery process.
Keynes' critics also deride what they call his central idea that you can "spend your way out of a recession." They feel that ongoing government spending and racking up debt just eventually lead to inflation—a rise in prices that lessens the value of money and wages—and this can be disastrous if it's not accompanied by underlying economic growth. The stagflation of the 1970s was a case in point: It was paradoxically a period in which there was high unemployment and low production, yet also high inflation and high-interest rates.
Finally, Keynes saw public expenditures and financing, deficit spending, high taxation, and consumption as more important than classical economic virtues like saving more than you spend, balanced government budgets, and low taxes. Deliberately running up a deficit was (and is) anathema to traditional economic principles; it could lead to default in the long run, critics said—which led to Keynes' famous retort, "In the long run, we are all dead."
Ironically, while supply-side and monetarist economists think Keynesian economics goes too far in advocating government influence n the economy, advocates of socialist and communist economies feel it doesn't go far enough. They feel a centralized authority should not just influence, but actually control, business and means of production—or own it outright.
Examples of Keynesian Economics
The New Deal
The onset of the Great Depression around the world in the 1930s influenced Keynes and helped shape his theories. President Franklin Roosevelt's New Deal during the 1930s, designed to address that very crisis, directly reflects many principles of Keynesian economics—starting with the basic tenet that even a free-enterprise capitalist system requires some federal oversight.
With the New Deal, the U.S. government intervened and tried to stimulate the national economy on an unprecedented scale. Its initiatives included an alphabet of new agencies:
- The CCC (Civilian Conservation Corps) provided jobs to unemployed youths while improving the environment.
- The TVA (Tennessee Valley Authority) provided jobs and brought electricity to rural areas for the first time.
- The FERA (Federal Emergency Relief Administration) and the WPA (Works Progress Administration) provided jobs to thousands of unemployed Americans in construction and arts projects across the country.
- The NRA (National Recovery Administration) sought to stabilize consumer goods prices through a series of controls.
Following the 1937 recession, Roosevelt explicitly adopted Keynes' notion of expanded deficit spending to stimulate aggregate demand. In 1938 the Treasury Department designed programs for public housing, slum clearance, railroad construction, and other massive public works. Finally, though, it was World War II-related export demands and expanded government spending that led the economy back to full employment capacity production by 1941.
Great Recession Spending
In response to the Great Recession of 2007-09, President Barack Obama took several steps. 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 February 2009, he signed the American Recovery and Reinvestment Act, which was a government stimulus package of $787 billion (later raised to $831 billion) 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. Though opinion is divided as to the Recovery Act’s overall effectiveness, most economists agree that at the end of 2010, unemployment was lower than it would have been without the stimulus package.
COVID-19 Stimulus Checks
In the wake of the COVID-19 pandemic of 2020, the U.S. government under President Donald Trump and President Joe Biden has offered a variety of relief, loan forgiveness, and loan-extension programs. It has supplemented state unemployment benefits, at first with an extra $600 a week and then $300 a week.
In addition, it sent American taxpayers direct aid, in the form of three separate stimulus checks. The first, in April 2020, was for $1,200 per individual, plus $500 per dependent under 16 years old. The second, in December 2020-January 2021, was for $600 per person, plus $600 per dependent. The third, in March 2021, amounted to $1,400 per person.
Each payment was tax-free.
John Maynard Keynes FAQs
What Is John Maynard Keynes Theory?
The theories of John Maynard Keynes, known as Keynesian economics, center around the tenet that governments should play an active role in their countries' economies, instead of just letting the free market reign. Specifically, Keynesian economics advocates federal spending to mitigate downturns in business cycles. Government boosting the economy in this way will stimulate demand, and thus production, which will increase employment.
What Is John Maynard Keynes Best Known For?
John Maynard Keynes is best known as the founder of Keynesian economics, a school of economic thought originating in the 1930s. Though its popularity has waxed and waned over the ensuing decades, and it has undergone considerable revision since Keynes' day, it has left one indelible stamp: the idea that governments have a role to play in the economy—even a capitalist one.
Keynes is also seen as is the father of modern macroeconomics, which studies how an overall economy—the market or other systems that operate on a large scale—behaves.
Was Keynes a Socialist?
It's difficult to pigeonhole Keynes as a socialist. On the one hand, he did show marked interest in and sympathy towards socialist regimes. And of course, he advocated the presence of government in economic affairs; he emphatically did not believe in letting business cycles go through boom and bust without any intervention—or in letting private enterprise operate unfettered.
On the other hand, Keynes did stop short of advocating that the government actually take over and run industries. He wanted central authorities to stimulate, but not necessarily control, methods of production. And there is evidence that he was growing more conservative, swaying back towards more traditional free-market capitalism, towards the end of his life. In 1946, shortly before his death, he referenced Adam Smith’s "invisible hand" (the natural tendency of a free-market economy to correct itself via the laws of supply and demand) to help post-war Britain out of its economic hole, telling a friend: “I find myself more and more relying on a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.”
What Are the Main Points of Keynesian Economics?
Keynesian economics holds that the driving force of an economy is aggregate demand—the total spending for and consumption of goods and services by the private sector and government. Total spending determines all economic outcomes, from the production of goods to the employment rate–because demand drives supply.
Even productive economies can get caught in an economic downturn if a lack of demand (and, therefore, a lack of spending) arises. Because demand is so important, central banks and government intervention can solve economic crises and downturns by spending. Activist fiscal policies (spending or tax cuts) and monetary policy (changes in interest rates) are the primary tools governments and central banks should use to manage the economy and fight unemployment.
This government spending will in turn increase consumer demand, thus spurring production. Even if a government has to go into debt to spend, it should do so, because that's the only way to spur recovery and ensure full employment in the workforce.
The Bottom Line
John Maynard Keynes (1883-1946) 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 remain debatable today. But Keynes did leave one lasting, undeniable legacy: the concept governments do have a role to play in the economic well-being of their industries and their people. The question is how big that role should be, and how best to execute it.