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Economists - John Maynard Keynes (1883-1946)

Keynes is perhaps one of the best known of all economists. This is hardly surprising for two main reasons. The first is that his work was perhaps the most important work that had been done for decades and changed the whole face of post-war economic policy. The second, more flippant reason for his fame is that he is perhaps the only economist to have a whole branch of economics named after him.

His main contribution to the economics debate of the time was in putting together a coherent critique of the existing classical economic theory that dominated policy-making circles. Keynes' father was an economist and his mother was Mayor of Cambridge for some time.

He was a varied character - not at all the stereotypical economist of people's assumptions. He married a Russian ballerina and was for much of his time a member of the Bloomsbury Group - a group of intellectuals whose ranks included well-known names such as Virginia Woolf, E.M.Forster and Bertrand Russell. He speculated considerably and as Bursar of King's College made the college very rich! He also acted as an advisor to a number of companies. In the Second World War made his peace again with the Treasury. As a result he was instrumental in providing the framework for post-war economic recovery.

Keynes's work was very varied and he wrote on any issues of the day that he felt important. Where he felt strongly he wrote works criticizing the policies of the time. He was particularly critical of the amount of money demanded from Germany for war reparations after the First World War and this prompted him to write a pamphlet:

  • The economic consequences of the peace (1919)

He was later very critical of Churchill's decision to return to the Gold Standard at the same rate as before the war, and this prompted him to put pen to paper again:

  • The economic consequences of Mr Churchill

However, the work he is best known for was his main book published in 1936. It is often considered that this book marked the birth of modern macroeconomics. Though certainly not an easy read (and that may be an understatement!), it has been a best seller and changed the face of not just the academic world of economics, but also the practical world of economic decision making. Many governments since the Second World War (including in the UK and USA) considered themselves to be Keynesian and pursued Keynesian demand-management policies. It took the stagflation of the early 1970s to break the Keynesian consensus. The title of this earth-shattering work was:

  • The General Theory of Employment, Interest and Money (1936)

In the General Theory Keynes comprehensively challenged the Classical orthodoxy. He argued that a slump was not a long-run phenomenon that we should all get depressed about and leave the markets to sort out. A slump was simply a short-run problem stemming from a lack of demand. If the private sector was not prepared to spend to boost demand, the government should instead. It could do this by running a budget deficit. When times were good again and the private sector was spending again, the government could trim its spending and pay off the debts they accumulated in the slump. The idea, according to Keynes, should be to balance your budget in the medium term, but not in the short run.

One of his best known quotes summarizes this focus on short-run policies:

'In the long-run we are all dead'

So his theory was that the government should actively intervene in the economy to manage the level of demand. These policies are often known as demand management policies, aptly named since the idea of them is to manage the level of aggregate demand. If you want to impress your teachers or lecturers even further and leave them totally stunned with your intimate knowledge of Keynesian economics (!), you could even call these policies counter-cyclical demand management policies. They are termed this because the government should be doing the exact opposite to the trade cycle. When economic activity is depressed (perhaps because it had been reading too much Classical economics!) the government should spend more, and when the economy is booming the government should spend less.

If aggregate demand in low then the government should pursue reflationary policies such as cutting taxes or boosting government spending to push aggregate demand higher and boost employment and output. However, if aggregate demand is too high and causing demand-pull inflation then the government should pursue deflationary policies. These may include increasing taxes or cutting government spending to reduce demand.

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Last modified: April 01, 2002