4 February 2015 - JOHN MAYNARD KEYNES


G'day folks,

Welcome to some background on a very famous man. John M. Keynes (June 5, 1883 – April 21, 1946) was one of the most influential economists of the Twentieth Century. His ground breaking work in the 1930s led to the development of a whole new economic discipline dedicated to macroeconomics. In particular, his economic theories termed ‘Keynesianism’ advocated government intervention to end the Great Depression.
  John M. Keynes was born in Cambridge to an upper middle class family. His father was a lecturer in economics and moral sciences at Cambridge university. He was bright scholar won a scholarship to Eton College. After Eton, he studied Maths at Kings College, Cambridge. It was here that the great economist Alfred Marshall encouraged Keynes to take up the relatively new science of Economics. He published his first economic article in 1909, and by 1911 was editor of the Economic Journal.

During the First World War, Keynes acted as a government advisor for the government. He helped to negotiate terms with Britain’s creditors (UK debt rose sharply in World War One. At the end of the First World War, Keynes took part in the British delegation to the Treaty of Versailles. Keynes was shocked at the level of reparations the Allies wanted to impose on the Germans. Keynes resigned from the British delegation saying it was a recipe for bankrupting Germany. He wrote the Economic Consequences of the Peace in 1919, accurately predicting the difficulties Germany would have and the consequent political resentment at such as harsh peace treaty.

 In the 1920s, Keynes was a fearsome critique of Britain’s decision to remain in the gold standards at a pre 1914 level. Keynes argued that this high value of sterling made life difficult for British exporters and was the main reason for the deflation and high unemployment the UK experienced in the 1920s.

It was the Great Depression of 1929-39, which gave Keynes the opportunity to disparage and challenge the classical orthodoxy which dominated economic theory at the time. At the outbreak of the Great Depression, the classical response was to rely on free markets and balance the budget. The classical response was to try and balance the government budget, through tax increases and government spending. In 1931, Keynes was particularly critical of Ramsay McDonald’s austerity budget which cut public investment, wages and increased taxes. 

Keynes argued that the government should be doing the opposite. Throughout the 1930s, Keynes was a consistent voice for advocating higher government spending funded through higher borrowing. However, in most democracies, it proved a lone voice – apart from intermittent spending as part of Roosevelt’s new deal.

The basic principle of Keynes’ work was that in a recession, there were wasted resources due to falling private sector investment and spending. Therefore, the government should step in and by increasing government spending making the unemployed resources, lying idle become used. See more at explanation of Keynesian economics

Keynes was also a great publicist of his own views, with a knack of attracting attention. For example, when he saw a waiter with nothing to do, he knocked some serviettes on to the floor. He explained to his bemused friends he was trying to prevent unemployment by creating work. In his General Theory, he used the analogy of digging holes in the ground to explain concepts of aggregate demand.

 His work created some notable soundbites – he popularised the idea of the paradox of thrift (individual saving causes aggregate spending to fall). He also coined the phrase ‘in the long run we are all dead’.

This phrase was an ironic criticism of classical theory, which argued markets would return to equilibrium ‘in the long run’

His ground breaking work – The General theory of Employment, Interest and Money (1936) provided a framework for macroeconomics and was a radical departure from the more limited classical framework. After the war, to varying degrees, governments in the West, pursued Keynesian demand management in an attempt to achieve full employment. This led the US president R. Nixon to declare in the 1960s – “we’re all Keynesians now.” In the 1970s, the reputation of Keynes’ work was challenged by the neo-classical economists – monetarists, such as Milton Friedman. But, the great recession of 2008-2013 led to a resurgence of interest in Keynes’ explanation for prolonged recessions.

In 1940, his health suffered, and he had to cut back on his workload. However, after the Second World War, he was asked to take part in the British negotiations with America over debt repayments. It was Keynes’ job to emphasise to the Americans how bankrupt the UK was. The American delegation who met Keynes were deeply impressed by his intellect and passion. Though they couldn’t meet his demands until congress became worried about the spread of Communism in Europe, and agreed to extend the terms of credit.

 Outside economics, Keynes was lover of the arts, opera and noted for his exceptional wit. He was a formidable, intellect and even critics admitted he had both great intellect and powers of persuasion.

Clancy's comment: Mm .... I bet he had his share of arguments over the years.
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