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English economist, journalist, and financier, best known for his revolutionary economic theories (Keynesian economics) on the causes of prolonged unemployment. His most important work, The General Theory of Employment, Interest and Money (1935-36), advocated a remedy for economic recession based on a government-sponsored policy of full employment.
Keynes was born into a moderately prosperous family of the professional elite. His father was an esteemed economic scholar and later academic administrator at the University of Cambridge. His mother, the daughter of a minister endowed with advanced opinions, was one of the first female graduates of the same university.
After graduating from Cambridge, Keynes became a civil servant and moved to the India Office in Whitehall. His experience there formed the basis of his first major work, which is still the definitive examination of pre-World War I Indian finance and currency. He then returned to Cambridge, where he taught economics with great success until 1915. The onset of World War I brought him back to government employment, this time in the Treasury, an agency even more powerful than its American counterpart. There he was daily concerned with the economic management of the war. His special responsibility covered relations with allies and the conservation of England's scant supply of foreign currencies.
His performance marked Keynes for a great public career, but the Versailles Peace Conference was to transform his prospects. Accompanying his prime minister, Lloyd George, to France as an economic adviser, Keynes soon became so distressed at the political chicaneries of the proceedings and the unrealistic character of the reparations policies to be imposed upon a defeated Germany that his health deteriorated, and he resigned his post, oppressed, to quote from a letter to his father, at the impending "devastation of Europe." (See Paris Peace Conference.)
Always an activist, Keynes translated personal distress into public protest. In two summer months he composed the indictment of the Versailles settlement that by Christmas 1919 reached the bookstores as The Economic Consequences of the Peace.
The permanent importance of this polemical essay lies in its economic analysis of the excessive weight of reparations upon the German economy and the corresponding lack of probability that they ever would be paid. What guaranteed the book general success were the blistering sketches of Woodrow Wilson, Clemenceau, and Keynes's old chief, Lloyd George. As a consequence, in some Whitehall circles Keynes remained to the end of his life a man not quite to be trusted, an iconoclast perfectly willing to rock any boat into which he had imprudently been invited.
In Cambridge, to which Keynes now returned, his reputation was rather different. He was quite simply esteemed as the most brilliant student of Alfred Marshall and A.C. Pigou, the two Cambridge economists who between them had produced the authoritative explanation of how competitive markets functioned, business firms operated, and consumers spent their incomes.
Although the tone of Keynes's major writings in the 1920s was occasionally skeptical, he did not directly challenge the conventional wisdom of the period that held laissez-faire, only slightly tempered by public policy, the best of all possible social arrangements.
Two of Keynes's opinions did foreshadow the theoretical revolution over which he presided in the 1930s. In 1925 he opposed England's return to the gold standard at the prewar dollar-pound ratio of $4.86; and, long before the Great Depression, Keynes was worried about the persistent unemployment of British coal miners, shipyard workers, and textile operatives.
Reconciled by this time to Lloyd George (who was never to return to office), he supported the Liberal Party's program of public works to take the unemployed off welfare and place them in useful jobs. But respectable economists still relied upon the expected automatic adjustments of the free market, and the Treasury was attached to the still more doctrinaire view that public works were necessarily useless because any increase in the government deficit would surely reflect itself as an equal decline in private investment. Since Keynes could not yet offer a theoretical refutation of his colleagues' opinions, his agitation for public works had little political effect.
His private life was more satisfactory. In 1925 he married the talented and charming ballerina Lydia Lopokova. Despite the doubts expressed by Cambridge conservatives of his wisdom in courting a "chorus girl," the marriage was happy. Indeed, in the judgment of the widow of the economist Alfred Marshall it was "the best thing Maynard ever did." His friendships with the Bloomsbury circle prospered, and he easily financed a comfortable London apartment from the proceeds of highly successful stock speculations. Always a late riser, Keynes conducted the management of his investments in civilized fashion while he breakfasted in bed. As a journalist he extended his reputation, writing in the leftist New Statesman (whose Board of Directors he later joined) as well as the major newspapers, The Times (of London) and the Manchester Guardian (now the Guardian).
Keynes and the Depression
What altered Keynes's public reputation a second time and swept him to permanent fame was his response to the economic tragedies of the 1930s. With a few noteworthy exceptions politicians and economists were universally bewildered by events and shorn of confidence in traditional policies. Conventional economic wisdom still held, against mounting evidence to the contrary, that time and nature would restore prosperity if government did not try to manipulate the economy. After all, the unemployed could always get jobs if they only were willing to work for lower wages. Businessmen could always restore their sales by the parallel strategy of slashing their prices. In the process a few of the weaker brethren would indubitably be wiped out. Nevertheless, if all groups accepted the discipline of competitive adjustment, soon recovery, prosperity, and higher wages would return. (See Great Depression.)
Unhappily, the remedy worked nowhere. In the United States Franklin Roosevelt's 1932 landslide presidential victory over Herbert Hoover attested to the political bankruptcy of laissez-faire. New explanations and new policies were urgently needed.
These Keynes supplied. His enduring triumph was his composition in the early 1930s of the most influential treatise composed by an economist thus far in this century, comparable to the Wealth of Nations as an intellectual event and to Malthus' Essay on Population as a guide to public policy. The General Theory of Employment, Interest and Money, which appeared in 1935-36, is a highly technical, even abstruse exposition of new ideas that had been partly foreshadowed in his Treatise on Money (1930). The central message is readily translated into two powerful propositions. The first declared the existing theory of unemployment nonsense. In a depression, according to Keynes, there was no wage so low that it could eliminate unemployment. Accordingly, it was wicked to blame the unemployed for their plight. The second proposition proposed an alternative explanation about the origins of unemployment and depression. This centred upon aggregate demand--i.e., the total spending of consumers, business investors, and public agencies. When aggregate demand was low, sales and jobs suffered.
When it was high, all was well. (See employment, supply and demand.)
From these generalities there flowed a powerful and comprehensive view of economic behaviour. Because consumers were limited in their spending by the size of their incomes, they were not the source of business cycle fluctuations. The dynamic actors were business investors and governments. In depressions the thing to do was either to enlarge private investment or to create public substitutes for private investment deficiencies. In mild economic contractions, monetary policy in the shape of easier credit and lower interest rates just might stimulate business investment and restore the aggregate demand caused by full employment. Severer contractions required as therapy the sterner remedy of deliberate public deficits either in the shape of public works or subsidies to afflicted groups. (See investment, fiscal policy.)
In an extremely short space of time, Keynes converted most of his professional colleagues to his economic beliefs. During World War II and after, one Western democracy after another affirmed its new commitment to maintain high employment. In the United States the Employment Act of 1946 formally imposed upon presidents and congresses the duty of maintaining prosperity.
The General Theory was Keynes's last major written work. In 1937 he suffered a severe heart attack. Two years later, though not completely recovered, he returned to teaching at Cambridge, wrote three influential articles on war finance entitled How to Pay for the War, and served once more in the Treasury as an all-purpose adviser. As the war drew to a victorious conclusion, Keynes turned his thoughts to the design of international financial institutions calculated to limit the spread of depression. At the Bretton Woods Conference in 1944 he played a prominent part. But the institutions that resulted from the conference, the International Monetary Fund and the World Bank--two agencies that survive into the 1980s--bear much stronger marks of the orthodox theories of the United States Treasury of that time than of Keynes's thinking.
His last major public service was his brilliant negotiation in the autumn and early winter of 1945 of a multibillion-dollar loan granted by the United States to England. By this time the British establishment was more than ready to welcome home its errant son. He was now both a member of the Court of the Bank of England (as its governing board is termed) and, as Lord Keynes of Tilton, a peer of the realm. In the old Bloomsbury tradition of disrespect for the conventional, he wryly commented, "I am not sure which of us is being made an honest woman--the Old Lady [as the Bank of England is popularly known] or me." The worry was groundless. Keynes's old enemies had by now capitulated to one of their country's supreme intellects. Overstrained by wartime exertion, Keynes died in 1946.
The continuing influence of Keynes was exemplified by publication of the Collected Writings of John Maynard Keynes, 29 vol. (1971-79), by the Royal Economic Society, which includes materials not previously published. (R.L./Ed.)
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