John Maynard Keynes, 1883-1946.
British economist John Maynard Keynes is doubtlessly one the most important figures in the entire history of economics. Keynes revolutionized economics with his classic book, The General Theory of Employment, Interest and Money (1936). This is generally regarded as probably the most influential social science treatise of the 20th Century, in that it quickly and permanently changed the way the world looked at the economy and the role of government in society. No other single book, before or since, has had quite such an impact.
Maynard (as he was commonly called) was the eldest son of the Cambridge economist and logician John Neville Keynes. An enormous influence, Keynes's father would remain a touchstone and frequent consultant during Maynard's future life and career. A sickly child, Maynard was raised in a solidly Victorian household in Cambridge. W.E. Johnson, Henry Sidgwick and Alfred Marshall were frequent visitors to the Keynes' home. Young Maynard showed an early aptitude for mathematics, and won a scholarship to the prestigious Eton school in 1897, where he quickly shone. Keynes won numerous prizes at Eton, both in mathematics and classics, while maintaining a highly active participation in the school's committees and clubs. Keynes's ability to juggle both high degrees of work and high degrees of extra-curricular play, and make it all seem effortless and easy, would be a feature of his life.
Maynard enrolled at King's College Cambridge in 1902, which he took to like a fish in water. In his second term, Keynes was recruited into the "Apostles", a secretive, exclusive student conversation society. Through the Apostles, Keynes formed life-long friendships with future literary men Lytton Strachey and Leonard Woolf, and came to know hefty Cambridge philosophers like Bertrand Russell, Alfred North Whitehead and G.E. Moore. In his later 1938 memoir, "My Early Beliefs", Keynes would credit the influence of the utilitarian Moore in constructing his philosophical and moral outlook, as well as sparking his interest in probability theory. Keynes was active in other areas - he became a member of the Cambridge Union debating society, eventually rising to the position of president. The former president, Edwin Montagu, would become Keynes's life-long political mentor. Montagu introduced him to the political Liberal Club and had Keynes actively campaigning for the Liberal Party during the elections of 1906. Keynes may have had political career in mind when he composed a prize essay on Edmund Burke in 1904.
Keynes sat for the (Mathematical) Tripos examination in May, 1905, coming out as twelfth wrangler (a middling score, but better than expected, given his ample distractions). Uncertain what to do next, Keynes began studying economics in the Summer of 1905, under the tutelage of Alfred Marshall, half in mind to complete an economics degree. Nonetheless, wary of being buried at Cambridge, and lured by London friends, John Maynard Keynes decided to join the British civil service. Keynes undertook the civil service examination in August 1906, but came only second, missing out on the prime spot at the Treasury, and consoling himself with a position at the India Office, under his old political mentor Edwin Montagu.
Keynes moved to London in October 1906 to begin work as a junior clerk in the India Office. Although Marshall had provided him the basic economic tools, it was his practical work at the India Office, much of it examining financial reports, that began to nudge Keynes in that direction. Handling large amounts of data led Keynes to direct some thoughts on the stubborn problem of index numbers. Nonetheless, the light duties allowed Keynes to focus on writing a dissertation on probability theory, a subject brought out by Moore's philosophy. Gradually finding Whitehall tiresome, Keynes began looking for opportunities to return to Cambridge and resuming the "student life". Although Keynes failed to win a fellowship to a college, in June 1908, Marshall (then in the process of passing his professorial chair to Arthur Cecil Pigou) secured for Keynes a position as an informal lecturer in economics at Cambridge. Thus, perhaps aptly, Keynes's entry into economics came not out of any prior passion (he still remained attached to philosophy and probability), but simply because he needed a job. After a term of preparation, Keynes began lecturing in January 1909. Later that year, Keynes was finally elected fellow of King's College, won the Adam Smith Prize (with an essay on index numbers) and published his first major economics article (on the Indian economy). Keynes's lectured primarily on money and banking, although in 1910 he would also take on the duties of Pigou's principles class. A tireless and popular lecturer, Keynes was upgraded to Girdlers lecturer at Cambridge in 1911, and by the end of the year was appointed editor of the RES's The Economic Journal, taking over from the retiring Francis Ysidro Edgeworth on December 31, 1911.
At this stage, Keynes's economics was largely conventional Marshallian Neoclassicism. Politically attached to the Liberal Party since his undergraduate days, Keynes was thoroughly orthodox in his ideas and policy positions - the gold standard (initially), the quantity theory, laissez faire, free trade, etc. - even more conservative than Pigou, who was then pushing economics into the socially activist realm via welfare theory. On the other hand, Keynes was a bit of a novice - disinterested, Keynes had read very little on the topic outside of Marshall's Principles, before he began teaching it. Keynes's education as an economist really began while editor of the Economic Journal, when he was forced to read the economics papers falling on his desk, and acquiring in that unique way a deeper and wider knowledge of the field..
Around the same time, Keynes found entry into a new social life in London - the "Bloomsbury Group", a set of non-conformist and iconoclastic upper class artists, writers and aesthetes that emerged around this time in London. It had started back in 1905, with weekly dinners hosted by the children of the late Sir Leslie Stephen in their grand home on Gordon Square, to which Thoby Stephen (the eldest) invited fellow Cambridge students (Clive Bell, Lytton Strachey, Leonard Woolf) visiting London. Although Thoby died tragically in 1906, the Cambridge men continued visiting, and the dinners continued, centered now around the Stephen sisters (novelist Virginia Woolf and painter Veronica Bell), and gradually evolved into a tight-knit intellectual discussion group. Despite being in London during this early period and on friendly terms with most of them, Keynes was not one of the original members - his entry into the Bloomsbury group only came later, enabled by the painter Duncan Grant, Keynes's homosexual partner at the time. In 1909, Keynes had set up Grant with a studio nearby at Fitzroy Square, and was shortly after drafted into the group. Although their personal relationship was fizzling out, Grant cleared the way for Keynes's acceptance. By the time the Bloosmbury group congealed c.1911, Keynes was one of its core members. The Bloomsbury group in London formed the center of Keynes's private and social life thereafter. With the exception of Gerald Shove (who overlapped both worlds), Keynes kept his Bloomsbury life strictly separate from his professional life as a Cambridge don or Treasury official. Social/intellectual life in Cambridge was changing anyway, with the arrival of the Fabians and the eclipse of the Apostles. Much of the male core of Bloomsbury - Keynes, Strachey, Woolf, Desmond McCarthy and E.M. Foster- had been Cambridge Apostles. In a sense, Bloomsbury was something of a Cambridge-in-exile for the old Apostles, and better reproduced the atmosphere Keynes had relished as a student than current Cambridge did.
At the time, Keynes was working on his probability theory. But he interrupted this to put out his first book, Indian currency and finance (1913). This was written in a rush to respond to the "Indian silver scandal" that had broken out in late 1912. In a nutshell, the British government in India was in need of making large silver purchases in 1912, but were afraid speculators might raise the price against it; so they avoided the standard channels for official bullion purchases, and had the private banking firm of Samuel Montagu & Co. discretely buy some £5 million of silver on their behalf. When this was revealed in late 1912, it smelled of corruption, and the British press had a field day - Sir Stanley Samuel, the leading partner at Samuel Montagu & Co. was the elder brother of Herbert Samuel, a cabinet minister in Lord Asquith's Liberal government, who had been implicated earlier that summer in the separate "Marconi scandal", and both were cousins of Edwin Montagu at the India Office. The press tied the scandals together, with anti-Semitic overtones, insinuating a "Jewish conspiracy" was afoot in the circles of government and high finance. Keynes's 1913 book was designed to show the wisdom of the silver purchase scheme and defend the government (and his old mentor). Keynes's deployed the intimate practical knowledge of financial matters acquired in the India Office years. The main outcome of the affair is that Keynes was sought out by a grateful Asquith government. Keynes was appointed to the Royal Commission on Indian Currency and Finance, which met over the summer of 1913, to consider whether India should convert to a full gold standard. Keynes was against it, and favored maintaining the current gold-silver exchange system. The commission dragged on until early 1914. Its report, delivered in March 1914, contained an annex written by Keynes, recommended the establishment of an India state bank (it did not come to be).
On August 2, 1914, two days before World War I broke out, at the pleading of his old commission friends, Keynes rushed to London to advise Lloyd George, the Chancellor of the Exchequer, on a mounting banking crisis. The City had gone into a panic and a credit crunch was developing. Lloyd George was contemplating suspending convertibility, effectively taking Britain off the gold standard, to maintain the Bank of England's gold reserves. Keynes quickly apprised that the situation was not a genuine crisis, but a temporary panic, brought about by fear that the outbreak of war might bring the international payments system to a sudden stop, and prevent foreign debtors from remitting payments to London banks. Keynes dissuaded suspension and advised the Chancellor to allow the Bank of England to use its gold reserves to maintain the international payments, while restricting payments internally. Banks caught temporarily short of funds could be bolstered by a government guarantee, and specially-issued Treasury notes. The advice was largely followed, the panic subsided.
Keynes brief experience as high government advisor whetted his appetite. Keynes returned to Cambridge for the fall of 1914, but it was largely depleted of students, many of them having enlisted in the British army. Keynes offered his services to the government, and in January 6, 1915, Keynes took leave of Cambridge and entered the Treasury, to assist with the financing of the British war economy. His initial post was as assistant to the economic advisor Sir George Paish. But Lloyd George was losing confidence in Paish. Not wishing to be tied to a sinking ship, Keynes ditched Paish and made himself independently available, authoring memoranda and working on committees on his own account, and positioning himself as an indispensable expert on inter-allied finance. After Lloyd George moved on to the ministry of munitions in May 1915, Keynes became particularly close his successor, Reginald McKenna, and by February 1916, Keynes was appointed head of A Division, basically in charge of anything to do with external finance, and had several fingers in other pies. The external finance question was a vital one - Britain was not only paying for its own huge war effort, but also financially subsidizing the efforts of allies France, Russia, Italy, Belgium and Serbia. As the war dragged on, this became more acute, and British government had to borrow immense sums from private American banks, like J.P. Morgan, to continue. But satisfying American lenders meant keeping the pound on the gold standard (for exchange rate stability) at all costs. That meant British industries had to continue exporting as much as possible to bring in gold and foreign exchange and keep the pound from collapsing. The McKenna-Keynes position brought them into conflict with Lloyd George (now PM) who wanted more and more resources diverted away from domestic industry and towards the war effort, and dismissed concerns about a pound depreciation, confident that the American banks would continue lending out of their own interest. Keynes annoyed Lloyd George with his opposition to the new military conscription law (instituted May 1916), on the grounds that it hampered the British export industries. It was enough for Lloyd George to personally strike Keynes name out of the honors list in February 1917 (although Keynes eventually got his Companion of Bath honor three months later, when the Treasury refused to recommend any other name).
The external finance question had reached crisis proportions in late 1916, when the US Federal Reserve instructed banks to curtail foreign lending. At Keynes's urging, the Treasury came up with all sorts of schemes to keep war spending under control, raise new revenues, and lean on Allies to curb their demands. The pressure was finally relieved when the United States entered the war in April 1917. This gave the assurance that funding would now be guaranteed - at least in the long-term. In the short-term, the British had to contend that private Americans savings were being diverted away from London to fund America's own wartime borrowing. The US Treasury was also unwilling to release government money to fund Britain's debt to Morgan and private banks, preferring to tie them instead to purchases of US goods, like wheat. By the late summer, the foreign funding crisis was renewed. Keynes undertook his first trip to the United States in early September 1917, to negotiate directly with the US Treasury on the terms for American loans. He returned to England in late October. Although the finance emergency was over, difficulties remained for Keynes to attend to - notably the inter-allied partition of funding. The US had agreed to subsidize the Allies' purchases of American goods, but the rest of their borrowing needs were still sent to London. Through early 1918, Keynes tried to negotiate with the Americans to take over a greater share of the funding of Allies, without however losing British control of it.
The other item on the agenda, as the war was approaching its close with the armistice of November 11, 1918, was German reparations. Keynes's Treasury memoranda insisted that reparations demands should be tailored to Germany's capacity to pay. In January 1919, Keynes went to France as part of the British delegation to the Versailles Peace Conference. Keynes was the official representative of the British Treasury at Versailles and sat on the Supreme Economic Council as the deputy of the Chancellor of the Exchequer. His negotiations with German representatives for food relief in early 1919 is captured in his "Dr. Melchior" memoir. Keynes was appalled at the vindictive nature of the peace settlement, and was particularly opposed to the devastating consequences of the heavy reparations payments imposed on Germany. Exhausted and disgusted, Keynes resigned from the conference and the Treasury on June 7, 1919. The treaty was signed a few weeks later (June 28), by which time Keynes was already back in England.
Keynes promptly set about writing his famous Economic Consequences of the Peace (Dec, 1919), denouncing the Treaty of Versailles. It became an international best-seller and catapulted his name into the public spotlight. Keynes condemned the Versailles terms for knocking out the central mast of the continental European economy - Germany being intimately intertwined by trade as both the major customer and supplier of neighboring countries and beyond, her economic ruin would impoverish Europe altogether. He blamed the "Carthaginian peace" on the short-sightedness of the statesmen and delegates at Versailles, and his book is replete with excoriating sketches of their personalities. He also articulated his worries about the massive war debt overhang of European governments crimping post-war recovery, and urged a "general bonfire" of these "paper shackles", i.e. the cancellation of inter-Allied debt. Keynes ended his book with a prophetic warning that if the Allies insist on the impoverishment of Germany, "vengeance, I dare predict, will not limp" (p.268) and ominously anticipates a future European war "before which the horrors of the late German war will fade into nothing".
Two years later, in his Revision of the Treaty (1922), Keynes crowed that public opinion had finally come around to him, and proposed a new plan to massively reduce German reparations bill (from 138 billion gold marks to 36 billion, to be paid in installments of 1,260 million per year for thirty years, paid principally to France and Belgium). Keynes again urged both Britain and the US to waive their share of German reparations, and again went on to urge them to unilaterally cancel the debts owed them by other European governments.
In the interlude, Keynes finally got around to publishing his Treatise on Probability (1921). Although it had been practically finished by 1913, Keynes had set it aside during the Indian commission, and then the war intervened, only allowing him to return to it now. In the treatise, Keynes dismantled the classical theory of probability and launched what has since become known as the "logical-relationist" theory of probability, connecting probability to information. Keynes's work caused something of a stir in philosophical circles. It aroused the young Cantabrigian logician, Frank P. Ramsey, to outline his own "subjective" theory of probability.
In 1923, Keynes published his Tract on Monetary Reform (1923), which was his contribution to the Cambridge cash-balance theory of money, then being developed by other Cambridge economists, Alfred Marshall, Arthur C. Pigou and Dennis H. Robertson. It was also in a 1923 newspaper article that he first proposed his "normal backwardation" theory of hedging and speculation.
Throughout the 1920s, Keynes remained active in public policy debates, channeled mainly through his numerous articles in The Nation & Atheneum, a Liberal-Labour weekly magazine which he helped purchase in 1923 (it was later absorbed by the New Statesman in 1931). The best of Keynes public policy writings was collected in his Essays in Persuasion (1931). Keynes was on the forefront of the battle against returning Britain to the gold standard on a pre-war parity (e.g. "Economic Consequences of Mr. Churchill", 1925). This led him to author two famous pieces in condemnation of laissez-faire economic policy (1925,1926). In 1929, he wrote an election pamphlet with Hubert D. Henderson advocating the use of public works to reduce unemployment and condemning the Treasury's fear of "budget deficits". In 1929, Keynes also entered into a small debate with Bertil Ohlin and Jacques Rueff on German reparations problem.
Somewhere in all this, John Maynard Keynes found time to marry the Russian ballerina Lydia Lopokova in 1925.
In 1930, John Maynard Keynes brought out his heavy, two-volume Treatise on Money, which effectively set out his Wicksellian theory of the credit cycle. In it, the rudiments of a liquidity preference theory of interest are laid out and Keynes believed it would be his magnum opus. His bubble was soon pricked. Friedrich von Hayek reviewed the Treatise so harshly that Keynes decided to set Sraffa to review (and condemn no less harshly) Heyek's own competing work. The Keynes-Hayek conflict was but one battle in the Cambridge-L.S.E. war for supremacy in British economics.
The Treatise also led to the formation of a reading group, known as "the Circus", composed of the young Cambridge economists Richard Kahn, Joan Robinson, Austin Robinson, James Meade and Piero Sraffa. Kahn dutifully delivered reports of the Circus's discussions to Keynes, who subsequently began revising his ideas. One resulting criticism of the Treatise was that it failed to provide a theory of the determination of output and employment as a whole -- a particular pertinent question given the increasing amount of unemployment at the time.
The key was provided to Keynes in a short article by Richard Kahn (1931) -- the theory of the income-expenditure multiplier -- which was to be the basis of his future revolution. Already in a few 1933 articles and pamphlets, Keynes began announcing the new idea, and began submitting the drafts of his new book to the Circus and several fellow economists for review and dissection. His ideas on the marginal efficiency of investment took a little longer to work out.
In early 1936, the new book finally came out with the pretentious title of The General Theory of Employment, Interest and Money. Heavily anticipated, cheaply priced and propitiously timed for a world caught in the grips of the Great Depression, the General Theory made a splash in both academic and political circles. As one American politician put it, everyone always knew that the economic policies recommended by the Neoclassical economists were bad policies; but now they realized it was also bad economics.
With the General Theory, as it became known, Keynes sought to develop a theory that could explain the determination of aggregate output - and as a consequence, employment. He posited that the determining factor was aggregate demand. Among the revolutionary concepts initiated by Keynes was the concept of a demand-determined equilibrium wherein unemployment is possible, the ineffectiveness of price flexibility to cure unemployment, a unique theory of money based on "liquidity preference", the introduction of radical uncertainty and expectations, the marginal efficiency of investment schedule breaking Say's Law (and thus reversing the savings-investment causation), the possibility of using government fiscal and monetary policy to help eliminate recessions and control economic booms. Indeed, with this book, he almost single-handedly constructed the fundamental relationships and ideas behind what became known as "macroeconomics".
The Keynesian Revolution split the economics world in two generations: the young climbed over themselves to line up behind Keynes; the old rallied to condemn it. John Maynard Keynes responded to his most able critics -- Jacob Viner, Dennis Robertson and Bertil Ohlin -- in a series of 1937 articles, which helped him to expand upon some key aspects of his theory. A densely-written and difficult book, it was followed up immediately by elucidatory publications by the members of Keynes's Circus, such as Joan Robinson, and young economists elsewhere in Britain, such as Roy Harrod and Abba Lerner.
Of particular importance was the 1937 article by John Hicks which introduced the "IS-LM" representation of Keynes's theory that launched the "Neoclassical-Keynesian Synthesis" that was to pervade in America (and elsewhere) as the dominant form of macroeconomics in the post-war era, particularly in the 1950s and 1960s. However, the so-called "Cambridge Keynesians" -- which included veterans of Keynes's Circus -- and their American cousins, the Post-Keynesian school, would dispute the "Synthesis" twist on the Keynesian Revolution. They posited up their own versions of the theory, which, they argued, was more faithful to Keynes's original message.
Keynes's health collapsed circa 1938, and, consequently, Keynes largely missed out participating in the debate which was then raging on the interpretation of his own grand work. When World War II broke out in earnest, Keynes re-emerged and published his 1940 pamphlet, How to Pay for the War. In that small tract, he identified the "inflationary gap" created by resource constraints during the war effort, and promoted the device of "compulsory saving" and rationing to prevent price inflation, proposals that were adopted in 1941. The 1940 piece is notable for it provided the seeds of a theory of inflation to complement the "depression economics" of the General Theory.
During the course of the war, Keynes was at the Treasury and set himself to think about the post-war economic order. In 1938, Keynes had warmed up to Benjamin Graham's proposals for an international "commodity-reserve" currency to replace the defunct Gold Standard. In 1943, Keynes forged his ideas for "Bancor", a proposal for an international clearing union. In consultation with the Americans, Keynes eventually relented on his idea and accepted the American "White Plan" for an international equalization "fund" held in the currencies of the participating nations. However, several essential aspects of Keynes's clearing union idea were incorporated.
In 1944, Keynes led the British delegation to the international conference in Bretton Woods where the details of the system were hammered out. The American "White Plan" was accepted, countries would retain fixed exchange rates against the dollar, while the dollar itself would be matched to gold. Two institutions, the International Monetary Fund (IMF) and the World Bank (IBRD), were created to oversee the new international monetary system.
All these exhausting official missions and work taxed Keynes's already precarious health. The ailing Keynes undertook one last strenuous journey to America on behalf of the Attlee Labour government in September 1945, to negotiate a $5 billion American grant to war-torn Great Britain. But Keynes met resistance from American officials, and only managed to arrange a guarantee of an American loan of $3.75 billion, but with 2% interest strings attached on trade concessions. He returned to England by sea (his heart unable to withstand the conditions of a return flight) to push for the ratification of the loan's terms by the British parliament. Keynes died on April 22, 1946, two months before the loan was ratified by Congress.
[The HET Website's Keynesian Revolution pages include an Essay on Keynes's General Theory and the post-1936 developments in the Neo-Keynesian World, Keynesian Growth Theory, Keynesian Business Cycle Theory.]
Major Works of John Maynard Keynes
[Keynes was a prolific writer. His wrote numerous anonymous and signed articles for Nation & Atheneum (N&A), the Manchester Guardian (MG), the Manchester Guardian Commercial, Reconstruction in Europe (MGCRE), The Listener, The New Republic, The New Statesman and Nation (NSN) and The Times, many of which are not yet included in the following list]
Resources on J.M. Keynes
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