Keynes, J. M. (1883–1946)

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KEYNES, J. M. (1883–1946)


, economist.

With the publication of The General Theory of Employment, Interest, and Money in 1936, John Maynard Keynes (1883–1946) created a new paradigm for economic thought, establishing the basis for what would later be called macroeconomics. Keynes's academic base was at Cambridge University, where he was a Fellow of King's College, but he spent the years of both world wars working for the British government at the Treasury. In 1944 he played a major role at the Bretton Woods Conference, which led to the creation of the International Monetary Fund and the World Bank.


In The Economic Consequences of the Peace, written in 1919, after he had resigned from the British delegation at the Versailles Conference, Keynes denounced the punitive decision to make Germany pay for the war, arguing that the terms would prove impossible to fulfill. More important for his development as an economist, he also developed the thesis that the years of World War I had ended an epoch in human history and opened a new age. Prior to 1914, Keynes argued, "Europe was so organized socially and economically as to secure the maximum accumulation of capital" (Keynes, vol. 2, p. 11). The pre-1914 society had absorbed the lesson taught by Adam Smith (1723–1790): savings and investment had taken precedence over wasteful consumption. According to Keynes, however, the war had undermined the psychological basis of that society in two ways. First, it had changed the balance between classes. The high degree of inequality, previously justified in the name of future consumption, was not natural. The laboring classes had now paid for a new citizenship status by accepting mass conscription in the service of a nation whose people had common goals, and the war had shown that new levels of expenditure were possible. Second, the new circumstances of the postwar years were not propitious for the long view. What appeared, in retrospect at least, to have been a high degree of confidence about the continuity of the existing order had played a crucial role in capital accumulation, the distinguishing feature of industrial society. Inequality had made that accumulation possible, but capital accumulation was precisely what had justified the inequality.

In the postwar world a new political situation existed: the laboring classes would not be willing to live at such a low standard of living, and the capitalist classes, fearing for the future, might undermine their privileged role by indulging in high levels of consumption rather than investing. Adam Smith had held out a promise of well-being for all—cheapness and plenty, as he put it. John Stuart Mill (1806–1873) had worried that an eternally class-divided commercial society would not be politically viable. Karl Marx (1818–1883) had condemned the capitalist system, predicting that it was not economically viable. Keynes rejected Marx's analysis and his conclusions, but from 1919 onward his central concern was that liberalism would not survive unless capitalism delivered the goods.


Keynes was born into the world of those who benefited from English liberalism. Both his parents were significant figures in Cambridge. He was educated at Eton, one of the most exclusive and well-connected schools in the country, and as a distinguished student in both classics and mathematics went from there to King's College at Cambridge, again a center of prestige and privilege. Before the appearance of the Economic Consequences of the Peace, Keynes had published A Treatise on Probability in 1921, but had yet to make his mark on economic thought. The younger Keynes's intellectual world was shaped by the philosophy of G. E. Moore (1873–1958), by his membership in the Apostles, a Cambridge club that was an elite within the elite, and by the "Bloomsbury" group, the non-Cambridge extension of the Apostles, a group that included Lytton Strachey and Virginia Stephen, who became better known later as Virginia Woolf. Keynes has been seen as the last of the great English liberals, but after 1914 certainly, he did not share the nineteenth-century belief in progress. He was a liberal who maintained Edmund Burke's conservative belief in civilization. Keynes did not see democracy as an end in itself. He was an elitist who continued to believe that the right solution to the economic questions of the day would "involve intellectual and scientific elements which must be above the heads of the vast mass of more or less illiterate voters" (quoted in Skidelsky, vol. 2, p. 224).

"Economics," Keynes once noted, "is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world" (quoted in Skidelsky, vol. 2, p. 619). While finding his way to The General Theory, Keynes published a major study of money (A Treatise on Money, 1930), numerous essays, and lengthy newspaper articles. He also worked on or made appearances before committees, participated in workshops for the Liberal Party, and taught at Cambridge. He engaged in endless debate with colleagues, including his younger colleagues Richard Kahn and Joan Robinson, who, along with Piero Sraffa, Austin Robinson, and James Meade, formed the "circus," an ongoing seminar that served as a sounding board for Keynes's ideas and was the source of several significant contributions to the General Theory.


In Wealth of Nations (1776), Adam Smith had assumed that "what is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too." That is, saving is turned into investment, understood as the purchase of raw materials, machinery, and labor for future production. Classical theory, as Keynes termed the prevalent economic assumptions that he had begun to question, relied on what is known as "Say's Law." In the formulation provided by Alfred Marshall (1842–1924), "a man purchases labour and commodities with that portion of his income which he saves just as much as he does with that which he is said to spend" (Keynes quoted in Skidelsky, vol. 2, p. 550). Recognizing that savers and investors are in practice frequently different people, the theory posited the rate of interest as the equilibrator between savings and investment. But as Keynes was ultimately to recognize, the rate of interest is merely the price for money itself. Furthermore, there is no market for savings and investment. Technically, after the fact, what is invested must be equal to what is saved, but the key issue is not what is actually saved and invested but what levels of savings and investment the community desires to achieve.

Keynes was particularly vexed by arguments that implied that a society with unemployed resources could not be more productive. To say, in a situation in which there were unemployed resources, that a society could not afford more consumption was "utterly imbecile": it is "with the unemployed men and the unemployed plant, and with nothing else" (quoted in Skidelsky, vol. 2, p. 298) that output is increased. In the Treatise on Money, Keynes underlines this point by making the crucial distinction between saving and investment: "mere abstinence is not enough.… It is enterprise which builds.… If enterprise is afoot, wealth accumulates whatever may be happening to thrift; and if enterprise is asleep, wealth decays, whatever thrift may be doing" (Keynes, vol. 6, p. 132). The question, then, is what engine drives investment understood as enterprise. The answer, Keynes recognized, is not thrift but profit. This point was well understood by Smith but was obscured in the nineteenth century by the ideologically driven desire to equate profit with the natural and deserved return to abstinence or thrift.

To be successful, economic policy would have to create an adequate inducement to invest. Attempts to save for the future would be futile unless they were equivalent to investing for the future by actually producing something. Attempts to save without producing would generate unemployment. By 1932 Keynes had seen that a full employment equilibrium, where the desire for investment equaled the desire for savings, was in fact a special case. What was required was a general theory to explain the actual existing level of employment.

In the General Theory, Keynes developed a concept of aggregate demand, which includes both consumption demand and investment demand for past production. The key variable is investment demand. Investment demand ultimately determines the major variations in production and thus in income, and it is income levels that determine both consumption and savings. Thus savings are a consequence of investment, rather than the reverse. An attempt by the society to save more than entrepreneurs wish to invest will reduce income and eventually bring savings down to the same level as investment. The problem is that such an equilibrium might be achieved at a very low level of output and thus of employment. The point, as James Meade noted, was to get economic thinking to adapt the model in which "the dog called investment wagged the tail labeled savings" (Clarke, p. 245).

Put simply, the main argument of the General Theory was that entrepreneurs were failing to invest sufficiently. The main reason for this was uncertainty about the profitability of investment. Entrepreneurs wishing to borrow funds would need to pay interest rates that covered the lenders' anxieties about the future and would in addition face the risk of not meeting expected rates of returns. If such a chronic state of inadequate investment existed, governments would have to protect their societies, and their important values, by fostering investment. What was at stake, as Keynes concluded, was the maintenance of the general traditions of society. Those traditions included "a wide field for the exercise of private initiative and responsibility" (Keynes, vol. 7, p. 380). Individualism offered the efficiency of decentralization and the play of self-interest and "individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty … of personal choice … of the variety of life … the loss of which is the greatest of all the losses of the homogeneous or totalitarian state" (Keynes, vol. 7. p. 380).


Looking outward from Britain in the conclusion to the General Theory, Keynes touched on the growing threats to liberty and the prospect of war. As he notes, war has several causes, including economic causes. Even the idealized nineteenth-century international economy had produced a competitive struggle for markets because there were no other means to "mitigate economic distress at home" (Keynes, vol. 7, p. 382). A peaceful international division of labor might come into existence if nations could first provide for full employment by domestic policies. But by the time Keynes wrote these words, it was too late. Not many influential people were listening and the die had been cast long before. In the 1930s Keynes knew that the United States was the key to the survival of capitalism and of liberalism. Ironically, it required the outbreak of global war to engage the United States in the global defense of liberalism.

Robert Skidelsky, the author of a three-volume biography of Keynes, calls Keynes "the Churchill of war finance and post-war financial planning" (vol. 3, p. 1). He became the key figure, negotiating the complex issues of U.S. war loans to Britain, attempting to avoid British postwar financial weakness and dependency on the United States, working to institute a postwar international settlement that would avoid the punitive and politically disastrous perspective that had dominated at Versailles following World War I. In 1942, on the recommendation of Prime Minister Winston Churchill, Keynes was made 1st Baron Keynes of Tilton.

Politically, in the 1930s Keynes was a voice in the wilderness, but the perspective of the General Theory swept the younger generation of economists. It was rapidly incorporated into mainstream academic thought in the versions developed by John Hicks and Paul Samuelson. Keynesianism focused on the concept of effective demand and the resulting equilibrium models of demand management. Roy Harrod extended the new concepts into a model of long-run growth. Joan Robinson attempted to maintain a more radical view of Keynes as a skeptic concerning the equilibrium between demand and supply and insisted that economists should continue the task of generalizing the General Theory to explain the more common world of nonequilibrium situations.

See alsoInflation .


Primary Sources

Keynes, John Maynard. The Collected Writings of John Maynard Keynes. 30 vols. Cambridge, U.K., 1971–1989.

Secondary Sources

Clarke, Peter. The Keynesian Revolution in the Making, 1924–1936. Oxford, U.K., 1988.

Krugman, Paul. Development, Geography, and Economic Theory. Cambridge, Mass., 1995.

Skidelsky, Robert. John Maynard Keynes: A Biography. 3 vols. Vol. 1: Hopes Betrayed 1883–1920; Vol. 2: The Economist as Saviour 1920–1937; Vol. 3: Fighting for Britain, 1937–1946. London, 1983–2000.

Solow, Robert. "Towards a Macroeconomics of the Medium Run." Journal of Economic Perspectives 14, no. 1 (winter 2000): 151–158.

Turner, Marjorie S. Joan Robinson and the Americans. Armonk, N.Y., 1989.

John Hutcheson