John Maynard KEYNES

1883-1946

The Keynesian Revolution1

 

 

Now 'in the long run' this [the quantity theory of money] is probably true ... . But this “long run” is a misleading guide to current affairs. “In the long run” we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

 

A Tract on Monetary Reform

Chapter 3 (1923)

 

This quote barely hints at why the theories of John Maynard Keynes chaffed the nerves of his classically-oriented colleagues. Keynes, in both his private life and in his professional work, delighted in debunking the conventional wisdom of his day.

The financier Bernard Baruch once squelched a renowned but argumentative economist with the joust, “If you're so smart, why aren't you rich?” Keynes would have been unembarrassed by such a question. A keen observer of human affairs, he amassed a private fortune by speculating in commodities, foreign currencies, and stock market securities.

Keynes was equally successful in the social, political, and academic arenas. He married a leading Russian ballerina and was among the inner circle of the Bloomsbury group, England's foremost intellectual set. He preferred to be called Maynard (not John), and served as a treasury official and as chief economics representative for the British government in important meetings following both World Wars. However, he will be remembered longest as a leading figure in economics. Only the works of Smith and Marx have rivaled Keynesian theories and policies in their impact on economic thought and practice in the twentieth century.1

Much of modern macroeconomics derives from Keynes’ 1936 work, The General Theory of Employment, Interest and Money, which summarized his reaction to contradictions between classical economic theory and the worldwide “Great Depression.” His General Theory challenged the conventional view that aggregate equilibrium is synonymous with full employment. Keynes was dismayed by persistent and high rates of unemployment throughout market-oriented economies, and sought to reconstruct theory to explain this phenomenon. He concluded that, far from being inconsistent with aggregate equilibrium, unemployment might in fact be a consequence of it.

In short, Keynes argued that a capitalist economy might experience high unemployment as a long term situation unless some external force were used to reduce it. For practical and political reasons, he thought that this external force must come from government and should take the form of large expenditures on public works projects capable of mobilizing idle manpower. Therefore, Keynes turned away from a long tradition in economic thought of “laissez-faire,” which discouraged government intervention in the economy.

There is generally a long lag between ideas and actions. Although some of Keynes' ideas were lightly tested shortly after World War II in the United States, the Kennedy administration ushered in the first period of intense experimentation in Keynesian economic policies in the early 1960s. Keynesian theory cut across party lines and dominated policymaking until President Reagan revived the policies of classical supply-side economics. Two decades of activist Keynesian economic policies in this country yielded mixed results, and Keynesian economics came under increasing fire as the specter of deep depression gave way to persistent inflation in the 1980s. However, the prosperity of the 1990s seemed to add new luster to the Keynesian legacy, in the eyes of many modern Keynesians.

Whether Keynes' massive reconstruction of economic theory was basically correct and will endure is debatable, but critics and proponents agree that Keynes made many valuable specific contributions. There is little doubt that much of Keynesian economics has proven extremely durable, and forever will influence our views of how market economies work.

Footnote:

 

1  How long it takes chronologically before the short run is swamped by long-run adjustments is the crux of continuing debates about the implications of theory for policy. Even much of the “modern monetarism” of Milton Friedman is arguably based in Keynesian theory in its focus on the importance of aggregate demand as a determinant of out put in the short run.  See the Quotes on this site for some discussion.

More websites on Keynes:

John Maynard Keynes and The Keynesian Revolution at the History of Economic Thought site

Brad DeLong's site on Keynes

Author: Ralph Byrns

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