John Maynard Keynes

Published: May 2013

John Maynard Keynes, a British economist, was so important to the theory and practice of the economics that an entire school of modern thought bears his name. His book, ‘The General Theory of Employment, Interest and Money’, is often viewed as the foundation of modern macroeconomics and many have hailed him as the most influential economist of the 20th Century.

His theories caused great upheaval in the world of economics, dubbed the Keynesian Revolution, and his economic policies dominated during the latter part of the Great Depression, World War II and the post-war economic expansion (1945–1973). The rise of Keynesianism marked the end of laissez-faire economics, which is based on the belief that markets and the private sector could operate efficiently without state intervention.

However, Keynesianism fell out of favour in the 1970s, when many Western economies were hit by stagflation – which is when both unemployment and inflation increase at the same time – and the deteriorating economic conditions after the 1973 oil crisis. Doubtful about the ability of governments to regulate the business cycle with fiscal policy, Milton Friedman led the attack against Keynesian economic policies, alongside monetarists and neoclassicalists such as those trained at the Chicago school of economics.

Today, the global financial crisis has stoked a Keynesianism resurgence. Most countries, including the US, the UK and China, undertook government interventionist policies in response to the crisis. While the US and UK used their stimulus packages to bail out the banks, China pledged a similar amount as the US ($586 billion) in key areas such as housing, rural infrastructure, transportation, health and education, environment and industry.

These stimulus plans have been credited for contributing to a better-than-expected economic outlook by both the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF).

As a result, Keynesianism has been rehabilitated in the eyes of economists worldwide. In March 2008, macroeconomist James K. Galbraith disputed the consensus of monetarist economics and argued that Keynesian economics were “far more relevant” for tackling the emerging crises.

Joseph Stiglitz, Robert Reich, George Akerlof and Brad DeLong are among other distinguished economists that have argued for Keynesian government intervention to mitigate the financial crisis. By the end of December 2008, the Financial Times reported that “the sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades.”

Seminal works

  • Indian Currency and Finance (1913)

    Keynes outlines how changing from a silver to a gold standard impacted the Indian economy, defined governmental policies regarding reserves and cash balances, and described the workings of India’s monetary system. It contains a description of the ‘gold exchange standard’.

  • The Economic Consequences of the Peace (1919)

    In this book Keynes criticises the exorbitant war reparations demanded from a defeated Germany and prophetically predicted that it would foster a desire for revenge among Germans. This best-selling book made him world famous.

  • A Tract on Monetary Reform (1923)

    Keynes recommends the depreciation of sterling to boost jobs by making British exports more affordable. From 1924 he also advocated a fiscal response, where the government could create jobs by spending on public works and called for an end to the gold standard.

  • A Treatise on Money (1930)

    Keynes draws a distinction between savings and investment, arguing that where saving exceeded investment, recession would occur. Thus, he reasoned that during a depression the best course of action would be to promote spending and to discourage saving.

  • The General Theory of Employment, Interest and Money (1936)

    Keynes develops interventionist policies for tackling a recession. This book challenged the earlier neoclassical economic paradigm, which had held that the market would naturally establish full employment equilibrium, provided it was unfettered by government interference.

  • How to Pay for the War (1940)

    Keynes argues that the war effort should be largely financed by higher taxation and especially by compulsory saving (essentially workers lending money to the government), rather than deficit spending, in order to avoid inflation.


Keynes was born on 5th June 1883 in Cambridge, England to an upper middle class family. His father, John Neville Keynes, was an economist and a lecturer in moral sciences at the University of Cambridge. The younger Keynes won a scholarship to Eton College in 1897, where he studied mathematics, classics and history.

In 1902 Keynes left Eton for King’s College, Cambridge after receiving a scholarship to study mathematics under economists Alfred Marshall and Arthur Pigou, whose scholarship on the quantity theory of money led to Keynes’s Tract on Monetary Reform many years later. Keynes was also interested in philosophy, especially the ethical system of G. E. Moore.

Keynes joined the Civil Service in October 1906, as a clerk in the India Office. In 1908 he resigned his position to return to Cambridge and work on probability theory, at first privately funded only by two dons at the university – his father and Pigou. In 1909 Keynes published his first professional economics article in the Economics Journal, about the effect of a recent global economic downturn on India. That same year, Keynes accepted a lectureship in economics funded personally by Marshall.

In 1911 Keynes was made editor of the Economic Journal. In 1913 he published his first book, ‘Indian Currency and Finance’, and was then appointed to the Royal Commission on Indian Currency and Finance.

In an appointment that marked his career, Keynes was financial representative for the Treasury to the 1919 Versailles peace conference. At Versailles he argued against setting Germany’s compensation payments so high that it would encumber innocent German people, make it impossible for the nation to pay its debt and limit its ability to buy exports from other countries, as a result negatively impacting not just Germany’s economy but that of the world. He was not successful in his endeavour and resigned from the Treasury in disgust.

During the war years, Keynes played a decisive role in the negotiations that were to shape the post-war international economic order. In 1944, he led the British delegation to the Bretton Woods conference, which established the World Bank and the IMF and put in place a system of fixed exchange rates. He died in 1946. Throughout his multidimensional career Keynes was also a director of the British Eugenics Society, a director of the Bank of England, a patron of the arts and an art collector, an advisor to several charitable trusts, a writer, a philosopher, a private investor, a farmer, and a part of the Bloomsbury Group of intellectuals. Bertrand Russell named Keynes one of the most intelligent people he had known, commenting, “every time I argued with Keynes, I felt that I took my life in my hands and I seldom emerged without feeling something of a fool.”

Keynesian economics

The theories forming the basis of Keynesian economics were first presented in ‘The General Theory’, published in 1936 during the Great Depression. Prior to this, mainstream economic thought was that the economy existed in a state of general equilibrium – that the economy naturally consumes whatever it produces because the needs of consumers are always greater than the capacity of the economy to satisfy those needs. The idea that supply creates its own demand is reflected in Say’s Law. This perception rests on the assumption that if a surplus of goods or services exists, they would naturally drop in price to the point where they would be consumed.

The General Theory, on the other hand, argues that demand, not supply, is the key variable governing the overall level of economic activity. Aggregate demand, which equals total un-hoarded income in a society, is defined by the sum of consumption and investment. In a state of unemployment and unused production capacity, employment and total income can be enhanced by first increasing expenditures for either consumption or investment.

The book advocates interventionist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works. “Let us be up and doing, using our idle resources to increase our wealth,” Keynes wrote in 1928. “With men and plants unemployed, it is ridiculous to say that we cannot afford these new developments. It is precisely with these plants and these men that we shall afford them.”

Keynes’ theory overturned the mainstream consensus at the time and brought about a greater recognition that unemployment is the result of a structural problem inherent in the economic system. He argued that because there was no guarantee that the goods that individuals produce would be met with demand, unemployment was a natural consequence. However, economists still argue today about what Keynes thought caused high unemployment.

Rather than having a negative view of unbalanced government budgets, Keynes supported countercyclical fiscal policies, which are policies that work against the cyclical tendencies in the economy. These include deficit spending when a nation’s economy suffers from recession or when recovery is slow and unemployment is persistently high, as well as the suppression of inflation in boom times by either increasing taxes or cutting back on government outlays. He argued that governments should solve problems in the short term rather than waiting for market forces to do it in the long term.


Contrary to some of his critics’ assertions, Keynes was a strong advocate of free markets. He believed that once full employment had been achieved by fiscal policy measures, the market mechanism could then operate freely.

So despite sparking a revolution in economic theory and practice, Keynes wasn’t for the overthrow of the capitalist system. In 1999, Time magazine included him in its list of the 100 most important and influential people of the 20th Century, commenting that, “his radical idea that governments should spend money they don’t have may have saved capitalism.”

Branches of Keynesianism

  • Neo-Keynesian.

    An attempt to interpret Keynes’ ideas and synthesise with the neoclassical models.

  • New Keynesian.

    Strives to provide microeconomic foundations for Keynesian economics.

  • Post-Keynesian.

    Attempt to get back-to-the-basics of The General Theory.

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