Thursday, July 24, 2008

John Maynard Keynes - Great Economists Series

Over the next few weeks I will be writing about some of the great economists. I will not be attempting to discuss every aspect of their work, but, will be looking at their major contributions to the world of Economics

John Maynard Keynes makes a good starting point because he was both an influential economist and a man of many talents.

Unlike many economists, Keynes, was very much at home in the business world. He put his money where his mouth was and become a very successful financial speculator. It is said that his morning would begin by scanning the newspaper, from which he would make various investment decisions on the foreign exchange markets; often making a fortune from an hour's work. However, he did fail to predict the Stock Market crash of 1929; he lost a fortune, which he later recouped.

After studying at Eton and Kings College Cambridge, he received a lectureship to teach at Cambridge. This was personally funded by his old teacher Alfred Marshall (Marshall was himself a formidable economist). This lectureship and patronage of Marshall helped Keynes establish his reputation as an economist. During the First World War, Keynes worked in the Treasury office running the UK's foreign exchange operations. On one occasion he bought a lot of Spanish Pesetas, only to declare he would soon sell them and break the market - something he succeeded in doing.

Keynes and Versailles Peace Treaty

After the war, Keynes was part of the British delegation to the Versailles Peace Treaty. During the complex negotiations, he found time to pick up some French masterpieces including a Cezanne, at knock down prices. However, it was Versailles, which helped establish his reputation as an outstanding economist. Keynes became increasingly dismayed and alarmed at the vengeful and excessive terms of the treaty. Eventually, he resigned writing a polemic, criticising the Treaty as a recipe for future German resentment. The Economic Consequences of the Peace proved remarkably prophetic and helped establish his reputation as an independent thinker who could see beyond the orthodoxy of the day. Speaking on Georges Clemenceau the French PM, he didn't mince his words
“He had one illusion — France; and one disillusion — mankind, including Frenchmen.”
30 years later, Keynes, found himself as part of the British delegation securing another post war economic settlement; however, this settlement was to be of a very different nature. He was one of the architects of the Bretton Woods system, until his untimely death in April 1946 brought a premature end to his involvement.

Keynes was not just a brilliant economist and mathematician but also a lover of the arts, and music. He was a key member of the Bloomsbury social group based around Cambridge and London. He loved ballet and married a famous Russian ballerina Lydia Lopokova. He could exercise both kindness and a brilliantly sharp wit. On the return from one visit from Washington, a reporter asked him if England had just been sold out and become another American state. Keynes' succinct reply was . 'No such luck'

see more quotes by John Maynard Keynes

Keynes and Great Depression

It was during the 1930s, that Keynes' really made his mark as an economist, helping to develop a whole new branch of Economics.

When the Great Depression hit, with unprecedented ferocity, economists were at a loss to explain its causes and how to overcome it. Prevailing economic orthodoxy stuck to the old classical view that Markets will clear in the long run. At the height of the crisis, the fledgling Labour government was told by Treasury officials that the government must balance the budget to survive the depression. This effectively meant increasing taxes and cutting unemployment benefits. Keynes described this as economic madness and argued for the exact opposite. He argued in a recession of this magnitude, it was necessary for the government to intervene and actively stimulate the economy. Apart from a few half hearted attempts such as the new deal, Keynes' policies were largely ignored in the UK and US; and high levels of unemployment persisted until the start of the second world war.

It was to this backdrop that Keynes wrote his General Theory of Employment, Interest, and Money (1936). Quite a dense work, it still broke the mould of classical economics and created a powerful argument for active demand management. ALthough, his theories were later criticised by Monetarists, much of his thought remain key elements of modern economic theory.

Keynes was a great publicist for his theories. He would say things like:

"The government should pay people to dig holes in the ground and then fill them up."
People would reply. "that's stupid, why not pay people to build roads and schools"
Keynes would respond saying "Fine, pay them to build schools. The point is it doesn't matter what they do as long as the government is creating jobs". He wanted to emphasise the importance of intervening in a recession. Keynes was a new style of Economist. He wasn't just content to spend hours reading away in the British Library (like Karl Marx) he understood the importance of the soundbite and actually influencing the political process.

Quotes on Keynes

"No one in our age was cleverer than Keynes nor made less attempt to conceal it."
- R. F. Harrod in The Life of John Maynard Keynes (1951)

"We're all Keynesians now."
- US President Richard Nixon (1972)

"If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions."
- Winston Churchill

1 comment:

Lionel Roberts said...

Some of the best books to get a real understanding of Keynes's life and the development of his thinking are:

Robert Skidelsky, "John Maynard Keynes, 1883-1946"
Donald Moggridge, "Maynard Keynes: An Economist's Biography"
Roy Harrod, "The Life of John Maynard Keynes"
Donald Markwell, "John Maynard Keynes and International Relations: Economic Paths to War and Peace"