Download Keynes was a liberal economist whose theory revolutionized

Keynes was a liberal economist whose theory
revolutionized macroeconomics. As the founder of
Keynesian economics, his ideas contrasted greatly with
Classical economics. A main difference between
Keynesian and Classical economics is their idea
concerning government intervention. Keynes believed
that in order to have an efficient economy, policies
established by the public sector would help stabilize
output. On the other hand, Classical economists were
adamant that the economy would fix itself if left alone without any government intervention.
Keynesian economics became prominent from 1936 onwards and quite literally brought a change
in the economic system due to the quick popularity of Keynesian thought.
Early Life and Education
John Maynard Keynes was born and raised in Cambridge, England. He was born on June 5, 1883
to John (an economist and lecturer in moral sciences) and Florence Keynes (social reformer).
Despite having been surrounded by economics as he grew up, Keynes originally leaned towards
the field of philosophy. He was born into an academic middle class family and was considered
brilliant by his teachers and peers. In 1902, Keynes attended King’s College at the University of
Cambridge after leaving Eton College and graduated with a B.A. in mathematics two years later;
he also later received a M.A. in economics.
Career
In 1909, Keynes’ first professional economics article about the global economic downturn and its
effect on India was published in the Economic Journal, “perhaps the world’s leading
professional economics periodical at the time” (Walsh 9). Two years later, by 1911, Keynes
became editor of the Economic Journal. During World War I, due to his remarkable ability to
apply economic theories to realistic problems, Keynes was asked to advise the British
Government regarding whether or not bank notes should be converted into gold. By 1915,
Keynes was appointed a government position at the Treasury. With this job came the
responsibility to devise credit terms between Britain and her allies. Besides being a phenomenal
economist and brilliant in his deductions, Keynes was a prolific writer, eventually compiling his
General Theory of Unemployment, Interest and Money. This series of writings formed the basis
of the now common system of Keynesian Economics.
The General Theory
Published in 1936, The General Theory of Employment, Interest and Money was considered
Keynes’ masterpiece. Though he was a liberal, Keynes showed interest in capitalism. In fact as
noted by the Keynesian economist Galbraith, Keynes believed
“’…that capitalism was worth saving, that it could be made to
work’” (Wattle 4). Moreover, some of Keynes ideas coincided
with those of capitalism, including the idea that an economic
system that is spending money prospers. Keynes’ reputation
preceded him and the people knew “Keynes stood for ‘spending
one’s way out of depression’ by road building, municipal
housing construction and the like” (Blaug 7). This made his
ideas popular during the first U.S. depression. No doubt, Keynes wrote his ideas out broadly and
without conveying a strong centralized message, but the theories he implored produced
remarkable results. His incredible reasoning, though, marked a clear main message, that is that “a
modern capitalist economy is constantly plagued by unemployment and that this unemployment
is caused by a deficiency of … the sum total of spending by consumers and investors” (Blaug
11). He called this sum total the “aggregate demand.” Keynes predicted, after utilizing years of
personal market experience, that if real aggregate demand exceeded the supply potential of the
economy, inflation would occur. For the reverse – aggregate demand falling below supply
potential – then unemployment would occur (Moggridge 4). A remarkable result, his prediction
has held its own.
Employment
The effect of the unemployment levels that Keynes introduced is just one of the ways Keynes
differed from classical doctrine on economics. Keynes believed some parts of the classical
doctrine were “based on flawed assumptions and deduced outcomes clearly diverging from those
in the real world,” and so he set out to overturn the fallacies in the works of his predecessors
(Walsh 55). To Keynes, eliminating unemployment was a central concern for economic progress
to be able to take place. For the classical theory, it was believed that there was always full
employment, and in order to keep full employment, wages would be lowered; effectively, this
was thought to balance and stabilize the economy. Keynes’ disagreed on this note, suggesting
that unemployment levels drove the economy down. This is because the unemployment levels
and aggregate demand tend to differ inversely. While his General Theory did not extend an exact
solution, Keynes’ implied that the solution was to spend money! (Blaug 12). If the aggregate
demand surpassed the economy’s supply potential, then employment opportunities would arise in
order to balance the supply and demand, eventually reaching equilibrium when there was no
unemployment. Simple and brilliant!
Interest & Money
Keynes’ economic theories branched farther than just the problems of unemployment. In fact,
not many topics in macroeconomics were not covered by his General Theory. On the topic of
interest and money, Keynes believed the two are closely related. He surmised that the quantity of
money played a key role in determining the rate of interest in the economy (Froyen 99). For all
financial assets, he believed, they can be separated into two groups: money and bonds. The
demand for one asset group implies the demand of the other. Through this line of thought,
Keynes rationalized equilibrium in the market: equilibrium of one side of the market would
imply equilibrium in the other! Because of this, total market equilibrium would occur when
supply and demand were at equilibrium. The equilibrium interest rate is the interest rate that
equates money supply and money demand. In order to determine this interest rate, Keynes
believed, because money supply is fixed, the demand for money would be the changing factor
adjusting itself to produce equilibrium (Froyen 102). This changing demand depends on three
distinct types: Transaction demand, Precautionary demand, and Speculative demand. With
Transaction demand, people hold onto money to make transactions; the interest rate becomes a
factor determining whether they should make transactions or not. Precautionary demand would
be additional monies held by people in case of unexpected expenditures, like a cushion.
Speculative demand deals with the speculation of the interest rates’ near future and the
desirability for people to either buy bonds or hold their money. These three demand types were
Keynes idea of why people hold on to money and how and why interest rates fluctuated. For
example, an increase in money supply would lead to a decrease in interest rate, which would lead
to an increase in investment, finally leading to an increase in income and, therefore, aggregate
demand. This idea was unheard of before Keynes’ time, but the ramifications were incredible.
Not only did it prove the relationship between money and interest rates, but also it provided
economists with an applicable approach to analyzing the market.
Legacy
In his more than 63 years of life, John Maynard Keynes established a legacy not soon to be
followed. As a person, he exceeded without restriction; his liberal views and persona rejected the
common notion of ideals present in the early 20th century. Keynes was boisterous, bisexual, and
beyond genius. Within a decade of the 1929 depression, Keynes revolutionized the economic
thought process and developed an economic system that sustains itself. Since his publication of
his General Theory of Employment, Interest, and Money, his ideas have spread across the
economic world and therefore have greatly affected the theory and practices of macroeconomics
as a whole – hardly any modern theorist would overlook Keynesian theory in regards to a wide
range of economics topics. Keynes’ genius was passed along due to his prolific writings and
adoption of academic pursuits. It is clear that without the legacy Keynes left behind, our modern
world may be quite different, and the impact he has made will be remembered forever.
Works Cited
Blaug, Mark. John Maynard Keynes: Life, Ideas, Legacy. New York: St. Martin's Press, 1990.
Print.
Froyen, Richard T. Macroeconomics: Theories and Policies. Saddle River, N.J: Prentice Hall,
2008. Print.
Moggridge, D E. Keynes: Aspects of the Man and His Work : the First Keynes Seminar Held at
the University of Kent at Canterbury, 1972. New York: St. Martin's Press, 1974. Print.
Walsh, Justyn. Keynes and the Market: How the World's Greatest Economist Overturned
Conventional Wisdom and Made a Fortune on the Stock Market. Hoboken, N.J: John Wiley &
Sons, 2008. Print.
Wattel, Harold L. The Policy Consequences of John Maynard Keynes. Armonk, N.Y: M.E.
Sharpe, 1986. Print.