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John Maynard Keynes

2007 Schools Wikipedia Selection. Related subjects: Economics

   John Maynard Keynes (right) and Harry Dexter White at the Bretton Woods
   Conference
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   John Maynard Keynes (right) and Harry Dexter White at the Bretton Woods
   Conference

   John Maynard Keynes, 1st Baron Keynes, CB (pronounced "canes", IPA
   /keɪnz/) ( 5 June 1883 – 21 April 1946) was a British economist whose
   ideas, called Keynesian economics, had a major impact on modern
   economic and political theory as well as on many governments' fiscal
   policies. He is particularly remembered for advocating interventionist
   government policy, by which the government would use fiscal and
   monetary measures to mitigate the adverse effects of economic
   recessions, depressions and booms. Economists consider him one of the
   main founders of modern theoretical macroeconomics. His popular
   expression "In the very long run, we are all dead" is still quoted.

Biography

Personal and marital life

   Born at 6 Harvey Road, Cambridge, John Maynard Keynes was the son of
   John Neville Keynes, an economics lecturer at Cambridge University, and
   Florence Ada Brown, a successful author and a social reformist. His
   younger brother Geoffrey Keynes (1887-1982) was a surgeon and
   bibliophile and his younger sister Margaret (1890-1974), married the
   Nobel-prize winning physiologist Archibald Hill.

   Keynes was very tall, standing at approximately 6' 6" (198 cm). He had
   a serious relationship with the Bloomsbury painter Duncan Grant from
   1908 to 1915. He continued to assist Grant financially for the rest of
   his life. Keynes met Lydia Lopokova, a well-known Russian ballerina, in
   October 1918. The two married and, by most accounts, Keynes enjoyed a
   happy marriage with Lopokova. For medical reasons, they were unable to
   have children, though both his siblings had children of note.

   Keynes was ultimately a successful investor, building up a substantial
   private fortune. He was nearly wiped out following the Stock Market
   Crash of 1929 but soon recouped his fortunes. He enjoyed collecting
   books; during his lifetime, for example, he collected and protected
   many of Isaac Newton's papers. He was interested in literature in
   general and drama in particular and supported the Cambridge Arts
   Theatre financially, which allowed the institution to become, at least
   for a while, a major British stage outside of London.

   Keynes had a fearsome reputation as a talented debater, and Friedrich
   von Hayek refused to discuss economics matters in person with him on
   several occasions. However, after reading Hayek's The Road to Serfdom
   Keynes said, "In my opinion it is a grand book....Morally and
   philosophically I find myself in agreement with virtually the whole of
   it: and not only in agreement with it, but in deeply moved agreement."
   Hayek says that this is "because Keynes believed that he was
   fundamentally still a classical English liberal and wasn't quite aware
   of how far he had moved away from it. His basic ideas were still those
   of individual freedom. He did not think systematically enough to see
   the conflicts." Bertrand Russell named Keynes as the most intelligent
   person he had ever known, commenting: "Every time I argued with Keynes,
   I felt I was taking my life in my hands".

Education

   Keynes enjoyed an elite early education at Eton, where he displayed
   talent in a wide range of subjects; particularly mathematics, classics
   and history. His abilities were remarkable for their sheer diversity.
   He entered King’s College, Cambridge, in 1902, to study mathematics,
   but his interest in politics led him towards the field of economics,
   which he studied at Cambridge under A.C. Pigou and Alfred Marshall.
   Marshall is believed to have prompted Keynes's shift in interest from
   mathematics and classics to economics. Keynes received his B.A. 1905
   and his M.A. in 1909.

Career

   Keynes accepted a lectureship at Cambridge in economics funded
   personally by Alfred Marshall, from which position he began to build
   his reputation. Soon he was appointed to the Royal Commission on Indian
   Currency and Finance, where he showed his considerable talent at
   applying economic theory to practical problems.

   His expertise was in demand during the First World War. He worked for
   the Adviser to the Chancellor of the Exchequer and to the Treasury on
   Financial and Economic Questions. Among his responsibilities were the
   design of terms of credit between Britain and its continental allies
   during the war, and the acquisition of scarce currencies.

   At this latter endeavor Keynes’ “nerve and mastery became legendary,”
   in the words of Robert Lekachman, as in the case where he managed to
   put together — with difficulty — a small supply of Spanish pesetas and
   sold them all to break the market: it worked, and pesetas became much
   less scarce and expensive. These accomplishments led eventually to the
   appointment that would have a huge effect on Keynes’ life and career:
   financial representative for the Treasury to the 1919 Paris Peace
   Conference.

   Keynes' career lifted off as an adviser to the British finance
   department from 1915 – 1919 during World War I, and their
   representative at the Versailles peace conference in 1919. His
   observations appeared in the highly influential book The Economic
   Consequences of the Peace in 1919, followed by A Revision of the Treaty
   in 1922. He argued that the reparations which Germany was forced to pay
   to the victors in the war were too large, would lead to the ruin of the
   German economy and result in further conflict in Europe. These
   predictions were borne out when the German economy suffered in the
   hyperinflation of 1923. Only a fraction of reparations were ever paid.

   Keynes published his Treatise on Probability in 1921, a notable
   contribution to the philosophical and mathematical underpinnings of
   probability theory. He attacked the deflation policies of the 1920s
   with A Tract on Monetary Reform in 1923, a trenchant argument that
   countries should target stability of domestic prices and proposing
   flexible exchange rates. The Treatise on Money (1930) (2 volumes)
   effectively set out his Wicksellian theory of the credit cycle.

   His magnum opus, the General Theory of Employment, Interest and Money
   challenged the economic paradigm when published in 1936. In this book
   Keynes put forward a theory based upon the notion of aggregate demand
   to explain variations in the overall level of economic activity, such
   as were observed in the Great Depression. The total income in a society
   is defined by the sum of consumption and investment; and in a state of
   unemployment and unused production capacity, one can only enhance
   employment and total income by first increasing expenditures for either
   consumption or investment.

   The total amount of saving in a society is determined by the total
   income and thus, the economy could achieve an increase of total saving,
   even if the interest rates were lowered to increase the expenditures
   for investment. The book advocated activist economic policy by
   government to stimulate demand in times of high unemployment, for
   example by spending on public works. The book is often viewed as the
   foundation of modern macroeconomics. Historians agree that Keynes
   influenced U.S. president Roosevelt's New Deal, but disagree as to what
   extent. Deficit spending of the sort the New Deal began in 1938 had
   previously been called "pump priming" and had been endorsed by
   President Herbert Hoover. Few senior economists in the U.S. agreed with
   Keynes in the 1930s. With time, however, his ideas became more widely
   accepted.

   In 1942, Keynes was a highly recognized economist and was raised to the
   House of Lords as Baron Keynes, of Tilton in the County of Sussex,
   where he sat on the Liberal benches. During World War II, Keynes argued
   in How to Pay for the War that the war effort should be largely
   financed by higher taxation, rather than deficit spending, in order to
   avoid inflation. As Allied victory began to look certain, Keynes was
   heavily involved, as leader of the British delegation and chairman of
   the World Bank commission, in the negotiations that established the
   Bretton Woods system. The Keynes-plan, concerning an international
   clearing-union argued for a radical system for the management of
   currencies, involving a world central bank, the Bancor, responsible for
   a common world unit of currency. The USA's greater negotiating
   strength, however, meant that the final outcomes accorded more closely
   to the less radical plans of Harry Dexter White.

   Keynes wrote Essays in Biography and Essays in Persuasion, the former
   giving portraits of economists and notables, whilst the latter presents
   some of Keynes' attempts to influence decision-makers during the Great
   Depression. Keynes was editor in chief for the Economic journal from
   1912. He was also a member of the Liberal Party.

Investor

   Keynes' brilliant record as a stock investor is demonstrated by the
   publicly available data of a fund he managed on behalf of King's
   College, Cambridge.

   From 1928 to 1945, despite taking a massive hit during the Stock Market
   Crash of 1929, Keynes' fund produced a very strong average increase of
   13.2% compared with the general market in the United Kingdom declining
   by an average 0.5% per annum.

   The approach generally adopted by Keynes with his investments he
   summarized accordingly:
    1. A careful selection of a few investments having regard to their
       cheapness in relation to their probable actual and potential
       intrinsic value over a period of years ahead and in relation to
       alternative investments at the time;
    2. A steadfast holding of these fairly large units through thick and
       thin, perhaps for several years, until either they have fulfilled
       their promise or it is evident that they were purchases on a
       mistake, and;
    3. A balanced investment position, i.e. a variety of risks in spite of
       individual holdings being large, and if possible opposed risks
       (e.g. a holding of gold shares among other equities, since they are
       likely to move in opposite directions when there are general
       fluctuations).

   Keynes argued that "It is a mistake to think one limits one's risks by
   spreading too much between enterprises about which one knows little and
   has no reason for special confidence ... One's knowledge and experience
   are definitely limited and there are seldom more than two or three
   enterprises at any given time in which I personally feel myself to put
   full confidence."

   Keynes' advice on speculation, some might say, is timeless:

          "[Investment is] intolerably boring and over-exacting to any one
          who is entirely exempt from the gambling instinct; whilst he who
          has it must pay to this propensity the appropriate toll."

   When reviewing an important early work on equities investments, Keynes
   argued that "Well-managed industrial companies do not, as a rule,
   distribute to the shareholders the whole of their earned profits. In
   good years, if not in all years, they retain a part of their profits
   and put them back in the business. Thus there is an element of compound
   interest operating in favour of a sound industrial investment."

Main Contributions to Economic Thought

   In his magnum opus, The General Theory of Employment, Interest, and
   Money, Keynes laid the foundation for the branch of economics termed "
   Macroeconomics" today. Based on the methods devised by Alfred Marshall,
   he argued that macroeconomic relationships differ from their
   microeconomic counterparts because the ceteris paribus clauses
   applicable to different levels of aggregation differ. The view that for
   given prices and wages income determines demand (see IS-LM), pre-dates
   Keynes. His innovation is to take, in his core argument, prices and
   wages as perfectly flexible and establish that the interaction of
   "aggregate demand" (in his sense) and "aggregate supply" (in his sense)
   may lead to stable unemployment equilibria. His work on employment went
   against the idea that the market ultimately settles at a state of full
   employment - a central tenet of Classical economists. Instead he argued
   that there exists a continuum of equilibria, the full employment
   equilibrium position being just one of them. (This idea underlies the
   choice of the title "General Theory": the classical theory being just a
   special case.)

   His main contribution can be seen in establishing an approach to
   macroeconomics that maintains its relationship to the underlying
   microeconomic behaviors, but assumes a form qualitatively different
   from microeconomic models. (This contrasts with the assumption made in
   New Classical Economics where macro relationsships are modelled
   analoguously to micro-relationships, → Robert Lucas, Jr.). He
   maintained, however, many factually doubtful assumptions of standard
   theory. He assumed for instance that (marginal) labor productivity
   decreases with expanding employment. This is incompatible with the
   empirical findings summarized in Okun's Law. He combined this position
   with the marginal productivity theory of wages, implying that real
   wages decrease with increasing employment. This is empirically
   incorrect, as has been pointed out by the economist Dunlop, and the
   criticism has readily been accepted by Keynes. Further, Keynes
   suggested in the General Theory that inflation would occur only near
   "full employment" (in his sense), but it has been observed in many
   cases that inflation creeps up in states of severe underemployment (
   Stagflation). The erroneous assumption entertained by Keynes that
   inflation can only occur near full employment is still maintained in
   modern macroeconomics (→ NAIRU). Keynes held that the cause of
   unemployment is a too high rate of savings, or insufficient investment
   expenditure. He conjectured that the amount of labor supplied is
   different when the decrease in real wages is due to a decrease in the
   money wage, than when it is due to an increase in the price level,
   assuming money wages stay constant. This conjecture relates to the
   "actual attitudes of workers" and is "not theoretically fundamental,"
   although the New Keynesian economics emphasizes this point.

   In his Theory of Money, Keynes said that savings and investment were
   independently determined. The amount saved had little to do with
   variations in interest rates which in turn had little to do with how
   much was invested. Keynes thought that changes in saving depended on
   the changes in the predisposition to consume which resulted from
   marginal, incremental changes to income. Therefore, investment was
   determined by the relationship between expected rates of return on
   investment and the rate of interest.

   In 1944, Mount Washington Hotel hosted the United Nations Monetary and
   Financial Conference also known as the Bretton Woods International
   Monetary Conference. Delegates from 44 nations convened, establishing
   the World Bank and International Monetary Fund, setting the gold
   standard at $35.00 an ounce and designating the United States dollar as
   the backbone of international exchange. Keynes was leader of the
   British delegation. The signing of the formal documents took place in
   the Gold Room, located off the Hotel Lobby and now preserved as an
   historic site, creating the Bretton Woods system. This system partly
   ended with the Nixon Shock.

Death

   Keynes died of infarction at his vacation home in Tilton, East Sussex.,
   his heart problems being aggravated by the strain of working on
   post-war international financial problems. John Neville Keynes (1852 –
   1949) outlived his son by three years. Keynes' brother Sir Geoffrey
   Keynes (1887 – 1982) was a distinguished surgeon, scholar and
   bibliophile. His nephews include Richard Keynes (born 1919) a
   physiologist; and Quentin Keynes (1921 – 2003) an adventurer and
   bibliophile.

Influences on Keynes' works

     * Arthur C. Pigou
     * Alfred Marshall
     * Adam Smith
     * David Ricardo
     * Karl Marx
     * Thomas Malthus

Keynes' influence

   Keynes' theories were so influential, even when disputed, that a
   subfield of Macroeconomics called Keynesian economics is further
   developing and discussing his theories and their applications. John
   Maynard Keynes had several cultural interests and was a central figure
   in the so-called Bloomsbury group, consisting of prominent artists and
   authors in Britain. His autobiographical essays Two Memoirs appeared in
   1949.

Critique

     * While Milton Friedman describes The General Theory as 'a great
       book', he argues that its implicit separation of nominal from real
       magnitudes is neither possible nor desirable; macroeconomic policy,
       Friedman argues, can reliably influence only the nominal.. He and
       other monetarists have consequently argued that Keynesian economics
       can result in stagflation, the combination of low growth and high
       inflation that developed economies suffered in the early 1970s.
       More to Friedman's taste was the 1923 Tract on Monetary Reform,
       which he regarded as Keynes's best work because of its focus on
       maintaining domestic price stability.
     * Friedrich von Hayek reviewed the Treatise on Money so harshly that
       Keynes decided to set Piero Sraffa to review (and condemn no less
       harshly) Hayek's own competing work. The Keynes-Hayek conflict was
       but one battle in the Cambridge- LSE war.
     * Ludwig von Mises
     * Murray Rothbard's essay Keynes, the Man , a scathing attack on both
       Keynes' economic theories and personage.
     * Rational expectations
     * Henry Hazlitt has written a book entitled The Failure of the New
       Economics, a detailed chapter-by-chapter critique of Keynes'
       "General Theory"
     * Roger W. Garrison author of Time and Money: The Macroeconomics of
       Capital Structure and other works
     * The Crisis of Keynesian Economics A Marxist Viewby Geoffrey Pilling

Citations

    1. ^ Reason Magazine, The Road to Serfdom, Foreseeing the Fall. F.A.
       Hayek interviewed by Thomas W. Hazlett
    2. ^ ^a ^b Milton Friedman, John Maynard Keynes, Federal Reserve Bank
       of Richmond Economic Quarterly Volume 83/2, Spring 1997

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