If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has. -JMK
This recession that we have been suffering through since essentially late 2007 is not something new; our economic history contains numerous instances of negative-growth economies, some obviously worse than others. However, in many ways, our current situation has perhaps brought to light the name John Maynard Keynes; a name that most likely wasn’t familiar to most people before this recent downturn and even in the midst of our recession, who he actually was and how his writings have influenced our economy may not be well known. Over my next three posts I’m going to be covering John Maynard Keynes; discussing the man, his theories, and finally, his impact on our current economic policy.
John Maynard Keynes was an early 20th century British economist. Born to a middle-class family in Cambridge, England on June 5th, 1883, Keynes demonstrated from an early age an aptitude for mathematics. Ironically, the year he was born was also the year that Karl Marx died; latter in his life Keynes spent considerable time challenging many fundamental Marxist principles. Despite extended periods of poor health when young, he excelled in school and in 1905 earned a degree in mathematics from King’s College in Cambridge.
After graduation, Keynes worked a variety of positions, initially as a civil servant clerk in Britain’s India Office. Despite a promising start to his career that included the publication of his first book (an analysis of the Indian monetary system), he soon left his position to take a job as a lecturer at Cambridge. Soon after accepting that position he took a leave of absence to work for the British Treasury after the beginning of World War I. There he worked on international finances, quickly rising through the ranks to the point where he was the Treasury’s representative during the 1919 Versailles Peace Conference. He quickly became frustrated with many of the conference’s other attendees, who he thought were instituting vindictive, counter-productive economic restrictions on Germany, eventually causing him to resign his post. Upon returning to England he wrote the book that brought him his initial fame: The Economic Consequences of the Peace.
The Economic Consequences of the Peace was a biting criticism of the French and American approach towards the Versailles Peace Conference. Keynes argued that such a hard approach would keep Germany in poverty and could ultimately undermine the goal of the Peace Conference by once again stirring up unrest and creating an unstable German state. At the time of its publication, his book received a lot of attention due to its vitriol directed towards powerful international political figures. However, as Keynes predicted, the 1919 Versailles Peace Conference enacted policies that led to the Germans being unable to recover and rebuild (leading to a period of hyperinflation in 1923), laying the groundwork for the Nazi aggression of World War II. Learning from their mistakes, and at the advisement of Keynes, both the United States and Britain took a different tone at the conclusion of World War II, setting aside vindictive ambitions in favor of more comprehensive assistance, which allowed Germany’s post-war economy to grow in a safe environment.
After the 1919 Peace Conference, Keynes returned to his philosophical and mathematical roots and published his Treatise on Probability. Additionally, at this time Keynes became more involved in journalism and finance as he began to amass his considerable personal fortune. It was also during this time, leading up to the second World War, during Britain’s economic struggles preceding the Great Depression, that he began to develop his theories on responsible government spending during economic downturns, which would eventually become a central theme of what is now referred to as “Keynesian Economics”. During this time, Keynes also advocated against returning Britain to the gold standard, a call which was ignored before finally being heeded in 1931 after it was shown to produce some of the disastrous effects that Keynes had predicted in his The Economic Consequences of Mr. Churchill.
Similarly to his call to abandon the gold standard, his calls in the early 1930s for deficit spending during periods of a stagnant economy were taken seriously but not readily adopted. Perhaps the most famous adopter of early Keynesian Economic ideas, Franklin D. Roosevelt did not initially take to Keynes’ notion that balancing the federal deficit was much less important than using the spending power of the government to stimulate the economy. Soon, however, Keynes would be granted the opportunity to prove his theory, as the advent of World War II left Roosevelt and other world leaders no choice but test Keynes on his ideas.
The economic productivity that resulted from the application of Keynesian principles during World War II proved to be an incredible success. This lead to wide-spread adoption of Keynes’ ideas on an even broader scale that would last well into the 1970s, when economic theorists attempted to formulate a more mathematically formal model of economic development, in comparison to Keynes’s more informal (and at times, disjoint, convoluted and disorganized) theories. In addition, as time progressed, Keynes’ initial assumptions about the state of current economic realities became insufficient as the world’s major powers progressed from an intrastate economic model to an interstate economic model. Regardless, his writings on inflation and unemployment remained relevant and still garnered support in many economic circles, achieving a near renaissance starting in late 2007 during the world’s current economic crisis.
Keynes worked tirelessly through the entirety of his life, leading to a series of heart attacks in early 1946, which eventually lead to his death on April 21st, 1946. He left his wife, ballerina Lydia Lopokova and no children. He died with a sizable fortune, which he had obtained due to an uncanny ability to effectively invest in the stock market. Parts of his fortune were used to continue his life-long patronage of the arts – he was highly influential in establishing the Arts Council of Great Britain after the war. His philosophies continued to resonate after his death: he was influential in the eventual establishment of the International Monetary Fund, his economic theories were adopted by nations across the globe, and his writings on rebuilding failed states became highly influential.