John Maynard Keynes was a British economist who lived from 1883 to 1946. He founded Keynesian economics and is the father of modern macroeconomics, which studies how economies (markets and other large-scale systems) work. One of the main ideas behind Keynesian economics is that governments should try to change how economies work by spending more to boost demand during decline.
He says that the government should step in to fix high unemployment in The General Theory of Employment, Interest, and Money, one of the most essential books in the history of economics.
Career and Schooling Early on
Keynes became interested in economics early on because his father, John Neville Keynes, taught economics at Cambridge University. His mother was among the first women to graduate from Cambridge and worked hard to help poor people.
He came from a middle-class family and got grants to Eton College and Cambridge University, two of England’s best schools. He got his first degree in math there in 1904. Notably, he did very well in math throughout his school career, even though he didn’t have much official training in economics.
As a young economist, Keynes worked on probability theory and taught at Cambridge University as a Fellow of King’s College. He held official posts in the British Civil Service and the British Treasury and was appointed to royal commissions on currency and finance. He traveled to Versailles in 1919 to serve as the Treasury’s financial representative at the peace conference that ended World War I.
Support for letting the government get involved in the economy
Laissez-faire economics is a free-market capitalist economic theory that says the government shouldn’t get involved in the economy. Keynes’ father believed in it. In his time at Cambridge, Keynes was a typical supporter of the free market and invested a lot of money in the stock market.
On the other hand, the 1929 stock market crash started the Great Depression. This made Keynes think that unrestricted free-market capitalism was fundamentally wrong and needed to be reformed to work better and beat competitive systems like communism.
Because of this, he started pushing for the government to step in and stop unemployment and the economic downturn. He said that in addition to government job programs, the government needed to spend more to lower unemployment, even if it meant a loss in the budget.
What does Keynesian economics mean?
This is John Maynard Keynes’s economics. It is based on the idea that governments should be involved in their countries’ economies instead of letting the free market run its course. In particular, Keynes pushed for increased government spending to help businesses recover from downturns.
Demand, not supply, is what drives an economy. This is the most basic idea behind Keynesian economics. In those days, most economists thought the opposite: that supply created demand. Since aggregate demand, which is the total amount of money that the private sector and the government spend on goods and services, controls supply, total spending determines everything about the economy, from creating goods to the job rate.
Another fundamental idea in Keynesian economics is that the best way to get an economy out of a slump is for the government to put money into it to boost demand. But spending is the key to getting the economy back on track.
Based on these two ideas, Keynes thought that demand was so crucial that the government should spend even if it meant going into debt. Keynes said that if the government does this to boost the economy, it will increase customer demand and output and keep jobs.
Some problems with Keynesian economics
Keynesian economics has been criticized since it was first presented in the 1930s, even though it became popular after World War II.
A big problem with this idea is that it leads to “big government,” which means the government needs to take a more significant role in business. Some economic thinkers, like those from the Chicago School of Economics, say that booms and busts are standard for businesses, that direct government involvement worsens the recovery process, and that federal spending stops private investment.
American economist Milton Friedman was the most well-known foe of Keynesian economics. Friedman was best known for supporting free-market capitalism. Friedman supported monetarism, which disagreed with critical parts of Keynesian economics. He was the most influential economist of the second half of the 20th century, just as Keynes was the most influential economist of the first half.
Friedman and other monetarists believed that governments could promote economic stability by targeting the growth rate of the money supply. This was in contrast to Keynes’ view that fiscal policy—how the government spends and taxes money to affect the economy—is more important than monetary policy—that is, controlling the total amount of money that banks, consumers, and businesses can use. Simply put, Friedman and other monetarist economists want to control the money in the economy, while Keynesian economists want the government to spend money.
For instance, Keynes thought that an active government could help with recessions by using fiscal policy to boost demand, encourage spending, and lower unemployment. On the other hand, Friedman was against deficit spending and pushed for a return to the free market, which would include a smaller government, less regulation in most parts of the economy, and a steady rise in the money supply.
What Keynesian Economics Looks Like
The Fresh Start
When the Great Depression hit in the 1930s, it greatly affected Keynes’ economic ideas and caused many people to follow some of his policies.
President Franklin D. Roosevelt created the New Deal to deal with the economic disaster in the United States. The Deal was a set of government programs following the Keynesian idea that even a free-enterprise capitalist system needs federal oversight.
The New Deal was an unusual effort by the U.S. government to boost the economy on a national level. It included the creation of several new agencies whose main goals were to create jobs for jobless Americans and keep the prices of consumer goods stable. Roosevelt also followed Keynes’s advice and increased deficit spending to boost demand. This included plans for public housing, slum clearing, building railroads, and other significant public works. Spending During the Recession
In reaction to the Great Recession of 2007–2009, President Obama did several things that aligned with Keynesian economics. The federal government helped several businesses that were in a lot of debt. It also put Fannie Mae and Freddie Mac under management. These are the two biggest companies that make mortgages and home loans and back them up.
In 2009, President Obama signed the American Recovery and Reinvestment Act, an $831 billion plan to help the economy and save jobs while creating new ones. It set aside money for healthcare, infrastructure, education, and jobless payments for families, as well as tax cuts and credits.COVID-19 Checks for Stimulus
After the COVID-19 pandemic in 2020, President Donald Trump and President Joseph Biden offered a wide range of aid, loan repayment, and loan extension programs all over the U.S.
Along with weekly state unemployment benefits, the U.S. government also sent direct help to American taxpayers through three different, tax-free stimulus checks.
The Past
There have been ups and downs in the acceptance of Keynesian economics since the 1930s. The ideas have also changed a lot since Keynes’ time. But one thing he did for economics that will never go away is the idea that governments should be involved in business, even in capitalist countries.
Who said that Keynesian economics meant that you could spend your way out of a recession?
Milton Friedman said the main Keynesian idea that spending is the way to get the economy going again was like trying to “spend your way out of a recession.”Friedman disagreed with Keynes and thought that when the government spends money and takes on more debt, prices will eventually increase, making money and paying less value. Without underlying economic growth, it cannot be perfect. The stagflation of the 1970s was a good example. It was a time of high unemployment, low production, and high inflation and interest rates.
Keynes: Was he a socialist?
It’s hard to say for sure that Keynes was a socialist. On the one hand, he was interested in leftist governments and wanted the government to be involved in business. He was vocal that he didn’t believe in letting business cycles go through ups and downs without help or letting private industry run freely.
On the other hand, Keynes did not say that the government should take over and run businesses. He wanted the government to support ways of making things but not always control them.
Along the way, there is proof that he was moving back toward more traditional free-market capitalism. This was because he was thinking about how to get Britain out of its economic rut after the war. He told his friend, Secretary of State Henry Clay, just before he died in 1946 that he relied more on a solution he had “tried to eject from economic thinking twenty years ago”: Adam Smith’s “invisible hand.” This is the idea that a free market economy will naturally correct itself through the laws of supply and demand.
“In the Long Run, We Are All Dead”: What did Keynes mean?
Some people said that Keynes’ support for public financing and deficit spending would cause failure in the long run. Keynes’ famous response was, “In the long run, we are all dead.” In this case, he meant that governments should deal with issues immediately instead of waiting for the market to fix them later “when we are all dead.”
Did Keynes see the rise of Nazi Germany coming?
During the 1919 Versailles Peace Conference, Keynes spoke out against the harsh economic rules some top politicians wanted to impose on Germany. When people didn’t listen to his warnings that these brutal sanctions would probably cause Europe’s economy and government to fall apart, he quit the meeting early to protest.
He quit the British Treasury when he returned to the U.K. In The Economic Consequences of the Peace, he summed up his concerns about the risks of a peace deal meant to weaken Germany forever.
Keynes’ book became a big hit within a year of its release in 1920. It greatly impacted people’s views that the Treaty of Versailles was unfair. As the 1930s’ political and economic unrest drove the rise of fascism, which led to World War II, Keynes’ early warnings began to sound even more like they were coming true.
In Short
John Maynard Keynes and Keynesian economics changed how economies worked after World War II and up until the present day. People criticized his ideas in the 1970s; they came back into style in the 2000s, and people are still arguing about them today.
One of the main ideas behind Keynesian economics is that the best way to get an economy out of a slump is for the government to put money into it to boost demand. But spending is the key to getting the economy back on track.
Some people thought Keynes was the most influential economist of the first half of the 20th century. Others thought Milton Friedman, who supported monetarism and was Keynes’s most prominent critic, was the most influential economist of the second half.
One crucial thing Keynes left behind was the idea that governments should be involved in the economic health of people and businesses. Still up in the air is how significant the government’s role should be and the best way to carry it out.
Conclusion
- Keynes, a British economist, came up with Keynesian economics.
- Keynesian economics says that when an economy is healthy, people spend or invest more than they save.
- Keynes thought governments should spend more, even if it meant getting into debt, to create jobs and give people more money to spend during a slump.
- Some people dislike Keynesian economics because it leads to inflation, deficit spending, and less private investment.
