The New World of Economics: A Remake of a Classic for New Generations of Economics Students
Keynes's mother made her children's interests her own, and according to Skidelsky, "because she could grow up with her children, they never outgrew home". In January at the age of five and a half, Keynes started at the kindergarten of the Perse School for Girls for five mornings a week. He quickly showed a talent for arithmetic, but his health was poor leading to several long absences. He was tutored at home by a governess, Beatrice Mackintosh, and his mother.
In January , at eight and a half, he started as a day pupil at St Faith's preparatory school.
By , Keynes was top of his class and excelling at mathematics. In , St Faith's headmaster, Ralph Goodchild, wrote that Keynes was "head and shoulders above all the other boys in the school" and was confident that Keynes could get a scholarship to Eton. In , Keynes won a scholarship to Eton College , where he displayed talent in a wide range of subjects, particularly mathematics, classics and history. In Keynes left Eton for King's College, Cambridge , after receiving a scholarship for this also to read mathematics.
Alfred Marshall begged Keynes to become an economist,  although Keynes's own inclinations drew him towards philosophy — especially the ethical system of G. Keynes joined the Pitt Club  and was an active member of the semi-secretive Cambridge Apostles society, a debating club largely reserved for the brightest students.
Like many members, Keynes retained a bond to the club after graduating and continued to attend occasional meetings throughout his life. He was said to be an atheist. In May , he received a first class BA in mathematics. Aside from a few months spent on holidays with family and friends, Keynes continued to involve himself with the university over the next two years.
He took part in debates, further studied philosophy and attended economics lectures informally as a graduate student for one term, which constituted his only formal education in the subject. He took civil service exams in The economist Harry Johnson wrote that the optimism imparted by Keynes's early life is a key to understanding his later thinking. According to Skidelsky , the sense of cultural unity current in Britain from the 19th century to the end of World War I provided a framework with which the well-educated could set various spheres of knowledge in relation to each other and to life, enabling them to confidently draw from different fields when addressing practical problems.
By Keynes had published his first professional economics article in The Economic Journal , about the effect of a recent global economic downturn on India.
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Also in , Keynes accepted a lectureship in economics funded personally by Alfred Marshall. Keynes's earnings rose further as he began to take on pupils for private tuition. In Keynes was made editor of The Economic Journal. By he had published his first book, Indian Currency and Finance. His written work was published under the name "J M Keynes", though to his family and friends he was known as Maynard. His father, John Neville Keynes, was also always known by his middle name.
While he did not formally re-join the civil service in , Keynes travelled to London at the government's request a few days before hostilities started. Bankers had been pushing for the suspension of specie payments — the convertibility of banknotes into gold — but with Keynes's help the Chancellor of the Exchequer then Lloyd George was persuaded that this would be a bad idea, as it would hurt the future reputation of the city if payments were suspended before it was absolutely necessary.
In January , Keynes took up an official government position at the Treasury. 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. According to economist Robert Lekachman , Keynes's "nerve and mastery became legendary" because of his performance of these duties, as in the case where he managed to assemble — with difficulty — a small supply of Spanish pesetas.
The secretary of the Treasury was delighted to hear Keynes had amassed enough to provide a temporary solution for the British Government. But Keynes did not hand the pesetas over, choosing instead to sell them all to break the market: On the introduction of military conscription in he applied for exemption as a conscientious objector , which was effectively granted conditional upon continuing his government work. In the King's Birthday Honours , Keynes was appointed Companion of the Order of the Bath for his wartime work,  and his success led to the appointment that would have a huge effect on Keynes's life and career; Keynes was appointed financial representative for the Treasury to the Versailles peace conference.
He was also appointed Officer of the Belgian Order of Leopold. Keynes's experience at Versailles was influential in shaping his future outlook, yet it was not a successful one for him. Keynes's main interest had been in trying to prevent Germany's compensation payments being set so high it would traumatise innocent German people, damage the nation's ability to pay and sharply limit her ability to buy exports from other countries — thus hurting not just Germany's own economy but that of the wider world.
Unfortunately for Keynes, conservative powers in the coalition that emerged from the coupon election were able to ensure that both Keynes himself and the Treasury were largely excluded from formal high-level talks concerning reparations. Their place was taken by the Heavenly Twins — the judge Lord Sumner and the banker Lord Cunliffe whose nickname derived from the "astronomically" high war compensation they wanted to demand from Germany.
Keynes was forced to try to exert influence mostly from behind the scenes. Lloyd George did however win some loyalty from Keynes with his actions at the Paris conference by intervening against the French to ensure the dispatch of much-needed food supplies to German civilians. Clemenceau also pushed for substantial reparations, though not as high as those proposed by the British, while on security grounds, France argued for an even more severe settlement than Britain. Wilson initially favoured relatively lenient treatment of Germany — he feared too harsh conditions could foment the rise of extremism, and wanted Germany to be left sufficient capital to pay for imports.
To Keynes's dismay, Lloyd George and Clemenceau were able to pressure Wilson to agree to include pensions in the reparations bill. Towards the end of the conference, Keynes came up with a plan that he argued would not only help Germany and other impoverished central European powers but also be good for the world economy as a whole. It involved the radical writing down of war debts, which would have had the possible effect of increasing international trade all round, but at the same time thrown the entire cost of European reconstruction on the United States.
Lloyd George agreed it might be acceptable to the British electorate. However, America was against the plan; the US was then the largest creditor, and by this time Wilson had started to believe in the merits of a harsh peace and thought that his country had already made excessive sacrifices. Hence despite his best efforts, the end result of the conference was a treaty which disgusted Keynes both on moral and economic grounds, and led to his resignation from the Treasury. Keynes's analysis on the predicted damaging effects of the treaty appeared in the highly influential book, The Economic Consequences of the Peace , published in In addition to economic analysis, the book contained pleas to the reader's sense of compassion:.
I cannot leave this subject as though its just treatment wholly depended either on our own pledges or on economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, —abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe.
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Also present was striking imagery such as "year by year Germany must be kept impoverished and her children starved and crippled" along with bold predictions which were later justified by events:. If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing.
Keynes's followers assert that his predictions of disaster were borne out when the German economy suffered the hyperinflation of , and again by the collapse of the Weimar Republic and the outbreak of the Second World War. However the historian Ruth Henig claims that "most historians of the Paris peace conference now take the view that, in economic terms, the treaty was not unduly harsh on Germany and that, while obligations and damages were inevitably much stressed in the debates at Paris to satisfy electors reading the daily newspapers, the intention was quietly to give Germany substantial help towards paying her bills, and to meet many of the German objections by amendments to the way the reparations schedule was in practice carried out".
Only a small fraction of reparations were ever paid. In fact, the historian Stephen Schuker demonstrates in American 'Reparations' to Germany, —33 , that the capital inflow from American loans substantially exceeded German outpayments so that, on a net basis, Germany received support equal to four times the amount of the post-Second World War Marshall Plan. Schuker also shows that, in the years after Versailles, Keynes became an informal reparations adviser to the German government, wrote one of the major German reparation notes, and actually supported the hyperinflation on political grounds.
Nevertheless, The Economic Consequences of the Peace gained Keynes international fame, even though it also caused him to be regarded as anti-establishment — it was not until after the outbreak of the Second World War that Keynes was offered a directorship of a major British Bank, or an acceptable offer to return to government with a formal job. However, Keynes was still able to influence government policy making through his network of contacts, his published works and by serving on government committees; this included attending high-level policy meetings as a consultant.
Keynes had completed his A Treatise on Probability before the war, but published it in Keynes developed the first upper-lower probabilistic interval approach to probability in chapters 15 and 17 of this book, as well as having developed the first decision weight approach with his conventional coefficient of risk and weight, c , in chapter In addition to his academic work, the s saw Keynes active as a journalist selling his work internationally and working in London as a financial consultant.
In Keynes wrote an obituary for his former tutor Alfred Marshall which Joseph Schumpeter called "the most brilliant life of a man of science I have ever read.
Britain suffered from high unemployment through most of the s, leading Keynes to recommend the depreciation of sterling to boost jobs by making British exports more affordable. From he was also advocating a fiscal response, where the government could create jobs by spending on public works. Keynes advised it was no longer a net benefit for countries such as Britain to participate in the gold standard , as it ran counter to the need for domestic policy autonomy. It could force countries to pursue deflationary policies at exactly the time when expansionary measures were called for to address rising unemployment.
The Treasury and Bank of England were still in favour of the gold standard and in they were able to convince the then Chancellor Winston Churchill to re-establish it, which had a depressing effect on British industry. Keynes responded by writing The Economic Consequences of Mr. Churchill and continued to argue against the gold standard until Britain finally abandoned it in Keynes had begun a theoretical work to examine the relationship between unemployment, money and prices back in the s. A central idea of the work was that if the amount of money being saved exceeds the amount being invested — which can happen if interest rates are too high — then unemployment will rise.
This is in part a result of people not wanting to spend too high a proportion of what employers pay out, making it difficult, in aggregate, for employers to make a profit. Another key theme of the book is the unreliability of financial indices for representing an accurate — or indeed meaningful — indication of general shifts in purchasing power of currencies over time. In particular he criticised the justification of Britain's return to the gold standard in at pre-war valuation by reference to the wholesale price index. He argued that the index understated the effects of changes in the costs of services and of labour.
In he wrote, "We will not have any more crashes in our time. Keynes was deeply critical of the British government's austerity measures during the Great Depression. He believed that budget deficits were a good thing, a product of recessions. He wrote, "For Government borrowing of one kind or another is nature's remedy, so to speak, for preventing business losses from being, in so severe a slump as the present one, so great as to bring production altogether to a standstill.
At the height of the Great Depression, in , Keynes published The Means to Prosperity , which contained specific policy recommendations for tackling unemployment in a global recession, chiefly counter-cyclical public spending. The Means to Prosperity contains one of the first mentions of the multiplier effect. While it was addressed chiefly to the British Government, it also contained advice for other nations affected by the global recession. A copy was sent to the newly elected President Franklin D. Roosevelt and other world leaders. The work was taken seriously by both the American and British governments, and according to Robert Skidelsky , helped pave the way for the later acceptance of Keynesian ideas, though it had little immediate practical influence.
In the London Economic Conference opinions remained too diverse for a unified course of action to be agreed upon. Keynesian-like policies were adopted by Sweden and Germany, but Sweden was seen as too small to command much attention, and Keynes was deliberately silent about the successful efforts of Germany as he was dismayed by their imperialist ambitions and their treatment of Jews.
In , he received considerable support for his views on counter-cyclical public spending in Chicago, then America's foremost centre for economic views alternative to the mainstream. It was researched and indexed by one of Keynes's favourite students, later the economist David Bensusan-Butt. The General Theory challenged the earlier neoclassical economic paradigm, which had held that provided it was unfettered by government interference, the market would naturally establish full employment equilibrium. In doing so Keynes was partly setting himself against his former teachers Marshall and Pigou.
Keynes believed the classical theory was a "special case" that applied only to the particular conditions present in the 19th century, his own theory being the general one. Classical economists had believed in Say's law , which, simply put, states that " supply creates its own demand ", and that in a free market workers would always be willing to lower their wages to a level where employers could profitably offer them jobs.
John Maynard Keynes
An innovation from Keynes was the concept of price stickiness — the recognition that in reality workers often refuse to lower their wage demands even in cases where a classical economist might argue it is rational for them to do so. Due in part to price stickiness, it was established that the interaction of " aggregate demand " and " aggregate supply " may lead to stable unemployment equilibria — and in those cases, it is the state, not the market, that economies must depend on for their salvation.
The General Theory argues that demand, not supply, is the key variable governing the overall level of economic activity. Aggregate demand, which equals total un-hoarded income in a society, is defined by the sum of consumption and investment. 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. Without government intervention to increase expenditure, an economy can remain trapped in a low employment equilibrium — the demonstration of this possibility has been described as the revolutionary formal achievement of the work.
It is precisely with these plants and these men that we shall afford them. The General Theory is often viewed as the foundation of modern macroeconomics. Few senior American economists agreed with Keynes through most of the s. Keynes himself had only limited participation in the theoretical debates that followed the publication of the General Theory as he suffered a heart attack in , requiring him to take long periods of rest. Among others, Hyman Minsky and Post-Keynesian economists have argued that as result, Keynes's ideas were diluted by those keen to compromise with classical economists or to render his concepts with mathematical models like the IS—LM model which, they argue, distort Keynes's ideas.
In the General Theory and later, Keynes responded to the socialists and left-wing liberals who argued, especially during the Great Depression of the s, that capitalism caused war. He argued that if capitalism were managed domestically and internationally with coordinated international Keynesian policies, an international monetary system that didn't pit the interests of countries against each other, and a high degree of freedom of trade , then this system of managed capitalism could promote peace rather than conflict between countries.
His plans during World War II for post-war international economic institutions and policies which contributed to the creation at Bretton Woods of the International Monetary Fund and the World Bank , and later to the creation of the General Agreement on Tariffs and Trade and eventually the World Trade Organization were aimed to give effect to this vision.
Although Keynes has been widely criticised — especially by members of the Chicago school of economics — for advocating irresponsible government spending financed by borrowing, in fact he was a firm believer in balanced budgets and regarded the proposals for programs of public works during the Great Depression as an exceptional measure to meet the needs of exceptional circumstances. During the Second World War , Keynes argued in How to Pay for the War , published in , that the war effort should be largely financed by higher taxation and especially by compulsory saving essentially workers lending money to the government , rather than deficit spending , in order to avoid inflation.
Compulsory saving would act to dampen domestic demand, assist in channelling additional output towards the war efforts, would be fairer than punitive taxation and would have the advantage of helping to avoid a post war slump by boosting demand once workers were allowed to withdraw their savings. In September he was proposed to fill a vacancy in the Court of Directors of the Bank of England , and subsequently carried out a full term from the following April.
As the 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 mid 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. He proposed the creation of a common world unit of currency, the bancor , and new global institutions — a world central bank and the International Clearing Union.
Keynes envisaged these institutions managing an international trade and payments system with strong incentives for countries to avoid substantial trade deficits or surpluses. According to US economist J. Bradford DeLong , on almost every point where he was overruled by the Americans, Keynes was later proved correct by events.
The two new institutions, later known as the World Bank and the International Monetary Fund IMF , were founded as a compromise that primarily reflected the American vision. There would be no incentives for states to avoid a large trade surplus ; instead, the burden for correcting a trade imbalance would continue to fall only on the deficit countries, which Keynes had argued were least able to address the problem without inflicting economic hardship on their populations.
Yet, Keynes was still pleased when accepting the final agreement, saying that if the institutions stayed true to their founding principles, "the brotherhood of man will have become more than a phrase. After the war, Keynes continued to represent the United Kingdom in international negotiations despite his deteriorating health. He succeeded in obtaining preferential terms from the United States for new and outstanding debts to facilitate the rebuilding of the British economy.
Just before his death in , Keynes told Henry Clay, a professor of social economics and advisor to the Bank of England ,  of his hopes that Adam Smith 's " invisible hand " could help Britain out of the economic hole it was in: From the end of the Great Depression to the mids, Keynes provided the main inspiration for economic policy makers in Europe, America and much of the rest of the world. According to the economist John Kenneth Galbraith then a US government official charged with controlling inflation , in the rebound of the economy from wartime spending, "one could not have had a better demonstration of the Keynesian ideas.
The Keynesian Revolution was associated with the rise of modern liberalism in the West during the post-war period. Despite his popularity as a war hero, Churchill suffered a landslide defeat to Clement Attlee whose government's economic policy continued to be influenced by Keynes's ideas. In the late s and s, economists notably John Hicks , Franco Modigliani , and Paul Samuelson attempted to interpret and formalise Keynes's writings in terms of formal mathematical models.
In what had become known as the neoclassical synthesis , they combined Keynesian analysis with neoclassical economics to produce neo-Keynesian economics , which came to dominate mainstream macroeconomic thought for the next 40 years. By the s, Keynesian policies were adopted by almost the entire developed world and similar measures for a mixed economy were used by many developing nations. By then, Keynes's views on the economy had become mainstream in the world's universities. Throughout the s and s, the developed and emerging free capitalist economies enjoyed exceptionally high growth and low unemployment.
In late Time magazine ran a cover article with a title comment from Milton Friedman later echoed by U. President Richard Nixon , " We are all Keynesians now ". The article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: Keynesian economics were officially discarded by the British Government in , but forces had begun to gather against Keynes's ideas over 30 years earlier. Friedrich Hayek had formed the Mont Pelerin Society in , with the explicit intention of nurturing intellectual currents to one day displace Keynesianism and other similar influences.
Initially the society had little impact on the wider world — according to Hayek it was as if Keynes had been raised to sainthood after his death and that people refused to allow his work to be questioned. On the practical side of economic life, " big government " had appeared to be firmly entrenched in the s, but the balance began to shift towards the power of private interests in the s. Keynes had written against the folly of allowing "decadent and selfish" speculators and financiers the kind of influence they had enjoyed after World War I. International speculation was severely restricted by the capital controls in place after Bretton Woods.
According to the journalists Larry Elliott and Dan Atkinson , was the pivotal year when power shifted in favour of private agents such as currency speculators. As the key event Elliott and Atkinson picked out America's suspension of the conversion of the dollar into gold except on request of foreign governments, which they identified as the beginning of the breakdown of the Bretton Woods system. Criticisms of Keynes's ideas had begun to gain significant acceptance by the early s, as they were then able to make a credible case that Keynesian models no longer reflected economic reality.
Keynes himself included few formulas and no explicit mathematical models in his General Theory. For economists such as Hyman Minsky , Keynes's limited use of mathematics was partly the result of his scepticism about whether phenomena as inherently uncertain as economic activity could ever be adequately captured by mathematical models.
Nevertheless, many models were developed by Keynesian economists, with a famous example being the Phillips curve which predicted an inverse relationship between unemployment and inflation. It implied that unemployment could be reduced by government stimulus with a calculable cost to inflation. In , Milton Friedman published a paper arguing that the fixed relationship implied by the Philips curve did not exist. In the early s stagflation appeared in both the US and Britain just as Friedman had predicted, with economic conditions deteriorating further after the oil crisis.
Aided by the prestige gained from his successful forecast, Friedman led increasingly successful criticisms against the Keynesian consensus, convincing not only academics and politicians but also much of the general public with his radio and television broadcasts. The academic credibility of Keynesian economics was further undermined by additional criticism from other monetarists trained in the Chicago school of economics , by the Lucas critique and by criticisms from Hayek's Austrian School.
Keynesian principles fared increasingly poorly on the practical side of economics — by they had been displaced by monetarism as the primary influence on Anglo-American economic policy. A more typical response was to accept some elements of the criticisms while refining Keynesian economic theories to defend them against arguments that would invalidate the whole Keynesian framework — the resulting body of work largely composing New Keynesian economics. In Alan Blinder wrote about a "Keynesian Restoration", as work based on Keynes's ideas had to some extent become fashionable once again in academia, though in the mainstream it was highly synthesised with monetarism and other neoclassical thinking.
In the world of policy making, free market influences broadly sympathetic to monetarism have remained very strong at government level — in powerful normative institutions like the World Bank , the IMF and US Treasury , and in prominent opinion-forming media such as the Financial Times and The Economist.
Revealed: the 30-year economic betrayal dragging down Generation Y’s income
Londoner Tanaka Mhishi, who works in a bookshop, adds: They had a lot more freedom to do things younger: Several economists told the Guardian that policymakers should do more to even up the balance between young and old to avoid economic stagnation. Paul Johnson , director of the Institute of Fiscal Studies, said he feared intergenerational inequality would fuel wider inequality in society because youngsters with rich parents would retain such an unfair advantage in the important years of early adulthood.
Instead, it appears they are not hitting the basic stages of adulthood at the same time as previous generations because such milestones are so much more costly and in some cases they are even being paid less than their parents were at the same age. In Australia, millennials are being inched out of the housing market. In the UK, new figures will show the notion of a property-owning democracy has already been terminated.
Across Europe, the issue centres more around jobs — and the lack of them. The numbers of thirtysomethings still living with their parents is stubbornly high in countries such as Italy and Spain , with grave implications for birthrates and family formation in places whose demographics are already badly skewed towards elderly people.
Old and rise In seven major economies in North America and Europe , the growth in income of the average young couple and families in their 20s has lagged dramatically behind national averages over the past 30 years. Prosperity has plummeted for young adults in the rich world. Alex You added it Apr 06, Nicoricel marked it as to-read Sep 09, Ion Sterpan added it Jan 10, Karl marked it as to-read Oct 31, Sir marked it as to-read Dec 03, Richard Strum marked it as to-read Jan 25, Keith added it Apr 15, Mo marked it as to-read Mar 17, Thomas Lee marked it as to-read Jan 11, Kevin Africa is currently reading it Jul 06, Ling Xiao is currently reading it Aug 17, Jon Emerson marked it as to-read Oct 12, Wigglestaff marked it as to-read Jan 02,