John Manyard Keynes

John Maynard Keynes (1883–1946)

John Maynard Keynes (last name rhymes with “rains”) was born into an educated family, and during his life he worked in academia, economic publishing, private financial advising and management, currency speculation, and as an official in the British Treasury. While his contributions to economics were extensive, Keynes is most famous for his ideas about the Great Depression, the major economic crisis of the 20th century. The Depression’s effects were felt worldwide from roughly the early 1930s to the mid-1940s. The United States saw unemployment increase from 3 to 25 percent, a halving of the national income, and a near cessation of residential construction (Buchholz, p. 210).

Keynes’s analysis of the Great Depression focused on the role of savings. In his 1936 book The General Theory of Employment, Interest and Money, Keynes argued that excessive savings could lead to economic ruin. A weak economy made businesses hesitant or unable to make investments that created jobs. Without jobs, people had no income that, if spent, would have stimulated demand for more production. Savings increased in anticipation of economic hardship. But then savings dried up as joblessness persisted. Individual rationality (saving in hard times) led to collective irrationality (an unbreakable cycle of economic decline).

Keynes believed the government should support the economy. While Keynes generally endorsed free-market capitalism, the Depression’s unique challenges required unique solutions. Keynes argued that only the government had the resources to spend the money that individual consumers and businesses could not, and so break the cycle.

This approach proved relevant in the 1930s and ’40s. The New Deal government relief programs of President Franklin D. Roosevelt were designed to stimulate the economy in the early 1930s, while cuts to the federal budget in the late ’30s caused an immediate economic downturn. Extensive government spending funding World War II coincided with the end of the Depression. While some Keynesian policies had mixed results, the overall picture seemed to confirm Keynes’s arguments, and until the 1970s, Keynesianism predominated American economics. The “Great Society” domestic social programs — including Medicare and education funding — reflected Keynesian thinking. So too did the establishment of many of the institutions that form the basis of international trade and finance, such as the International Monetary Fund and the World Bank. While the 1980s and ’90s saw a resurgence in “classical” economic theories closer to Smith than to Keynes, the recent “recession” presents a new opportunity to debate whether Keynesian economics are still viable.