John Maynard Keynes

John Maynard Keynes, 1st Baron Keynes[2] CB FBA (/keɪnz/

The Right Honourable
KAYNZ; 5 June 1883 – 21 April 1946), was a British economist,
The Lord Keynes
whose ideas fundamentally changed the theory and practice of
CB FBA
macroeconomics and the economic policies of governments.
Originally trained in mathematics, he built on and greatly refined
earlier work on the causes of business cycles, and was one of the
most influential economists of the 20th century.[3][4][5][6] Widely
considered the founder of modern macroeconomics, his ideas are
the basis for the school of thought known as Keynesian
economics, and its various offshoots.[7]

During the Great Depression of the 1930s, Keynes spearheaded a

revolution in economic thinking, challenging the ideas of
neoclassical economics that held that free markets would, in the
short to medium term, automatically provide full employment, as
long as workers were flexible in their wage demands. He argued Born 5 June 1883
that aggregate demand (total spending in the economy) Cambridge,
determined the overall level of economic activity, and that Cambridgeshire,
inadequate aggregate demand could lead to prolonged periods of England
high unemployment. Keynes advocated the use of fiscal and Died 21 April 1946
monetary policies to mitigate the adverse effects of economic (aged 62)
recessions and depressions. He detailed these ideas in his Tilton, near Firle,
magnum opus, The General Theory of Employment, Interest and Sussex, England
Money, published in 1936. In the mid to late-1930s, leading
Nationality British
Western economies adopted Keynes's policy recommendations.
Almost all capitalist governments had done so by the end of the Alma mater Eton College,
two decades following Keynes's death in 1946. As a leader of the University of
British delegation, Keynes participated in the design of the Cambridge
international economic institutions established after the end of Political party Liberal
World War II but was overruled by the American delegation on Spouse(s) Lydia Lopokova
several aspects.
Academic career
Keynes's influence started to wane in the 1970s, partly as a result Institution King's College,
of the stagflation that plagued the Anglo-American economies Cambridge
during that decade, and partly because of criticism of Keynesian
Field Political economy ·
policies by Milton Friedman and other monetarists,[8] who
Probability
disputed the ability of government to favorably regulate the
School or Keynesian
business cycle with fiscal policy.[9] However, the advent of the
tradition economics
global financial crisis of 2007–2008 sparked a resurgence in
Keynesian thought. Keynesian economics provided the Alma mater King's College,
theoretical underpinning for economic policies undertaken in Cambridge
Influences Jeremy Bentham,
response to the crisis by President Barack Obama of the United Thomas Malthus,
States, Prime Minister Gordon Brown of the United Kingdom, Alfred Marshall,
and other heads of governments.[10] Nicholas
Johannsen, Knut
When Time magazine included Keynes among its Most Important Wicksell, Piero
People of the Century in 1999, it stated that "his radical idea that Sraffa, John Neville
governments should spend money they don't have may have Keynes, Bertrand
saved capitalism."[11] The Economist has described Keynes as Russell[1]
"Britain's most famous 20th-century economist."[12] In addition
Contributions Macroeconomics
to being an economist, Keynes was also a civil servant, a director
of the Bank of England, and a part of the Bloomsbury Group of Keynesian
intellectuals.[13] economics
Liquidity preference
Spending multiplier

Contents AD–AS model

Demand-side
Early life and education
economics
Career
First World War
Versailles peace conference
In the 1920s
During the Great Depression
Second World War
Postwar
Legacy
Keynesian ascendancy 1939–79
Neo-Keynesian economics
Keynesian economics out of favour 1979–2007
Keynesian resurgence 2008–09
Reception and views
Praise
Critiques
Views on race
Views on inflation
Views on trade imbalances
Personal life
Relationships
Marriage
Support for the arts
Investments
Political causes
Death
Arms
Publications
See also
 References
Notes and citations
Sources
Further reading
Primary sources
External links

Early life and education

John Maynard Keynes was born in Cambridge, Cambridgeshire,
England, to an upper-middle-class family. His father, John
Neville Keynes, was an economist and a lecturer in moral
sciences at the University of Cambridge and his mother Florence
Ada Keynes a local social reformer. Keynes was the first born,
and was followed by two more children – Margaret Neville
Keynes in 1885 and Geoffrey Keynes in 1887. Geoffrey became
a surgeon and Margaret married the Nobel Prize-winning
physiologist Archibald Hill.
King's College, Cambridge. Keynes's
grandmother wrote to him saying
According to the economic historian and biographer Robert
that, since he was born in
Skidelsky, Keynes's parents were loving and attentive. They Cambridge, people will expect him to
remained in the same house throughout their lives, where the be clever.
children were always welcome to return. Keynes would receive
considerable support from his father, including expert coaching to
help him pass his scholarship exams and financial help both as a young man and when his assets were
nearly wiped out at the onset of Great Depression in 1929. 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".[14]

In January 1889 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 1892, at eight and a half, he started as a day pupil at St Faith's preparatory school. By
1894, Keynes was top of his class and excelling at mathematics. In 1896, 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.[15][16]

In 1897, Keynes won a scholarship to Eton College, where he displayed talent in a wide range of
subjects, particularly mathematics, classics and history. At Eton, Keynes experienced the first "love of his
life" in Dan Macmillan, older brother of the future Prime Minister Harold Macmillan.[17] Despite his
middle-class background, Keynes mixed easily with upper-class pupils.

In 1902 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,[18] although Keynes's own
inclinations drew him towards philosophy – especially the ethical system of G. E. Moore. Keynes joined
the Pitt Club[19] 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. Before leaving
Cambridge, Keynes became the President of the Cambridge Union Society and Cambridge University
Liberal Club. He was said to be an atheist.[20][21]

In May 1904, 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 1906.

The economist Harry Johnson wrote that the optimism imparted by Keynes's early life is a key to
understanding his later thinking.[22] Keynes was always confident he could find a solution to whatever
problem he turned his attention to and retained a lasting faith in the ability of government officials to do
good.[23] Keynes's optimism was also cultural, in two senses: he was of the last generation raised by an
empire still at the height of its power and was also of the last generation who felt entitled to govern by
culture, rather than by expertise. 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 life, enabling them to confidently
draw from different fields when addressing practical problems.[14]

Career
In October 1908, Keynes's Civil Service career began as a clerk in the India Office.[24] He enjoyed his
work at first, but by 1908 had become bored and resigned his position to return to Cambridge and work
on probability theory, at first privately funded only by two dons at the university – his father and the
economist Arthur Pigou.

By 1909 Keynes had published his first professional economics article in The Economic Journal, about
the effect of a recent global economic downturn on India.[25] He founded the Political Economy Club, a
weekly discussion group. Also in 1909, 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 1911 Keynes was made the editor of The Economic Journal. By 1913 he had published his first book,
Indian Currency and Finance.[26] He was then appointed to the Royal Commission on Indian Currency
and Finance[27] – the same topic as his book – where Keynes showed considerable talent at applying
economic theory to practical problems. 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).[28]

First World War

The British Government called on Keynes's expertise during the First World War. While he did not
formally re-join the civil service in 1914, Keynes traveled 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 necessary.
In January 1915, 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: his boldness paid off, as pesetas then became much less scarce and
expensive.[29]

On the introduction of military conscription in 1916, he applied for exemption as a conscientious

objector, which was effectively granted conditional upon continuing his government work.

In the 1917 King's Birthday Honours, Keynes was appointed Companion of the Order of the Bath for his
wartime work,[30] 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 1919 Versailles peace
conference. He was also appointed Officer of the Belgian Order of Leopold.[31]

Versailles peace conference

Keynes's experience at Versailles was influential in shaping his
future outlook, yet it was not a successful one. Keynes's main
interest had been in trying to prevent Germany's compensation
payments being set so high it would traumatize 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 economy but that of the wider world.

Unfortunately for Keynes, conservative powers in the coalition

that emerged from the 1918 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 Keynes's colleague, David Lloyd
mostly from behind the scenes. George. Keynes was initially wary of
the "Welsh Wizard," preferring his
The three principal players at Versailles were Britain's Lloyd rival Asquith, but was impressed with
George, France's Clemenceau and America's President Lloyd George at Versailles; this did
Wilson.[32] It was only Lloyd George to whom Keynes had much not prevent Keynes from painting a
scathing picture of the then-prime
direct access; until the 1918 election he had some sympathy with
minister in his Economic
Keynes's view but while campaigning had found his speeches Consequences of the Peace.
were only well received by the public if he promised to harshly
punish Germany, and had therefore committed his delegation to
extracting high payments.
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 favored 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 result of the conference was a treaty which disgusted Keynes both on moral and economic
grounds and led to his resignation from the Treasury.[33]

In June 1919 he turned down an offer to become chairman of the British Bank of Northern Commerce, a
job that promised a salary of £2000 in return for a morning per week of work.

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 1919.[34] This work has been described as
Keynes's best book, where he was able to bring all his gifts to bear – his passion as well as his skill as an
economist. 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 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 was
possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized
life of Europe.

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 1923, 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".[35][36]

Only a small fraction of reparations was ever paid. In fact, the historian Stephen A. Schuker demonstrates
in American 'Reparations' to Germany, 1919–33, that the capital inflow from American loans
substantially exceeded German out payments 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 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.[33]

In the 1920s
Keynes had completed his A Treatise on Probability before the
war but published it in 1921.[33] The work was a notable
contribution to the philosophical and mathematical underpinnings
of probability theory, championing the important view that
probabilities were no more or less than truth values intermediate
between simple truth and falsity. 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 Keynes argued against a return to
first decision weight approach with his conventional coefficient the gold standard at parity with pre-
of risk and weight, c, in chapter 26. In addition to his academic war sterling valuation after World War
I
work, the 1920s saw Keynes active as a journalist selling his
work internationally and working in London as a financial
consultant. In 1924 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."[37] Marshall's widow
was "entranced" by the memorial, while Lytton Strachey rated it as one of Keynes's "best works".[33]

In 1922 Keynes continued to advocate reduction of German reparations with A Revision of the Treaty.[33]
He attacked the post-World War I deflation policies with A Tract on Monetary Reform in 1923[33] – a
trenchant argument that countries should target stability of domestic prices, avoiding deflation even at the
cost of allowing their currency to depreciate. Britain suffered from high unemployment through most of
the 1920s, leading Keynes to recommend the depreciation of sterling to boost jobs by making British
exports more affordable. From 1924 he was also advocating a fiscal response, where the government
could create jobs by spending on public works.[33] During the 1920s Keynes's pro stimulus views had
only limited effect on policy makers and mainstream academic opinion – according to Hyman Minsky
one reason was that at this time his theoretical justification was "muddled".[25] The Tract had also called
for an end to the gold standard. 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 favor of
the gold standard and in 1925 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 1931.[33]

During the Great Depression

Keynes had begun a theoretical work to examine the relationship
between unemployment, money, and prices back in the 1920s.[38]
The work, Treatise on Money, was published in 1930 in two
volumes. 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 criticized the justification of Britain's return to the
gold standard in 1925 at pre-war valuation by reference to the
wholesale price index. He argued that the index understated the The Great Depression with its
effects of changes in the costs of services and labor. periods of worldwide economic
hardship formed the backdrop
Keynes was deeply critical of the British government's austerity against which the Keynesian
Revolution took place. The image is
measures during the Great Depression. He believed that budget
Florence Owens Thompson by
deficits during recessions were a good thing and a natural product photographer Dorothea Lange taken
of an economic slump. He wrote, "For Government borrowing of in March 1936.
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."[39]

At the height of the Great Depression, in 1933, 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 1933 London Economic
Conference opinions remained too diverse for a unified course of action to be agreed upon.[40]
Keynesian-like policies were adopted by Sweden and Germany,
but Sweden was seen as too small to command much attention, External video
and Keynes was deliberately silent about the successful efforts Booknotes interview with Robert
of Germany as he was dismayed by its imperialist ambitions and Skidelsky on John Maynard Keynes:
its treatment of Jews. [40] Apart from Great Britain, Keynes's Fighting for Freedom, 1937–1946,
attention was primarily focused on the United States. In 1931, he 28 April 2002 (https://www.c-span.or
received considerable support for his views on counter-cyclical g/video/?169138-1/john-maynard-ke
public spending in Chicago, then America's foremost center for ynes-fighting-freedom), C-SPAN
economic views alternative to the mainstream. [25][40] However,
orthodox economic opinion remained generally hostile regarding
fiscal intervention to mitigate the depression, until just before the outbreak of war.[25] In late 1933
Keynes was persuaded by Felix Frankfurter to address President Roosevelt directly, which he did by
letters and face to face in 1934, after which the two men spoke highly of each other.[40] However,
according to Skidelsky, the consensus is that Keynes's efforts began to have a more than marginal
influence on US economic policy only after 1939.[40]

Keynes's magnum opus, The General Theory of Employment, Interest and Money was published in
1936[41]. It was researched and indexed by one of Keynes's favorite students, later the economist David
Bensusan-Butt.[42] The work served as a theoretical justification for the interventionist policies Keynes
favoured for tackling a recession. 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 theory being the general one.
Classical economists had believed in Say's law, which, simply put, states that "supply creates its
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. 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 that 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 on the state, not the market, that economies
must depend 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 enhance employment and total income only 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.[43] The book advocated activist economic policy by
government to stimulate demand in times of high unemployment, for example by spending on public
works. "Let us be up and doing, using our idle resources to increase our wealth," he wrote in 1928. "With
men and plants unemployed, it is ridiculous to say that we cannot afford these new developments. It is
precisely with these plants and these men that we shall afford them."[39]

The General Theory is often viewed as the foundation of modern macroeconomics. Few senior American
economists agreed with Keynes through most of the 1930s.[44] Yet his ideas were soon to achieve
widespread acceptance, with eminent American professors such as Alvin Hansen agreeing with the
 General Theory before the outbreak of World War II.[45][46][47]

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 1937, 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).[25][47] Keynes
began to recover in 1939, but for the rest of his life his
professional energies were directed largely towards the practical
side of economics: the problems of ensuring optimum allocation
of resources for the war efforts, post-war negotiations with
Caricature by David Low, 1934 America, and the new international financial order that was
presented at the Bretton Woods Conference.

In the General Theory and later, Keynes responded to the socialists who argued, especially during the
Great Depression of the 1930s, that capitalism caused war. He argued that if capitalism were managed
domestically and internationally (with coordinated international Keynesian policies, an international
monetary system that did not pit the interests of countries against one another, 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.[48]

Although Keynes has been widely criticized – 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.[49]

Second World War

During the Second World War, Keynes argued in How to Pay for the War, published in 1940, 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 channeling 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 1941 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.[50] In June 1942, Keynes was rewarded for
his service with a hereditary peerage in the King's Birthday Honours.[51] On 7 July his title was gazetted
as "Baron Keynes, of Tilton, in the County of Sussex" and he took his seat in the House of Lords on the
Liberal Party benches.[52]
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-1944 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.[53] The USA's greater negotiating strength, however,
meant that the outcomes accorded more closely to the more
conservative plans of Harry Dexter White. According to US
economist J. Bradford DeLong, on almost every point where he Keynes (right) and the US
representative Harry Dexter White at
was overruled by the Americans, Keynes was later proved correct
the inaugural meeting of the
by events.[54]
International Monetary Fund's Board
of Governors in Savannah, Georgia
The two new institutions, later known as the World Bank and the in 1946
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."[55][56]

Postwar
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.[57]

Just before his death in 1946, Keynes told Henry Clay, a professor of social economics and advisor to the
Bank of England,[58] of his hopes that Adam Smith's "invisible hand" could help Britain out of the
economic hole it was in: "I find myself more and more relying for a solution of our problems on the
invisible hand which I tried to eject from economic thinking twenty years ago."[59]

Legacy

Keynesian ascendancy 1939–79

From the end of the Great Depression to the mid-1970s, Keynes provided the main inspiration for
economic policymakers in Europe, America and much of the rest of the world.[47] While economists and
policymakers had become increasingly won over to Keynes's way of thinking in the mid and late 1930s,
it was only after the outbreak of World War II that governments started to borrow money for spending on
a scale sufficient to eliminate unemployment. 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."[60]

The Keynesian Revolution was associated with the rise of

modern liberalism in the West during the post-war period.[61]
Keynesian ideas became so popular that some scholars point to
Keynes as representing the ideals of modern liberalism, as Adam
Smith represented the ideals of classical liberalism.[62] After the
war, Winston Churchill attempted to check the rise of Keynesian
policy-making in the United Kingdom and used rhetoric critical
of the mixed economy in his 1945 election campaign. 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.[60]
Prime Minister Clement Attlee with
King George VI after Attlee won the
1945 election Neo-Keynesian economics
In the late 1930s and
1940s, 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 1950s, Keynesian policies were adopted by almost the

entire developed world and similar measures for a mixed Neo-Keynesian IS–LM model is used
economy were used by many developing nations. By then, to analyse the effect of demand
Keynes's views on the economy had become mainstream in the shocks on the economy
world's universities. Throughout the 1950s and 1960s, the
developed and emerging free capitalist economies enjoyed
exceptionally high growth and low unemployment.[63][64] Professor Gordon Fletcher has written that the
1950s and 1960s, when Keynes's influence was at its peak, appear in retrospect as a golden age of
capitalism.[47]

In late 1965 Time magazine ran a cover article with a title comment from Milton Friedman (later echoed
by U.S. 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: the modern capitalist economy does
not automatically work at top efficiency, but can be raised to that level by the intervention and influence
of the government." The article also states that Keynes was one of the three most important economists
who ever lived, and that his General Theory was more influential than the magna opera of other famous
economists, like Adam Smith's The Wealth of Nations.[65]

Keynesian economics out of favour 1979–2007

Keynesian economics were officially discarded by the British Government in 1979, but forces had begun
to gather against Keynes's ideas over 30 years earlier. Friedrich Hayek had formed the Mont Pelerin
Society in 1947, with the explicit intention of nurturing intellectual currents to one day displace
Keynesianism and other similar influences. Its members included the Austrian School economist Ludwig
von Mises along with the then young Milton Friedman. 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.[66][67] Friedman however began to emerge as a
formidable critic of Keynesian economics from the mid-1950s, and especially after his 1963 publication
of A Monetary History of the United States.

On the practical side of economic life, "big government" had appeared to be firmly entrenched in the
1950s, but the balance began to shift towards the power of private interests in the 1960s. 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. For two decades after World War II the public opinion was
strongly against private speculators, the disparaging label "Gnomes of Zürich" being typical of how they
were described during this period. International speculation was severely restricted by the capital controls
in place after Bretton Woods. According to the journalists Larry Elliott and Dan Atkinson, 1968 was the
pivotal year when power shifted in favour of private agents such as currency speculators. As the key
1968 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.[68]

Criticisms of Keynes's ideas had begun to gain significant acceptance by the early 1970s, 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 1968, Milton Friedman published a paper arguing that the
fixed relationship implied by the Philips curve did not exist.[69] Friedman suggested that sustained
Keynesian policies could lead to both unemployment and inflation rising at once – a phenomenon that
soon became known as stagflation. In the early 1970s stagflation appeared in both the US and Britain just
as Friedman had predicted, with economic conditions deteriorating further after the 1973 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.[47] So successful were
these criticisms that by 1980 Robert Lucas claimed economists would often take offence if described as
Keynesians.[70]

Keynesian principles fared increasingly poorly on the practical side of economics – by 1979 they had
been displaced by monetarism as the primary influence on Anglo-American economic policy.[47]
However, many officials on both sides of the Atlantic retained a preference for Keynes, and in 1984 the
Federal Reserve officially discarded monetarism, after which Keynesian principles made a partial
comeback as an influence on policy making.[71] Not all academics accepted the criticism against Keynes
– Minsky has argued that Keynesian economics had been debased by excessive mixing with neoclassical
ideas from the 1950s, and that it was unfortunate that this branch of economics had even continued to be
called "Keynesian".[25] Writing in The American Prospect, Robert Kuttner argued it was not so much
excessive Keynesian activism that caused the economic problems of the 1970s but the breakdown of the
Bretton Woods system of capital controls, which allowed capital flight from regulated economies into
unregulated economies in a fashion similar to Gresham's law phenomenon (where weak currencies
undermine strong currencies).[72] Historian Peter Pugh has stated that a key cause of the economic
problems afflicting America in the 1970s was the refusal to raise taxes to finance the Vietnam War,
which was against Keynesian advice.[73]

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 1992 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.[74]

Keynesian resurgence 2008–09

The global financial crisis of 2007–08 led to public skepticism about the
free market consensus even from some on the economic right. In March
2008, Martin Wolf, chief economics commentator at the Financial Times,
announced the death of the dream of global free-market capitalism.[76] In
the same month macroeconomist James K. Galbraith used the 25th
Annual Milton Friedman Distinguished Lecture to launch a sweeping
attack against the consensus for monetarist economics and argued that
Keynesian economics were far more relevant for tackling the emerging
crises.[77] Economist Robert J. Shiller had begun advocating robust
government intervention to tackle the financial crises, specifically citing
Keynes.[78][79][80] Nobel laureate Paul Krugman also actively argued the
case for vigorous Keynesian intervention in the economy in his columns
for The New York Times.[81][82][83] Other prominent economic
commentators who have argued for Keynesian government intervention The economist Manmohan
to mitigate the financial crisis include George Akerlof,[84] J. Bradford Singh, the then prime
minister of India, spoke
DeLong,[85] Robert Reich,[86] and Joseph Stiglitz.[87] Newspapers and
strongly in favour of
other media have also cited work relating to Keynes by Hyman Keynesian fiscal stimulus at
Minsky,[25] Robert Skidelsky,[14] Donald Markwell[88] and Axel the 2008 G-20 Washington
Leijonhufvud.[89] summit.[75]

A series of major bailouts were pursued during the financial crisis,

starting on 7 September with the announcement that the U.S. Government was to nationalise the two
government-sponsored enterprises which oversaw most of the U.S. subprime mortgage market – Fannie
Mae and Freddie Mac. In October, Alistair Darling, the British Chancellor of the Exchequer, referred to
Keynes as he announced plans for substantial fiscal stimulus to head off the worst effects of recession, in
accordance with Keynesian economic thought.[90][91] Similar policies have been adopted by other
governments worldwide.[92][93] This is in stark contrast to the action imposed on Indonesia during the
Asian financial crisis of 1997, when it was forced by the IMF to close 16 banks at the same time,
prompting a bank run.[94] Much of the post-crisis discussion reflected Keynes's advocacy of international
coordination of fiscal or monetary stimulus, and of international economic institutions such as the IMF
and the World Bank, which many had argued should be reformed as a "new Bretton Woods", and should
have been even before the crises broke out.[95] The IMF and United Nations economists advocated a
coordinated international approach to fiscal stimulus.[96] Donald Markwell argued that in the absence of
such an international approach, there would be a risk of worsening international relations and possibly
even world war arising from economic factors similar to those present during the depression of the
1930s.[88]

By the end of December 2008, the Financial Times reported that "the sudden resurgence of Keynesian
policy is a stunning reversal of the orthodoxy of the past several decades."[97] In December 2008, Paul
Krugman released his book The Return of Depression Economics and the Crisis of 2008, arguing that
economic conditions similar to those that existed during the earlier part of the 20th century had returned,
making Keynesian policy prescriptions more relevant than ever. In February 2009 Robert J. Shiller and
George Akerlof published Animal Spirits, a book where they argue the current US stimulus package is
too small as it does not take into account Keynes's insight on the importance of confidence and
expectations in determining the future behaviour of businesspeople and other economic agents.

In the March 2009 speech entitled Reform the International Monetary System, Zhou Xiaochuan, the
governor of the People's Bank of China, came out in favour of Keynes's idea of a centrally managed
global reserve currency. Zhou argued that it was unfortunate that part of the reason for the Bretton Woods
system breaking down was the failure to adopt Keynes's bancor. Zhou proposed a gradual move towards
increased use of IMF special drawing rights (SDRs).[98][99] Although Zhou's ideas had not been broadly
accepted, leaders meeting in April at the 2009 G-20 London summit agreed to allow $250 billion of
special drawing rights to be created by the IMF, to be distributed globally. Stimulus plans were credited
for contributing to a better than expected economic outlook by both the OECD[100] and the IMF,[101][102]
in reports published in June and July 2009. Both organisations warned global leaders that recovery was
likely to be slow, so counter recessionary measures ought not be rolled back too early.

While the need for stimulus measures was broadly accepted among policy makers, there had been much
debate over how to fund the spending. Some leaders and institutions, such as Angela Merkel[103] and the
European Central Bank,[104] expressed concern over the potential impact on inflation, national debt and
the risk that a too large stimulus will create an unsustainable recovery.

Among professional economists the revival of Keynesian economics has been even more divisive.
Although many economists, such as George Akerlof, Paul Krugman, Robert Shiller, and Joseph Stiglitz,
supported Keynesian stimulus, others did not believe higher government spending would help the United
States economy recover from the Great Recession. Some economists, such as Robert Lucas, questioned
the theoretical basis for stimulus packages.[105] Others, like Robert Barro and Gary Becker, say that
empirical evidence for beneficial effects from Keynesian stimulus does not exist.[106] However, there is a
growing academic literature that shows that fiscal expansion helps an economy grow in the near term,
and that certain types of fiscal stimulus are particularly effective.[107][108]

Reception and views

Praise
Keynes's economic thinking only began to achieve close to universal acceptance in the last few years of
his life. On a personal level, Keynes's charm was such that he was generally well received wherever he
went – even those who found themselves on the wrong side of his occasionally sharp tongue rarely bore a
grudge.[109] Keynes's speech at the closing of the Bretton Woods negotiations was received with a lasting
standing ovation, rare in international relations, as the delegates acknowledged the scale of his
achievements made despite poor health.[23]

Austrian School economist Friedrich Hayek was Keynes's most prominent contemporary critic, with
sharply opposing views on the economy.[43] Yet after Keynes's death, he wrote: "He was the one really
great man I ever knew, and for whom I had unbounded admiration. The world will be a very much poorer
place without him."[110]

Lionel Robbins, former head of the economics department at the London School of Economics, who
engaged in many heated debates with Keynes in the 1930s, had this to say after observing Keynes in
early negotiations with the Americans while drawing up plans for Bretton Woods:[43]

This went very well indeed. Keynes was in his most lucid and persuasive mood: and the
effect was irresistible. At such moments, I often find myself thinking that Keynes must be
one of the most remarkable men that have ever lived – the quick logic, the birdlike swoop of
intuition, the vivid fancy, the wide vision, above all the incomparable sense of the fitness of
words, all combine to make something several degrees beyond the limit of ordinary human
achievement.

Douglas LePan,[43] an official from the Canadian High Commission, wrote:

I am spellbound. This is the most beautiful creature I have ever listened to. Does he belong
to our species? Or is he from some other order? There is something mythic and fabulous
about him. I sense in him something massive and sphinx like, and yet also a hint of wings.

Bertrand Russell[111] named Keynes one of the most intelligent people he had ever known,
commenting:[112]

Keynes's intellect was the sharpest and clearest that I have ever known. When I argued with
him, I felt that I took my life in my hands, and I seldom emerged without feeling something
of a fool.

Keynes's obituary in The Times included the comment: "There is the man himself – radiant, brilliant,
effervescent, gay, full of impish jokes ... He was a humane man genuinely devoted to the cause of the
common good."[45]

Critiques
As a man of the centre described by some as having the greatest impact of any 20th-century
economist,[38] Keynes attracted considerable criticism from both sides of the political spectrum. In the
1920s, Keynes was seen as anti-establishment and was mainly attacked from the right. In the "red
1930s", many young economists favoured Marxist views, even in Cambridge,[25] and while Keynes was
engaging principally with the right to try to persuade them of the merits of more progressive policy, the
most vociferous criticism against him came from the left, who saw him as a supporter of capitalism.
From the 1950s and onwards, most of the attacks against Keynes have again been from the right.

In 1931 Friedrich Hayek extensively critiqued Keynes's 1930 Treatise on

Money.[113] After reading Hayek's The Road to Serfdom, Keynes wrote to
Hayek[114] "Morally and philosophically I find myself in agreement with
virtually the whole of it", but concluded the letter with the
recommendation:

What we need therefore, in my opinion, is not a change in

our economic programmes, which would only lead in
practice to disillusion with the results of your philosophy;
but perhaps even the contrary, namely, an enlargement of
them. Your greatest danger is the probable practical failure
of the application of your philosophy in the United States. Friedrich Hayek, one of
Keynes's most prominent
critics
On the pressing issue of the time, whether deficit spending could lift a
country from depression, Keynes replied to Hayek's criticism[115] in the
following way:

I should... conclude rather differently. I should say that what we want is not no planning, or
even less planning, indeed I should say we almost certainly want more. But the planning
should take place in a community in which as many people as possible, both leaders and
followers wholly share your moral position. Moderate planning will be safe enough if those
carrying it out are rightly oriented in their minds and hearts to the moral issue.

Asked why Keynes expressed "moral and philosophical" agreement with Hayek's Road to Serfdom,
Hayek stated:[116]

Because he 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. He was, in a
sense, corrupted by political necessity.

According to some observers, Hayek felt that the post-World War II "Keynesian orthodoxy" gave too
much power to the state, and that such policies would lead toward socialism.[117]

While Milton Friedman described 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.[118] 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 Tract on Monetary Reform (1923), which he regarded as Keynes's best work because of its focus on
maintaining domestic price stability.[118]
Joseph Schumpeter was an economist of the same age as Keynes and one of his main rivals. He was
among the first reviewers to argue that Keynes's General Theory was not a general theory, but a special
case.[119] He said the work expressed "the attitude of a decaying civilisation". After Keynes's death
Schumpeter wrote a brief biographical piece Keynes the Economist – on a personal level he was very
positive about Keynes as a man, praising his pleasant nature, courtesy and kindness. He assessed some of
Keynes's biographical and editorial work as among the best he'd ever seen. Yet Schumpeter remained
critical about Keynes's economics, linking Keynes's childlessness to what Schumpeter saw as an
essentially short term view. He considered Keynes to have a kind of unconscious patriotism that caused
him to fail to understand the problems of other nations. For Schumpeter "Practical Keynesianism is a
seedling which cannot be transplanted into foreign soil: it dies there and becomes poisonous as it
dies."[120]

President Harry S. Truman was skeptical of Keynesian theorizing: "Nobody can ever convince me that
government can spend a dollar that it's not got," he told Leon Keyserling, a Keynesian economist who
chaired Truman's Council of Economic Advisers.[39]

Views on race
Keynes sometimes explained the mass murder that took place during the first years of communist Russia
on a racial basis, as part of the "Russian and Jewish nature", rather than as a result of the communist rule.
After a trip to Russia, he wrote in his Short View of Russia that there is "beastliness on the Russian and
Jewish natures when, as now, they are allied together". He also wrote that "out of the cruelty and
stupidity of the Old Russia nothing could ever emerge, but (...) beneath the cruelty and stupidity of the
New Russia a speck of the ideal may lie hid", which together with other comments may be construed as
anti-Russian and antisemitic.[121]

Some critics have sought to show that Keynes had sympathy with Nazism, and a number of writers
described him as antisemitic. Keynes's private letters contain portraits and descriptions, some of which
can be characterized as antisemitic, others as philosemitic.[122][123] Scholars have suggested that these
reflect clichés current at the time that he accepted uncritically, rather than any racism.[124] On several
occasions Keynes used his influence to help his Jewish friends, most notably when he successfully
lobbied for Ludwig Wittgenstein to be allowed residency in the United Kingdom, explicitly in order to
rescue him from being deported to Nazi-occupied Austria. Keynes was a supporter of Zionism, serving
on committees supporting the cause.[124]

Allegations that he was racist or had totalitarian beliefs have been rejected by Robert Skidelsky and other
biographers.[23] Professor Gordon Fletcher wrote that "the suggestion of a link between Keynes and any
support of totalitarianism cannot be sustained".[47] Once the aggressive tendencies of the Nazis towards
Jews and other minorities had become apparent, Keynes made clear his loathing of Nazism. As a lifelong
pacifist he had initially favoured peaceful containment of Nazi Germany, yet he began to advocate a
forceful resolution while many conservatives were still arguing for appeasement. After the war started he
roundly criticised the Left for losing their nerve to confront Hitler:

The intelligentsia of the Left were the loudest in demanding that the Nazi aggression should
be resisted at all costs. When it comes to a showdown, scarce four weeks have passed before
they remember that they are pacifists and write defeatist letters to your columns, leaving the
defence of freedom and civilisation to Colonel Blimp and the Old School Tie, for whom
Three Cheers.[43]
Views on inflation
Keynes has been characterised as being indifferent or even positive about mild inflation.[125] He had
indeed expressed a preference for inflation over deflation, saying that if one has to choose between the
two evils, it is "better to disappoint the rentier" than to inflict pain on working class families.[126] He also
supported the German hyperinflation as a way to get free from reparations obligations. However, Keynes
was also aware of the dangers of inflation.[47] In The Economic Consequences of the Peace, he wrote:

Lenin is said to have declared that the best way to destroy the Capitalist System was to
debauch the currency. By a continuing process of inflation, governments can confiscate,
secretly and unobserved, an important part of the wealth of their citizens. There is no subtler,
no surer means of overturning the existing basis of society than to debauch the currency. The
process engages all the hidden forces of economic law on the side of destruction, and does it
in a manner which not one man in a million is able to diagnose.[125]

Views on trade imbalances

Keynes was the principal author of a proposal – the so-called Keynes Plan – for an International Clearing
Union. The two governing principles of the plan were that the problem of settling outstanding balances
should be solved by "creating" additional "international money", and that debtor and creditor should be
treated almost alike as disturbers of equilibrium. In the event, though, the plans were rejected, in part
because "American opinion was naturally reluctant to accept the principle of equality of treatment so
novel in debtor-creditor relationships".[127]

The new system is not founded on free-trade (liberalisation[128] of foreign trade[129]) but rather on the
regulation of international trade, in order to eliminate trade imbalances: the nations with a surplus would
have an incentive to reduce it, and in doing so they would automatically clear other nations deficits.[130]
He proposed a global bank that would issue its currency – the bancor – which was exchangeable with
national currencies at fixed rates of exchange and would become the unit of account between nations,
which means it would be used to measure a country's trade deficit or trade surplus. Every country would
have an overdraft facility in its bancor account at the International Clearing Union. He pointed out that
surpluses lead to weak global aggregate demand – countries running surpluses exert a "negative
externality" on trading partners, and posed, far more than those in deficit, a threat to global
prosperity.[131]

In his 1933 Yale Review article "National Self-Sufficiency,"[132][133] he already highlighted the problems
created by free trade. His view, supported by many economists and commentators at the time, was that
creditor nations may be just as responsible as debtor nations for disequilibrium in exchanges and that
both should be under an obligation to bring trade back into a state of balance. Failure for them to do so
could have serious consequences. In the words of Geoffrey Crowther, then editor of The Economist, "If
the economic relationships between nations are not, by one means or another, brought fairly close to
balance, then there is no set of financial arrangements that can rescue the world from the impoverishing
results of chaos."[134]
These ideas were informed by events prior to the Great Depression when – in the opinion of Keynes and
others – international lending, primarily by the U.S., exceeded the capacity of sound investment and so
got diverted into non-productive and speculative uses, which in turn invited default and a sudden stop to
the process of lending.[135]

Influenced by Keynes, economics texts in the immediate post-war period put a significant emphasis on
balance in trade. For example, the second edition of the popular introductory textbook, An Outline of
Money,[136] devoted the last three of its ten chapters to questions of foreign exchange management and in
particular the "problem of balance". However, in more recent years, since the end of the Bretton Woods
system in 1971, with the increasing influence of Monetarist schools of thought in the 1980s, and
particularly in the face of large sustained trade imbalances, these concerns – and particularly concerns
about the destabilising effects of large trade surpluses – have largely disappeared from mainstream
economics discourse[137] and Keynes' insights have slipped from view.[138] They are receiving some
attention again in the wake of the financial crisis of 2007–08.[139]

Personal life

Relationships
Keynes's early romantic and sexual relationships were
exclusively with men.[140] Keynes had been in relationships
while at Eton and Cambridge; significant among these early
partners were Dilly Knox and Daniel Macmillan.[17][141] Keynes
was open about his affairs, and from 1901 to 1915 kept separate
diaries in which he tabulated his many sexual
encounters.[142][143] Keynes's relationship and later close
friendship with Macmillan was to be fortunate, as Macmillan's
company first published his tract Economic Consequences of the
Peace.[144]

Attitudes in the Bloomsbury Group, in which Keynes was avidly

involved, were relaxed about homosexuality. Keynes, together
Painter Duncan Grant (left) with
with writer Lytton Strachey, had reshaped the Victorian attitudes Keynes
of the Cambridge Apostles: "since [their] time, homosexual
relations among the members were for a time common", wrote
Bertrand Russell.[145] The artist Duncan Grant, whom he met in 1908, was one of Keynes's great loves.
Keynes was also involved with Lytton Strachey,[140] though they were for the most part love rivals, not
lovers. Keynes had won the affections of Arthur Hobhouse,[146] and as with Grant, fell out with a jealous
Strachey for it.[147] Strachey had previously found himself put off by Keynes, not least because of his
manner of "treat[ing] his love affairs statistically".[148]

Political opponents have used Keynes's sexuality to attack his academic work.[149] One line of attack
held that he was uninterested in the long term ramifications of his theories because he had no
children.[149]

Keynes's friends in the Bloomsbury Group were initially surprised when, in his later years, he began
pursuing affairs with women,[150] demonstrating himself to be bisexual.[151] Ray Costelloe (who would
later marry Oliver Strachey) was an early heterosexual interest of Keynes.[152] In 1906, Keynes had
written of this infatuation that, "I seem to have fallen in love with Ray a little bit, but as she isn't male I
haven't [been] able to think of any suitable steps to take."[153]

Marriage
In 1921, Keynes wrote that he had fallen "very much in love"
with Lydia Lopokova, a well-known Russian ballerina and one of
the stars of Sergei Diaghilev's Ballets Russes.[154] In the early
years of his courtship, he maintained an affair with a younger
man, Sebastian Sprott, in tandem with Lopokova, but eventually
chose Lopokova exclusively.[155][156] They were married in
1925, with Keynes's former lover Duncan Grant as best
man.[111][140] "What a marriage of beauty and brains, the fair
Lopokova and John Maynard Keynes" was said at the time.
Keynes later commented to Strachey that beauty and intelligence
were rarely found in the same person, and that only in Duncan
Grant had he found the combination.[157] The union was happy,
with biographer Peter Clarke writing that the marriage gave
Keynes "a new focus, a new emotional stability and a sheer
delight of which he never wearied".[28][158] Lydia became Lydia Lopokova and Keynes in the
pregnant in 1927 but miscarried.[28] Among Keynes's 1920s
Bloomsbury friends, Lopokova was, at least initially, subjected to
criticism for her manners, mode of conversation, and supposedly
humble social origins – the last of the ostensible causes being particularly noted in the letters of Vanessa
and Clive Bell, and Virginia Woolf.[159][160] In her novel Mrs Dalloway (1925), Woolf bases the
character of Rezia Warren Smith on Lopokova.[161] E. M. Forster would later write in contrition about
"Lydia Keynes, every whose word should be recorded":[162] "How we all used to underestimate her".[159]

Support for the arts

Keynes thought that the pursuit of money for its own sake was a pathological condition, and that the
proper aim of work is to provide leisure. He wanted shorter working hours and longer holidays for all.[49]

Keynes was interested in literature in general and drama in particular and supported the Cambridge Arts
Theatre financially, which allowed the institution to become one of the major British stages outside
London.[111]

Keynes's interest in classical opera and dance led him to support the Royal Opera House at Covent
Garden and the Ballet Company at Sadler's Wells. During the war, as a member of CEMA (Council for
the Encouragement of Music and the Arts), Keynes helped secure government funds to maintain both
companies while their venues were shut. Following the war, Keynes was instrumental in establishing the
Arts Council of Great Britain and was its founding chairman in 1946. From the start, the two
organisations that received the largest grants from the new body were the Royal Opera House and
Sadler's Wells.

Like several other notable British authors of his time, Keynes was a member of the Bloomsbury Group.
Virginia Woolf's biographer tells an anecdote of how Virginia Woolf, Keynes, and T. S. Eliot discussed
religion at a dinner party, in the context of their struggle against Victorian era morality.[164] Keynes may
have been confirmed,[165] but according to Cambridge University
he was clearly an agnostic, which he remained until his
death.[166] According to one biographer, "he was never able to
take religion seriously, regarding it as a strange aberration of the
human mind."[165]

Investments
Keynes was ultimately a successful investor, building up a private
fortune. His assets were nearly wiped out following the Wall
Street Crash of 1929, which he did not foresee, but he soon
recouped. At Keynes's death, in 1946, his net worth stood just
short of £500,000 – equivalent to about £20.5 million ($27.1
million) in 2018. The sum had been amassed despite lavish
support for various good causes and his ethic which made him
reluctant to sell on a falling market, in cases where he saw such
46 Gordon Square, where Keynes
behaviour as likely to deepen a slump.[167]
would often stay while in London.
Following his marriage, Keynes took
Keynes built up a substantial collection of fine art, including
out an extended lease on Tilton
works by Paul Cézanne, Edgar Degas, Amedeo Modigliani, House, a farm in the countryside
Georges Braque, Pablo Picasso, and Georges Seurat (some of near Brighton, which became the
which can now be seen at the Fitzwilliam Museum).[111] He couple's main home when not in the
enjoyed collecting books; he collected and protected many of capital.[163]
Isaac Newton's papers. In part on the basis of these papers,
Keynes wrote of Newton as "the last of the magicians."[168]

Keynes successfully managed the endowment of King's College,

Cambridge, with the active component of his portfolio
outperforming a British equity index by an average of 8% a year
over a quarter century, earning him favourable mention by later
investors such as Warren Buffett and George Soros.[169]

Political causes
Keynes was a lifelong member of the Liberal Party, which until
the 1920s had been one of the two main political parties in the
Blue plaque, 46 Gordon Square
United Kingdom, and as late as 1916 had often been the
dominant power in government. Keynes had helped campaign for
the Liberals at elections from about 1906, yet he always refused
to run for office himself, despite being asked to do so on three separate occasions in 1920. From 1926,
when Lloyd George became leader of the Liberals, Keynes took a major role in defining the party's
economic policy, but by then the Liberals had been displaced into third party status by the Labour
Party.[14]

In 1939 Keynes had the option to enter Parliament as an independent MP with the University of
Cambridge seat. A by-election for the seat was to be held due to the illness of an elderly Tory, and the
master of Magdalene College had obtained agreement that none of the major parties would field a
candidate if Keynes chose to stand. Keynes declined the invitation as he felt he would wield greater
influence on events if he remained a free agent.[28]

Keynes was a proponent of eugenics. He served as director of the British Eugenics Society from 1937 to
1944. As late as 1946, shortly before his death, Keynes declared eugenics to be "the most important,
significant and, I would add, genuine branch of sociology which exists."[170]

Keynes once remarked that "the youth had no religion save communism and this was worse than
nothing."[164] Marxism "was founded upon nothing better than a misunderstanding of Ricardo", and,
given time, he (Keynes) "would deal thoroughly with the Marxists" and other economists to solve the
economic problems their theories "threaten to cause".[164]

In 1931 Keynes had the following to say on Marxism:[171]

How can I accept the Communist doctrine, which sets up as its bible, above and beyond
criticism, an obsolete textbook which I know not only to be scientifically erroneous but
without interest or application to the modern world? How can I adopt a creed which,
preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the
intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all
human achievement? Even if we need a religion, how can we find it in the turbid rubbish of
the red bookshop? It is hard for an educated, decent, intelligent son of Western Europe to
find his ideals here, unless he has first suffered some strange and horrid process of
conversion which has changed all his values.

Keynes was a firm supporter of women's rights and in 1932 became vice-chairman of the Marie Stopes
Society which provided birth control education. He also campaigned against job discrimination against
women and unequal pay. He was an outspoken campaigner for reform of the laws against
homosexuality.[49]

Death
Throughout his life, Keynes worked energetically for the benefit
both of the public and his friends; even when his health was poor,
he laboured to sort out the finances of his old college.[172]
Helping to set up the Bretton Woods system, he worked to
institute an international monetary system that would be
beneficial for the world economy. In 1946, Keynes suffered a
series of heart attacks, which ultimately proved fatal. They began
during negotiations for the Anglo-American loan in Savannah, Tilton House, 2017
Georgia, where he was trying to secure favourable terms for the
United Kingdom from the United States, a process he described
as "absolute hell".[38][173] A few weeks after returning from the United States, Keynes died of a heart
attack at Tilton, his farmhouse home near Firle, East Sussex, England, on 21 April 1946, at the age of
62.[14][174] Against his wishes (he wanted for his ashes to be deposited in the crypt at King's), his ashes
were scattered on the Downs above Tilton.[175]
Both of Keynes's parents outlived him: his father John Neville Keynes (1852–1949) by three years, and
his mother Florence Ada Keynes (1861–1958) by twelve. Keynes's brother Sir Geoffrey Keynes (1887–
1982) was a distinguished surgeon, scholar, and bibliophile. His nephews include Richard Keynes (1919–
2010), a physiologist, and Quentin Keynes (1921–2003), an adventurer and bibliophile. Keynes had no
children; his widow, Lydia Lopokova, died in 1981.

Arms
Coat of arms of John Maynard Keynes

Notes
Granted 16th May 1944 [176]
Motto
Me Tutore Tutus Eris

Publications
1913 Indian Currency and Finance (https://www.gutenberg.org/ebooks/49166)
1915 The Economics of War in Germany (EJ)
1919 The Economic Consequences of the Peace
1921 A Treatise on Probability
1922 The Inflation of Currency as a Method of Taxation (MGCRE)
1922 Revision of the Treaty (https://www.gutenberg.org/ebooks/46037)
1923 A Tract on Monetary Reform
1925 Am I a Liberal? (N&A)
1926 The End of Laissez-Faire
1926 Laissez-Faire and Communism
1930 A Treatise on Money
1930 Economic Possibilities for our Grandchildren
1931 The End of the Gold Standard (Sunday Express)
1931 Essays in Persuasion (https://www.fadedpage.com/showbook.php?pid=20110804)
1931 The Great Slump of 1930 (https://www.fadedpage.com/showbook.php?pid=20141077)
1933 The Means to Prosperity (https://www.fadedpage.com/showbook.php?pid=20080102)
1933 An Open Letter to President Roosevelt (New York Times)
 1933 Essays in Biography
1936 The General Theory of Employment, Interest and Money
1937 The General Theory of Employment (https://www.jstor.org/stable/1882087?seq=1#pag
e_scan_tab_contents)
1940 How to Pay for the War: A radical plan for the Chancellor of the Exchequer
1949 Two Memoirs. Ed. by David Garnett (On Carl Melchior and G. E. Moore.)

See also
Animal spirits (Keynes)
Effective demand
Embedded liberalism
Global financial system
Nicholas Johannsen
Keynes family
Mixed Economy
Post-war consensus
Stockholm school (economics)
The Island of Sheep by John Buchan, where the financier Barralty is based on Keynes

References

Notes and citations

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www.glbtq.com/social-sciences/keynes_jm,2.html). glbtq. Archived from the original (http://w
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160. "Review: Keynes and the Celestial Dancer", by Anand Chandavarkar, Reviewed work(s):
Lydia and Maynard: Letters between Lydia Lopokova and Maynard Keynes by Polly Hill;
Richard Keynes, Economic and Political Weekly, Vol. 25, No. 34 (25 August 1990), p. 1896
161. Polly Hill; Richard Keynes, eds. (1989). Lydia and Maynard: letters between Lydia Lopokova
and John Maynard Keynes (https://archive.org/details/lydiamaynard00lydi). André Deutsch.
p. 97 (https://archive.org/details/lydiamaynard00lydi/page/97).
162. E.M. Forster (1987). Commonplace Book. p. 195. "Lydia Keynes, every whose word should
be recorded, said to me as I was leaving her flat the other night: "You know I once tumbled
from the stairs and believe me I paid the price." I took the sentence down before I forgot it."
163. "Tilton House homepage" (http://www.tiltonhouse.co.uk/). Tiltonhouse.co.uk. Retrieved
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1972. p. 177.
165. Skidelsky, Robert (1 January 1994). John Maynard Keynes: Volume 1: Hopes Betrayed
1883–1920. Penguin Books. p. 86. ISBN 014023554X.
166. Lubenow, William C (1998). The Cambridge Apostles, 1820–1914. Cambridge University
Press. ISBN 0-521-57213-4.
167. See John Maynard Keynes by Skidelsky (2003), pp. 520–21, p. 563 and especially p. 565
where Keynes is quoted as "It is the duty of a serious investor to accept the depreciation of
his holding with equanimity ... any other policy is anti-social, destructive of confidence and
incompatible with the working of the economic system."
168. Keynes, John Maynard (1956). James R. Newman (ed.). The World of Mathematics (2000
ed.). Dover. p. 277. ISBN 0-486-41153-2.
169. Chambers, David; Dimson, Elroy (Summer 2013). "Retrospectives: John Maynard Keynes,
Investment Innovator". Journal of Economic Perspectives. American Economic Association.
27 (3): 213–228. doi:10.1257/jep.27.3.213 (https://doi.org/10.1257%2Fjep.27.3.213).
170. Keynes, John Maynard (1946). "The Galton lecture, 1946: Presentation of the society's gold
medal" (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2986310). Eugenics Review. 38 (1):
39–40. PMC 2986310 (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2986310).
PMID 21260495 (https://pubmed.ncbi.nlm.nih.gov/21260495). "On February I4th, I946,
before a large gathering of Fellows, Members and guests at Manson house, London, Lord
Keynes, On behalf of the Eugenics Society, presented the first Galton Medal... Opening the
proceedings, Lord Keynes said: It is a satisfaction to take part in the presentation of the first
Galton Gold Medal, both in piety to the memory of the great Galton and in recognition of a
worthy and appropriate recipient of a medal established in his name."
171. Keynes, John Maynard (1931). Essays in Persuasion (https://archive.org/details/essaysinpe
rsuasi00john_1). New York, W.W. Norton & Co. ISBN 0-393-00190-3.
172. Fraser, Nick (8 November 2008). "John Maynard Keynes: Can the great economist save the
world?" (https://www.independent.co.uk/news/business/analysis-and-features/john-maynard
-keynes-can-the-great-economist-save-the-world-994416.html). The Independent. United
Kingdom. Retrieved 20 November 2008.
173. Marr, Andrew (2007). A history of modern Britain (https://books.google.com/books?id=CF9n
AAAAMAAJ&pg=PP1). London: Macmillan. p. 12. ISBN 978-1-4050-0538-8.
174. "Lord Keynes Dies of Heart Attack. Noted Economist Exhausted by Strain of Recent
Savannah Monetary Conference" (https://www.nytimes.com/1946/04/22/archives/lord-keyne
s-dies-of-heart-attack-noted-economist-exhausted-by.html). The New York Times. 22 April
1946. Retrieved 10 February 2010. "John Maynard Lord Keynes, distinguished economist,
whose work for restoring the economic structure of a world twice shattered by war brought
him world-wide influence, died of a heart attack today at his home in Firle, Sussex. His age
was 63."
175. Wilson, Scott. Resting Places: The Burial Sites of More Than 14,000 Famous Persons, 3d
ed.: 2 (Kindle Location 25430). McFarland & Company, Inc., Publishers. Kindle Edition.
176. "The Coat of Arms No. 226" (https://www.theheraldrysociety.com/wp-content/uploads/2019/
10/CoA-226-ODonoghue-paper.pdf) (PDF). The Heraldry Society. Retrieved 11 October
2019.

Sources
Backhouse, Roger E. and Bateman, Bradley W.. Capitalist Revolutionary: John Maynard
Keynes. 2011
Barnett, Vincent. John Maynard Keynes. London: Routledge, 2013. ISBN 978-0415567695.
Beaudreau, Bernard C.. The Economic Consequences of Mr. Keynes: How the Second
Industrial Revolution Passed Great Britain By. iUniverse, 2006, ISBN 0-595-41661-6
Clarke, Peter. Keynes: The Twentieth Century's Most Influential Economist. Bloomsbury,
2009, ISBN 978-1-4088-0385-1
Clarke, Peter. Keynes: The Rise, Fall and Return of the 20th Century's Most Influential
Economist, Bloomsbury Press, 2009
Davidson, Paul (2007). John Maynard Keynes (https://web.archive.org/web/2016081909253
1/http://library.fa.ru/files/Davidson.pdf) (PDF). Great Thinkers in Economics Series.
Basingstoke, England: Palgrave Macmillan. ISBN 9780230229204. Archived from the
original (http://www.library.fa.ru/files/Davidson.pdf) (PDF) on 19 August 2016.
Markwell, Donald. John Maynard Keynes and International Relations: Economic Paths to
War and Peace. Oxford University Press, 2006, ISBN 0-19-829236-8, ISBN 978-0-19-
829236-4
Markwell, Donald. Keynes and Australia (http://www.rba.gov.au/publications/rdp/2000/pdf/rd
p2000-04.pdf). Reserve Bank of Australia, 2000.
 Keynes, Milo (editor). Essays on John Maynard Keynes. Cambridge University Press, 1975,
ISBN 0-521-20534-4
Moggridge, Donald Edward. Keynes. Macmillan, 1980, ISBN 0-333-29524-2
Patinkin, Don. "Keynes, John Maynard", The New Palgrave: A Dictionary of Economics. v.
2, 1987, pp. 19–41. Macmillan ISBN 0-333-37235-2 (US Edition: ISBN 0-935859-10-1)
Schuker, Stephen A., "American 'Reparations' to Germany, 1919–33." Princeton Studies in
International Finance, No. 61 (1988).
Schuker, Stephen A., "J.M. Keynes and the Personal Politics of Reparations," Diplomacy &
Statecraft (25/3-4), 2014.
Skidelsky, Robert Jacob Alexander (1994). John Maynard Keynes: Hopes betrayed, 1883-
1920 (https://books.google.com/books?id=CnXWAAAAMAAJ&pg=PP1). Penguin Books.
ISBN 978-0-14-023554-8.
Skidelsky, Robert Jacob Alexander (1995). John Maynard Keynes: the Economist as
Saviour 1920-1937 (https://books.google.com/books?id=O8UUAQAAMAAJ&pg=PP1).
Penguin Books. ISBN 978-0-14-023806-8.
Skidelsky, Robert (2002). John Maynard Keynes: Fighting for Britain, 1937-1946 (https://boo
ks.google.com/books?id=J9qXmQEACAAJ&pg=PP1). Penguin. ISBN 978-0-14-200167-7.
Skidelsky, Robert (2010). Keynes: The Return of the Master (https://books.google.com/book
s?id=AoL3mdHGXz4C&pg=PP1). PublicAffairs. ISBN 978-1-61039-003-3.
Strachey, Lytton (1994). Michael Holroyd (ed.). Lytton Strachey by Himself: A Self-portrait (h
ttps://books.google.com/books?id=ngwwvgAACAAJ&pg=PP1). Vintage. ISBN 978-0-09-
945941-5.
Yergin, Daniel; Stanislaw, Joseph (2002). The Commanding Heights: The Battle for the
World Economy (https://books.google.com/books?id=uNYzPUhXhJYC&pg=PP1). Simon
and Schuster. ISBN 978-0-7432-2963-0.

Further reading
Bateman, Bradley (2010). The return to Keynes. Harvard University Press. ISBN 978-0-674-
03538-6.
Blaug, Mark (September 1994), "Recent Biographies of Keynes", Journal of Economic
Literature, 32 (3): 1204–1215, JSTOR 2728608 (https://www.jstor.org/stable/2728608)
Clarke, Peter. Keynes: The Rise, Fall and Return of the 20th Century's Most Influential
Economist, Bloomsbury Press, 2009
Davidson, Paul. John Maynard Keynes (Great Thinkers in Economics). Palgrave Macmillan,
2007, ISBN 1-4039-9623-7
Dillard, Dudley (1948). The Economics of John Maynard Keynes: The Theory of Monetary
Economy. Prentice-Hall, Inc. p. 384. ISBN 978-1-4191-2894-3.
Dimand, Robert W. and Harald Hagemann, eds. The Elgar Companion to John Maynard
Keynes (Edward Elgar, 20190 + 670 pp. online review (http://eh.net/?s=dimand)
Harrod, R. F.. The Life of John Maynard Keynes. Macmillan, 1951, ISBN 1-125-39598-2
Pecchi, Lorenzo & Gustavo Piga (2010). Revisiting Keynes. MIT Press. ISBN 978-0-262-
51511-5.
Skidelsky, Robert (2010). Keynes: A Very Short Introduction. Oxford: Oxford University
Press. ISBN 978-0-19-959164-0.
Skidelsky. Robert. John Maynard Keynes: 1883-1946: Economist, Philosopher, Statesman
(2005)
Skidelsky. Robert. John Maynard Keynes: Hopes Betrayed, 1883-1920 (Vol. 1) (1986)
 Skidelsky. Robert. John Maynard Keynes: Volume 2: The Economist as Savior, 1920-
1937 (1994)
Skidelsky. Robert. John Maynard Keynes, Vol. 3: Fighting for Freedom, 1937-1946
Syll, Lars Pålsson (2007). John Maynard Keynes. SNS Förlag. p. 95.
ISBN 9789185695270.
Temin, Peter & David Vines. Keynes: Useful Economics for the World Economy. MIT Press,
2014.
Wapshott, Nicholas. Keynes Hayek: The Clash That Defined Modern Economics. 2011

Primary sources
Keynes, John Maynard (1998). The Collected Writings of John Maynard Keynes (30 Volume
Hardback ed.). Cambridge: Cambridge University Press. ISBN 978-0-521-30766-6.

External links
Professor Robert Skildesky explains Keynes theories video (https://www.youtube.com/watc
h?v=q1YA-RG5qG0)
Professor Robert Skidelsky on economist Keynes video (https://www.youtube.com/watch?v
=DEBiziiVrNo)
Works by John Maynard Keynes (https://www.gutenberg.org/author/Keynes,+John+Maynar
d) at Project Gutenberg
Works by John Maynard Keynes (https://fadedpage.com/csearch.php?author=Keynes%2
C%20John%20Maynard) at Faded Page (Canada)
Works by or about John Maynard Keynes (https://archive.org/search.php?query=%28%28s
ubject%3A%22Keynes%2C%20John%20Maynard%22%20OR%20subject%3A%22Keyne
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t%3A%22John%20M%2E%20Keynes%22%20OR%20subject%3A%22J%2E%20M%2E%2
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22John%20Maynard%20Keynes%22%20OR%20description%3A%22John%20M%2E%20
Keynes%22%20OR%20description%3A%22J%2E%20M%2E%20Keynes%22%20OR%20
description%3A%22Keynes%2C%20John%20Maynard%22%20OR%20description%3A%2
2Keynes%2C%20John%20M%2E%22%20OR%20description%3A%22John%20Keynes%2
2%20OR%20description%3A%22Keynes%2C%20John%22%29%20OR%20%28%221883
-1946%22%20AND%20Keynes%29%29%20AND%20%28-mediatype:software%29) at
Internet Archive
Works by John Maynard Keynes (https://librivox.org/author/9726) at LibriVox (public domain
audiobooks)
"Archival material relating to John Maynard Keynes" (https://discovery.nationalarchives.gov.
uk/details/c/F71720). UK National Archives.
 John Maynard Keynes (https://scholar.google.com/citations?user=viLe5BEAAAAJ) on
Google Scholar
Keynes, The Economic Consequences of the Peace (https://web.archive.org/web/20060207
173710/http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/keynes/peace.htm) (1919)
Keynes, The end of laissez-faire (http://www.panarchy.org/keynes/laissezfaire.1926.html)
(1926)
Keynes, Economic Possibilities for our Grandchildren (http://www.panarchy.org/keynes/poss
ibilities.html) (1930)
Keynes, The raising of prices (http://www.panarchy.org/keynes/depression.html) (1933)
Keynes, National Self-Sufficiency (http://www.panarchy.org/keynes/national.1933.html)
(1933)
Keynes, An Open Letter to President Roosevelt (http://newdeal.feri.org/misc/keynes2.htm)
(1933)
Keynes, The General Theory of Employment, Interest and Money (https://www.marxists.org/
reference/subject/economics/keynes/general-theory/) (1936)
John Maynard Keynes (1883–1946) (http://www.econlib.org/library/Enc/bios/Keynes.html).
The Concise Encyclopedia of Economics. Library of Economics and Liberty (2nd ed.).
Liberty Fund. 2008.
Interactive E-Book John Maynard Keynes: The Lives of a Mind (http://jmaynardkeynes.ucc.i
e/) (2016). The Keynes Centre at University College Cork (http://keynes.ucc.ie/)

Peerage of the United Kingdom

Baron Keynes
New creation Extinct
1942–1946

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Keynesian economics
Keynesian economics (/ˈkeɪnziən/ KAYN-zee-ən; sometimes Keynesianism, named for the economist
John Maynard Keynes) are various macroeconomic theories about how in the short run – and especially
during recessions – economic output is strongly influenced by aggregate demand (total spending in the
economy). In the Keynesian view, aggregate demand does not necessarily equal the productive capacity
of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting
production, employment, and inflation.[1]

Keynesian economics developed during and after the Great Depression from the ideas presented by
Keynes in his 1936 book, The General Theory of Employment, Interest and Money.[2] Keynes contrasted
his approach to the aggregate supply-focused classical economics that preceded his book. The
interpretations of Keynes that followed are contentious and several schools of economic thought claim
his legacy.

Keynesian economics served as the standard economic model in the developed nations during the later
part of the Great Depression, World War II, and the post-war economic expansion (1945–1973), though it
lost some influence following the oil shock and resulting stagflation of the 1970s.[3] The advent of the
financial crisis of 2007–08 caused a resurgence in Keynesian thought,[4] which continues as new
Keynesian economics.

Keynesian economists generally argue that as aggregate demand is volatile and unstable, a market
economy often experiences inefficient macroeconomic outcomes in the form of economic recessions
(when demand is low) and inflation (when demand is high), and that these can be mitigated by economic
policy responses, in particular, monetary policy actions by the central bank and fiscal policy actions by
the government, which can help stabilize output over the business cycle.[5] Keynesian economists
generally advocate a managed market economy – predominantly private sector, but with an active role
for government intervention during recessions and depressions.[6]

Contents
Historical context
Pre-Keynesian macroeconomics
Precursors of Keynesianism
Keynes's early writings
Development of The General Theory
Origins of the multiplier
Public policy debates
The General Theory
Keynes and classical economics
Keynesian unemployment
Saving and investment
Liquidity preference
 Keynes’s economic model
Wage rigidity
Remedies for unemployment
Monetary remedies
Fiscal remedies
Keynesian models and concepts
Aggregate demand
The Keynesian multiplier
The liquidity trap
The IS–LM model
Keynesian economic policies
Active fiscal policy
Views on trade imbalance
Postwar Keynesianism
Schools
Is Keynesianism liberal?
Other schools of macroeconomic thought
Stockholm School
Monetarism
Marxian economics
Public choice
New classical
See also
References
Further reading
External links

Historical context

Pre-Keynesian macroeconomics
Macroeconomics is the study of the factors applying to an economy as a whole, such as the overall price
level, the interest rate, and the level of employment (or equivalently, of income/output measured in real
terms).

The classical tradition of partial equilibrium theory had been to split the economy into separate markets,
each of whose equilibrium conditions could be stated as a single equation determining a single variable.
The theoretical apparatus of supply and demand curves developed by Fleeming Jenkin and Alfred
Marshall provided a unified mathematical basis for this approach, which the Lausanne School
generalized to general equilibrium theory.

For macroeconomics the relevant partial theories were: the Quantity theory of money determining the
price level, the classical theory of the interest rate, and for employment the condition referred to by
Keynes as the "first postulate of classical economics" stating that the wage is equal to the marginal
product, which is a direct application of the marginalist principles developed during the nineteenth
century (see The General Theory). Keynes sought to supplant all three aspects of the classical theory.

Precursors of Keynesianism
Although Keynes's work was crystallized and given impetus by the advent of the Great Depression, it
was part of a long-running debate within economics over the existence and nature of general gluts. A
number of the policies Keynes advocated to address the Great Depression (notably government deficit
spending at times of low private investment or consumption), and many of the theoretical ideas he
proposed (effective demand, the multiplier, the paradox of thrift), had been advanced by various authors
in the 19th and early 20th centuries. Keynes's unique contribution was to provide a general theory of
these, which proved acceptable to the economic establishment.

An intellectual precursor of Keynesian economics was underconsumption theories associated with John
Law, Thomas Malthus, the Birmingham School of Thomas Attwood,[7] and the American economists
William Trufant Foster and Waddill Catchings, who were influential in the 1920s and 1930s.
Underconsumptionists were, like Keynes after them, concerned with failure of aggregate demand to
attain potential output, calling this "underconsumption" (focusing on the demand side), rather than
"overproduction" (which would focus on the supply side), and advocating economic interventionism.
Keynes specifically discussed underconsumption (which he wrote "under-consumption") in the General
Theory, in Chapter 22, Section IV (https://www.marxists.org/reference/subject/economics/keynes/general
-theory/ch22.htm#iv) and Chapter 23, Section VII (https://www.marxists.org/reference/subject/economic
s/keynes/general-theory/ch23.htm#vii).

Numerous concepts were developed earlier and independently of Keynes by the Stockholm school during
the 1930s; these accomplishments were described in a 1937 article, published in response to the 1936
General Theory, sharing the Swedish discoveries.[8]

The paradox of thrift was stated in 1892 by John M. Robertson in his The Fallacy of Saving, in earlier
forms by mercantilist economists since the 16th century, and similar sentiments date to antiquity.[9][10]

Keynes's early writings

In 1923 Keynes published his first contribution to economic theory, A Tract on Monetary Reform, whose
point of view is classical but incorporates ideas that later played a part in the General Theory. In
particular, looking at the hyperinflation in European economies, he drew attention to the opportunity cost
of holding money (identified with inflation rather than interest) and its influence on the velocity of
circulation.[11]

In 1930 he published A Treatise on Money, intended as a comprehensive treatment of its subject "which
would confirm his stature as a serious academic scholar, rather than just as the author of stinging
polemics",[12] and marks a large step in the direction of his later views. In it, he attributes unemployment
to wage stickiness[13] and treats saving and investment as governed by independent decisions: the former
varying positively with the interest rate,[14] the latter negatively.[15] The velocity of circulation is
expressed as a function of the rate of interest.[16] He interpreted his treatment of liquidity as implying a
purely monetary theory of interest.[17]
Keynes's younger colleagues of the Cambridge Circus and Ralph Hawtrey believed that his arguments
implicitly assumed full employment, and this influenced the direction of his subsequent work.[18] During
1933, he wrote essays on various economic topics "all of which are cast in terms of movement of output
as a whole".[19]

Development of The General Theory

At the time that Keynes's wrote the General Theory, it had been a tenet of mainstream economic thought
that the economy would automatically revert to a state of general equilibrium: it had been assumed that,
because the needs of consumers are always greater than the capacity of the producers to satisfy those
needs, everything that is produced would eventually be consumed once the appropriate price was found
for it. This perception is reflected in Say's law[20] and in the writing of David Ricardo,[21] which states
that individuals produce so that they can either consume what they have manufactured or sell their output
so that they can buy someone else's output. This argument rests upon the assumption that if a surplus of
goods or services exists, they would naturally drop in price to the point where they would be consumed.

Given the backdrop of high and persistent unemployment during the Great Depression, Keynes argued
that there was no guarantee that the goods that individuals produce would be met with adequate effective
demand, and periods of high unemployment could be expected, especially when the economy was
contracting in size. He saw the economy as unable to maintain itself at full employment automatically,
and believed that it was necessary for the government to step in and put purchasing power into the hands
of the working population through government spending. Thus, according to Keynesian theory, some
individually rational microeconomic-level actions such as not investing savings in the goods and services
produced by the economy, if taken collectively by a large proportion of individuals and firms, can lead to
outcomes wherein the economy operates below its potential output and growth rate.

Prior to Keynes, a situation in which aggregate demand for goods and services did not meet supply was
referred to by classical economists as a general glut, although there was disagreement among them as to
whether a general glut was possible. Keynes argued that when a glut occurred, it was the over-reaction of
producers and the laying off of workers that led to a fall in demand and perpetuated the problem.
Keynesians therefore advocate an active stabilization policy to reduce the amplitude of the business
cycle, which they rank among the most serious of economic problems. According to the theory,
government spending can be used to increase aggregate demand, thus increasing economic activity,
reducing unemployment and deflation.

Origins of the multiplier

The Liberal Party fought the 1929 General Election on a promise to "reduce levels of unemployment to
normal within one year by utilising the stagnant labour force in vast schemes of national
development".[22] David Lloyd George launched his campaign in March with a policy document, We can
cure unemployment, which tentatively claimed that, "Public works would lead to a second round of
spending as the workers spent their wages."[23] Two months later Keynes, then nearing completion of his
Treatise on money,[24] and Hubert Henderson collaborated on a political pamphlet seeking to "provide
academically respectable economic arguments" for Lloyd George's policies.[25] It was titled Can Lloyd
George do it? and endorsed the claim that "greater trade activity would make for greater trade activity ...
with a cumulative effect".[26] This became the mechanism of the "ratio" published by Richard Kahn in
his 1931 paper "The relation of home investment to unemployment",[27] described by Alvin Hansen as
"one of the great landmarks of economic analysis".[28] The "ratio" was soon rechristened the "multiplier"
at Keynes's suggestion.[29]

The multiplier of Kahn's paper is based on a respending mechanism familiar nowadays from textbooks.
Samuelson puts it as follows:

Let’s suppose that I hire unemployed resources to build a $1000 woodshed. My carpenters
and lumber producers will get an extra $1000 of income... If they all have a marginal
propensity to consume of 2/3, they will now spend $666.67 on new consumption goods. The
producers of these goods will now have extra incomes... they in turn will spend $444.44 ...
Thus an endless chain of secondary consumption respending is set in motion by my primary
investment of $1000.[30]

Samuelson's treatment closely follows Joan Robinson's account of 1937[31] and is the main channel by
which the multiplier has influenced Keynesian theory. It differs significantly from Kahn's paper and even
more from Keynes's book.

The designation of the initial spending as "investment" and the employment-creating respending as
"consumption" echoes Kahn faithfully, though he gives no reason why initial consumption or subsequent
investment respending shouldn't have exactly the same effects. Henry Hazlitt, who considered Keynes as
much a culprit as Kahn and Samuelson, wrote that ...

... in connection with the multiplier (and indeed most of the time) what Keynes is referring
to as "investment" really means any addition to spending for any purpose... The word
"investment" is being used in a Pickwickian, or Keynesian, sense.[32]

Kahn envisaged money as being passed from hand to hand, creating employment at each step, until it
came to rest in a cul-de-sac (Hansen's term was "leakage"); the only culs-de-sac he acknowledged were
imports and hoarding, although he also said that a rise in prices might dilute the multiplier effect. Jens
Warming recognised that personal saving had to be considered,[33] treating it as a "leakage" (p. 214)
while recognising on p. 217 that it might in fact be invested.

The textbook multiplier gives the impression that making society richer is the easiest thing in the world:
the government just needs to spend more. In Kahn's paper, it is harder. For him, the initial expenditure
must not be a diversion of funds from other uses, but an increase in the total expenditure: something
impossible – if understood in real terms – under the classical theory that the level of expenditure is
limited by the economy's income/output. On page 174, Kahn rejects the claim that the effect of public
works is at the expense of expenditure elsewhere, admitting that this might arise if the revenue is raised
by taxation, but says that other available means have no such consequences. As an example, he suggests
that the money may be raised by borrowing from banks, since ...

... it is always within the power of the banking system to advance to the Government the
cost of the roads without in any way affecting the flow of investment along the normal
channels.
This assumes that banks are free to create resources to answer any demand. But Kahn adds that ...

... no such hypothesis is really necessary. For it will be demonstrated later on that, pari
passu with the building of roads, funds are released from various sources at precisely the
rate that is required to pay the cost of the roads.

The demonstration relies on "Mr Meade's relation" (due to James Meade) asserting that the total amount
of money that disappears into culs-de-sac is equal to the original outlay,[34] which in Kahn's words
"should bring relief and consolation to those who are worried about the monetary sources" (p. 189).

A respending multiplier had been proposed earlier by Hawtrey in a 1928 Treasury memorandum ("with
imports as the only leakage"), but the idea was discarded in his own subsequent writings.[35] Soon
afterwards the Australian economist Lyndhurst Giblin published a multiplier analysis in a 1930 lecture
(again with imports as the only leakage).[36] The idea itself was much older. Some Dutch mercantilists
had believed in an infinite multiplier for military expenditure (assuming no import "leakage"), since ...

... a war could support itself for an unlimited period if only money remained in the country
... For if money itself is "consumed", this simply means that it passes into someone else's
possession, and this process may continue indefinitely.[37]

Multiplier doctrines had subsequently been expressed in more theoretical terms by the Dane Julius Wulff
(1896), the Australian Alfred de Lissa (late 1890s), the German/American Nicholas Johannsen (same
period), and the Dane Fr. Johannsen (1925/1927).[38] Kahn himself said that the idea was given to him as
a child by his father.[39]

Public policy debates

As the 1929 election approached "Keynes was becoming a strong public advocate of capital
development" as a public measure to alleviate unemployment.[40] Winston Churchill, the Conservative
Chancellor, took the opposite view:

It is the orthodox Treasury dogma, steadfastly held ... [that] very little additional
employment and no permanent additional employment can, in fact, be created by State
borrowing and State expenditure.[41]

Keynes pounced on a chink in the Treasury view. Cross-examining Sir Richard Hopkins, a Second
Secretary in the Treasury, before the Macmillan Committee on Finance and Industry in 1930 he referred
to the "first proposition" that "schemes of capital development are of no use for reducing unemployment"
and asked whether "it would be a misunderstanding of the Treasury view to say that they hold to the first
proposition". Hopkins responded that "The first proposition goes much too far. The first proposition
would ascribe to us an absolute and rigid dogma, would it not?"[42]

Later the same year, speaking in a newly created Committee of Economists, Keynes tried to use Kahn's
emerging multiplier theory to argue for public works, "but Pigou's and Henderson's objections ensured
that there was no sign of this in the final product".[43] In 1933 he gave wider publicity to his support for
Kahn's multiplier in a series of articles titled "The road to prosperity" in The Times newspaper.[44]
A. C. Pigou was at the time the sole economics professor at Cambridge. He had a continuing interest in
the subject of unemployment, having expressed the view in his popular Unemployment (1913) that it was
caused by "maladjustment between wage-rates and demand"[45] – a view Keynes may have shared prior
to the years of the General Theory. Nor were his practical recommendations very different: "on many
occasions in the thirties" Pigou "gave public support ... to State action designed to stimulate
employment."[46] Where the two men differed is in the link between theory and practice. Keynes was
seeking to build theoretical foundations to support his recommendations for public works while Pigou
showed no disposition to move away from classical doctrine. Referring to him and Dennis Robertson,
Keynes asked rhetorically: "Why do they insist on maintaining theories from which their own practical
conclusions cannot possibly follow?"[47]

The General Theory

John Maynard Keynes (1883–1946) set forward the ideas that became the basis for Keynesian economics
in his main work, The General Theory of Employment, Interest and Money (1936). It was written during
the Great Depression, when unemployment rose to 25% in the United States and as high as 33% in some
countries. It is almost wholly theoretical, enlivened by occasional passages of satire and social
commentary. The book had a profound impact on economic thought, and ever since it was published
there has been debate over its meaning.

Keynes and classical economics

Keynes begins the General Theory with a summary of the classical theory of employment, which he
encapsulates in his formulation of Say's Law as the dictum "Supply creates its own demand".

Under the classical theory, the wage rate is determined by the marginal productivity of labour, and as
many people are employed as are willing to work at that rate. Unemployment may arise through friction
or may be "voluntary," in the sense that it arises from a refusal to accept employment owing to
"legislation or social practices ... or mere human obstinacy", but "...the classical postulates do not admit
of the possibility of the third category," which Keynes defines as involuntary unemployment.[48]

Keynes raises two objections to the classical theory's assumption that "wage bargains ... determine the
real wage". The first lies in the fact that "labour stipulates (within limits) for a money-wage rather than a
real wage". The second is that classical theory assumes that, "The real wages of labour depend on the
wage bargains which labour makes with the entrepreneurs," whereas, "If money wages change, one
would have expected the classical school to argue that prices would change in almost the same
proportion, leaving the real wage and the level of unemployment practically the same as before."[49]
Keynes considers his second objection the more fundamental, but most commentators concentrate on his
first one: it has been argued that the quantity theory of money protects the classical school from the
conclusion Keynes expected from it.[50]

Keynesian unemployment

Saving and investment

Saving is that part of income not devoted to consumption, and consumption is that part of expenditure
not allocated to investment, i.e., to durable goods.[51] Hence saving encompasses hoarding (the
accumulation of income as cash) and the purchase of durable goods. The existence of net hoarding, or of
a demand to hoard, is not admitted by the simplified liquidity preference model of the General Theory.

Once he rejects the classical theory that unemployment is due to excessive wages, Keynes proposes an
alternative based on the relationship between saving and investment. In his view, unemployment arises
whenever entrepreneurs' incentive to invest fails to keep pace with society's propensity to save
(propensity is one of Keynes's synonyms for "demand"). The levels of saving and investment are
necessarily equal, and income is therefore held down to a level where the desire to save is no greater than
the incentive to invest.

The incentive to invest arises from the interplay between the physical circumstances of production and
psychological anticipations of future profitability; but once these things are given the incentive is
independent of income and depends solely on the rate of interest r. Keynes designates its value as a
function of r as the "schedule of the marginal efficiency of capital".[52]

The propensity to save behaves quite differently.[53] Saving is simply that part of income not devoted to
consumption, and:

... the prevailing psychological law seems to be that when aggregate income increases,
consumption expenditure will also increase but to a somewhat lesser extent.[54]

Keynes adds that "this psychological law was of the utmost importance in the development of my own
thought".

Liquidity preference
Keynes viewed the money supply as one of the main
determinants of the state of the real economy. The significance he
attributed to it is one of the innovative features of his work, and
was influential on the politically hostile monetarist school.

Money supply comes into play through the liquidity preference

function, which is the demand function that corresponds to
money supply. It specifies the amount of money people will seek
to hold according to the state of the economy. In Keynes's first
(and simplest) account – that of Chapter 13 – liquidity preference
is determined solely by the interest rate r—which is seen as the
earnings forgone by holding wealth in liquid form:[55] hence
liquidity preference can be written L(r ) and in equilibrium must
equal the externally fixed money supply M.

Keynes’s economic model

Money supply, saving and investment combine to determine the
level of income as illustrated in the diagram,[56] where the top
graph shows money supply (on the vertical axis) against interest Determination of income according to
rate. M determines the ruling interest rate r̂ through the liquidity the General Theory
preference function. The rate of interest determines the level of
investment Î through the schedule of the marginal efficiency of
capital, shown as a blue curve in the lower graph. The red curves in the same diagram show what the
propensities to save are for different incomes Y ; and the income Ŷ corresponding to the equilibrium state
of the economy must be the one for which the implied level of saving at the established interest rate is
equal to Î.

In Keynes's more complicated liquidity preference theory (presented in Chapter 15) the demand for
money depends on income as well as on the interest rate and the analysis becomes more complicated.
Keynes never fully integrated his second liquidity preference doctrine with the rest of his theory, leaving
that to John Hicks: see the IS-LM model below.

Wage rigidity
Keynes rejects the classical explanation of unemployment based on wage rigidity, but it is not clear what
effect the wage rate has on unemployment in his system. He treats wages of all workers as proportional
to a single rate set by collective bargaining, and chooses his units so that this rate never appears
separately in his discussion. It is present implicitly in those quantities he expresses in wage units, while
being absent from those he expresses in money terms. It is therefore difficult to see whether, and in what
way, his results differ for a different wage rate, nor is it entirely clear what he thought about the matter.

Remedies for unemployment

Monetary remedies
An increase in the money supply, according to Keynes's theory, leads to a drop in the interest rate and an
increase in the amount of investment that can be undertaken profitably, bringing with it an increase in
total income.

Fiscal remedies
Keynes' name is associated with fiscal, rather than monetary, measures but they receive only passing (and
often satirical) reference in the General Theory. He mentions "increased public works" as an example of
something that brings employment through the multiplier,[57] but this is before he develops the relevant
theory, and he does not follow up when he gets to the theory.

Later in the same chapter he tells us that:

Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it
possessed two activities, namely, pyramid-building as well as the search for the precious
metals, the fruits of which, since they could not serve the needs of man by being consumed,
did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two
pyramids, two masses for the dead, are twice as good as one; but not so two railways from
London to York.

But again, he doesn't get back to his implied recommendation to engage in public works, even if not fully
justified from their direct benefits, when he constructs the theory. On the contrary he later advises us that
...
 ... our final task might be to select those variables which can be deliberately controlled or
managed by central authority in the kind of system in which we actually live ...[58]

and this appears to look forward to a future publication rather than to a subsequent chapter of the General
Theory.

Keynesian models and concepts

Aggregate demand
Keynes' view of saving and investment was his most important
departure from the classical outlook. It can be illustrated using
the "Keynesian cross" devised by Paul Samuelson.[59] The
horizontal axis denotes total income and the purple curve shows
C (Y ), the propensity to consume, whose complement S (Y ) is the
propensity to save: the sum of these two functions is equal to
total income, which is shown by the broken line at 45°.

The horizontal blue line I (r ) is the schedule of the marginal

efficiency of capital whose value is independent of Y. Keynes
interprets this as the demand for investment and denotes the sum
Keynes–Samuelson cross
of demands for consumption and investment as "aggregate
demand", plotted as a separate curve. Aggregate demand must
equal total income, so equilibrium income must be determined by
the point where the aggregate demand curve crosses the 45° line.[60] This is the same horizontal position
as the intersection of I (r ) with S (Y ).

The equation I (r ) = S (Y ) had been accepted by the classics, who had viewed it as the condition of
equilibrium between supply and demand for investment funds and as determining the interest rate (see
the classical theory of interest). But insofar as they had had a concept of aggregate demand, they had
seen the demand for investment as being given by S (Y ), since for them saving was simply the indirect
purchase of capital goods, with the result that aggregate demand was equal to total income as an identity
rather than as an equilibrium condition. Keynes takes note of this view in Chapter 2, where he finds it
present in the early writings of Alfred Marshall but adds that "the doctrine is never stated to-day in this
crude form".

The equation I (r ) = S (Y ) is accepted by Keynes for some or all of the following reasons:

As a consequence of the principle of effective demand, which asserts that aggregate

demand must equal total income (Chapter 3).
As a consequence of the identity of saving with investment (Chapter 6) together with the
equilibrium assumption that these quantities are equal to their demands.
In agreement with the substance of the classical theory of the investment funds market,
whose conclusion he considers the classics to have misinterpreted through circular
reasoning (Chapter 14).

The Keynesian multiplier

Keynes introduces his discussion of the multiplier in Chapter 10 with a reference to Kahn's earlier paper
(see below). He designates Kahn's multiplier the "employment multiplier" in distinction to his own
"investment multiplier" and says that the two are only "a little different".[61] Kahn's multiplier has
consequently been understood by much of the Keynesian literature as playing a major role in Keynes's
own theory, an interpretation encouraged by the difficulty of understanding Keynes's presentation. Kahn's
multiplier gives the title ("The multiplier model") to the account of Keynesian theory in Samuelson's
Economics and is almost as prominent in Alvin Hansen’s Guide to Keynes and in Joan Robinson's
Introduction to the Theory of Employment.

Keynes states that there is ...

... a confusion between the logical theory of the multiplier, which holds good continuously,
without time-lag ... and the consequence of an expansion in the capital goods industries
which take gradual effect, subject to a time-lag, and only after an interval ...[62]

and implies that he is adopting the former theory.[63] And when the multiplier eventually emerges as a
component of Keynes's theory (in Chapter 18) it turns out to be simply a measure of the change of one
variable in response to a change in another. The schedule of the marginal efficiency of capital is
identified as one of the independent variables of the economic system:[64] "What [it] tells us, is ... the
point to which the output of new investment will be pushed ..."[65] The multiplier then gives "the ratio ...
between an increment of investment and the corresponding increment of aggregate income".[66]

G. L. S. Shackle regarded Keynes' move away from Kahn's multiplier as ...

... a retrograde step ... For when we look upon the Multiplier as an instantaneous functional
relation ... we are merely using the word Multiplier to stand for an alternative way of
looking at the marginal propensity to consume ...[67],

which G. M. Ambrosi cites as an instance of "a Keynesian commentator who would have liked Keynes to
have written something less 'retrograde' ".[68]

The value Keynes assigns to his multiplier is the reciprocal of the marginal propensity to save:
k = 1 / S '(Y ). This is the same as the formula for Kahn's mutliplier in a closed economy assuming that all
saving (including the purchase of durable goods), and not just hoarding, constitutes leakage. Keynes gave
his formula almost the status of a definition (it is put forward in advance of any explanation[69]). His
multiplier is indeed the value of "the ratio ... between an increment of investment and the corresponding
increment of aggregate income" as Keynes derived it from his Chapter 13 model of liquidity preference,
which implies that income must bear the entire effect of a change in investment. But under his
Chapter 15 model a change in the schedule of the marginal efficiency of capital has an effect shared
between the interest rate and income in proportions depending on the partial derivatives of the liquidity
preference function. Keynes did not investigate the question of whether his formula for multiplier needed
revision.

The liquidity trap

The liquidity trap is a phenomenon that may impede the effectiveness of monetary policies in reducing
unemployment.
Economists generally think the rate of interest will not fall below
a certain limit, often seen as zero or a slightly negative number.
Keynes suggested that the limit might be appreciably greater than
zero but did not attach much practical significance to it. The term
"liquidity trap" was coined by Dennis Robertson in his comments
on the General Theory,[70] but it was John Hicks in "Mr. Keynes
and the Classics"[71] who recognised the significance of a slightly
different concept.

If the economy is in a position such that the liquidity preference

curve is almost vertical, as must happen as the lower limit on r is
approached, then a change in the money supply M makes almost
no difference to the equilibrium rate of interest r̂ or, unless there
is compensating steepness in the other curves, to the resulting
income Ŷ. As Hicks put it, "Monetary means will not force down
the rate of interest any further."

Paul Krugman has worked extensively on the liquidity trap,

claiming that it was the problem confronting the Japanese
economy around the turn of the millennium.[72] In his later The liquidity trap.
words:

Short-term interest rates were close to zero, long-term rates were at historical lows, yet
private investment spending remained insufficient to bring the economy out of deflation. In
that environment, monetary policy was just as ineffective as Keynes described. Attempts by
the Bank of Japan to increase the money supply simply added to already ample bank
reserves and public holdings of cash...[73]

The IS–LM model

Hicks showed how to analyze Keynes' system when liquidity
preference is a function of income as well as of the rate of
interest. Keynes's admission of income as an influence on the
demand for money is a step back in the direction of classical
theory, and Hicks takes a further step in the same direction by
generalizing the propensity to save to take both Y and r as
arguments. Less classically he extends this generalization to the
schedule of the marginal efficiency of capital.

The IS-LM model uses two equations to express Keynes' model.

The first, now written I (Y, r ) = S (Y,r ), expresses the principle of
IS–LM plot
effective demand. We may construct a graph on (Y, r )
coordinates and draw a line connecting those points satisfying the
equation: this is the IS curve. In the same way we can write the equation of equilibrium between liquidity
preference and the money supply as L(Y ,r ) = M and draw a second curve – the LM curve – connecting
points that satisfy it. The equilibrium values Ŷ of total income and r̂ of interest rate are then given by the
point of intersection of the two curves.
If we follow Keynes's initial account under which liquidity preference depends only on the interest rate r,
then the LM curve is horizontal.

Joan Robinson commented that:

... modern teaching has been confused by J. R. Hicks' attempt to reduce the General Theory
to a version of static equilibrium with the formula IS–LM. Hicks has now repented and
changed his name from J. R. to John, but it will take a long time for the effects of his
teaching to wear off.

Hicks subsequently relapsed.[74]

Keynesian economic policies

Active fiscal policy

Keynes argued that the solution to the Great
Depression was to stimulate the country
("incentive to invest") through some
combination of two approaches:

1. A reduction in interest rates

(monetary policy), and
2. Government investment in
infrastructure (fiscal policy).
If the interest rate at which businesses and
consumers can borrow decreases,
investments that were previously
uneconomic become profitable, and large
consumer sales normally financed through Typical intervention strategies under different conditions
debt (such as houses, automobiles, and,
historically, even appliances like
refrigerators) become more affordable. A principal function of central banks in countries that have them
is to influence this interest rate through a variety of mechanisms collectively called monetary policy. This
is how monetary policy that reduces interest rates is thought to stimulate economic activity, i.e., "grow
the economy"—and why it is called expansionary monetary policy.

Expansionary fiscal policy consists of increasing net public spending, which the government can effect
by a) taxing less, b) spending more, or c) both. Investment and consumption by government raises
demand for businesses' products and for employment, reversing the effects of the aforementioned
imbalance. If desired spending exceeds revenue, the government finances the difference by borrowing
from capital markets by issuing government bonds. This is called deficit spending. Two points are
important to note at this point. First, deficits are not required for expansionary fiscal policy, and second,
it is only change in net spending that can stimulate or depress the economy. For example, if a government
ran a deficit of 10% both last year and this year, this would represent neutral fiscal policy. In fact, if it ran
a deficit of 10% last year and 5% this year, this would actually be contractionary. On the other hand, if
the government ran a surplus of 10% of GDP last year and 5% this year, that would be expansionary
fiscal policy, despite never running a deficit at all.

But – contrary to some critical characterizations of it – Keynesianism does not consist solely of deficit
spending, since it recommends adjusting fiscal policies according to cyclical circumstances.[75] An
example of a counter-cyclical policy is raising taxes to cool the economy and to prevent inflation when
there is abundant demand-side growth, and engaging in deficit spending on labour-intensive
infrastructure projects to stimulate employment and stabilize wages during economic downturns.

Keynes's ideas influenced Franklin D. Roosevelt's view that insufficient buying-power caused the
Depression. During his presidency, Roosevelt adopted some aspects of Keynesian economics, especially
after 1937, when, in the depths of the Depression, the United States suffered from recession yet again
following fiscal contraction. But to many the true success of Keynesian policy can be seen at the onset of
World War II, which provided a kick to the world economy, removed uncertainty, and forced the
rebuilding of destroyed capital. Keynesian ideas became almost official in social-democratic Europe after
the war and in the U.S. in the 1960s.

The Keynesian advocacy of deficit spending contrasted with the classical and neoclassical economic
analysis of fiscal policy. They admitted that fiscal stimulus could actuate production. But, to these
schools, there was no reason to believe that this stimulation would outrun the side-effects that "crowd
out" private investment: first, it would increase the demand for labour and raise wages, hurting
profitability; Second, a government deficit increases the stock of government bonds, reducing their
market price and encouraging high interest rates, making it more expensive for business to finance fixed
investment. Thus, efforts to stimulate the economy would be self-defeating.

The Keynesian response is that such fiscal policy is appropriate only when unemployment is persistently
high, above the non-accelerating inflation rate of unemployment (NAIRU). In that case, crowding out is
minimal. Further, private investment can be "crowded in": Fiscal stimulus raises the market for business
output, raising cash flow and profitability, spurring business optimism. To Keynes, this accelerator effect
meant that government and business could be complements rather than substitutes in this situation.

Second, as the stimulus occurs, gross domestic product rises—raising the amount of saving, helping to
finance the increase in fixed investment. Finally, government outlays need not always be wasteful:
government investment in public goods that is not provided by profit-seekers encourages the private
sector's growth. That is, government spending on such things as basic research, public health, education,
and infrastructure could help the long-term growth of potential output.

In Keynes's theory, there must be significant slack in the labour market before fiscal expansion is
justified.

Keynesian economists believe that adding to profits and incomes during boom cycles through tax cuts,
and removing income and profits from the economy through cuts in spending during downturns, tends to
exacerbate the negative effects of the business cycle. This effect is especially pronounced when the
government controls a large fraction of the economy, as increased tax revenue may aid investment in
state enterprises in downturns, and decreased state revenue and investment harm those enterprises.

Views on trade imbalance

In the last few years of his life, John Maynard Keynes was much preoccupied with the question of
balance in international trade. He was the leader of the British delegation to the United Nations Monetary
and Financial Conference in 1944 that established the Bretton Woods system of international currency
management. He was the principal author of a proposal – the so-called Keynes Plan – for an International
Clearing Union. The two governing principles of the plan were that the problem of settling outstanding
balances should be solved by 'creating' additional 'international money', and that debtor and creditor
should be treated almost alike as disturbers of equilibrium. In the event, though, the plans were rejected,
in part because "American opinion was naturally reluctant to accept the principle of equality of treatment
so novel in debtor-creditor relationships".[76]

The new system is not founded on free-trade (liberalisation[77] of foreign trade[78]) but rather on
regulating international trade to eliminate trade imbalances. Nations with a surplus would have a
powerful incentive to get rid of it, which would automatically clear other nations deficits.[79] Keynes
proposed a global bank that would issue its own currency - the bancor - which was exchangeable with
national currencies at fixed rates of exchange and would become the unit of account between nations,
which means it would be used to measure a country's trade deficit or trade surplus. Every country would
have an overdraft facility in its bancor account at the International Clearing Union. He pointed out that
surpluses lead to weak global aggregate demand – countries running surpluses exert a "negative
externality" on trading partners, and posed far more than those in deficit, a threat to global prosperity.
Keynes thought that surplus countries should be taxed to avoid trade imbalances.[80] In "National Self-
Sufficiency" The Yale Review, Vol. 22, no. 4 (June 1933),[81][82] he already highlighted the problems
created by free trade.

His view, supported by many economists and commentators at the time, was that creditor nations may be
just as responsible as debtor nations for disequilibrium in exchanges and that both should be under an
obligation to bring trade back into a state of balance. Failure for them to do so could have serious
consequences. In the words of Geoffrey Crowther, then editor of The Economist, "If the economic
relationships between nations are not, by one means or another, brought fairly close to balance, then there
is no set of financial arrangements that can rescue the world from the impoverishing results of chaos."[83]

These ideas were informed by events prior to the Great Depression when – in the opinion of Keynes and
others – international lending, primarily by the U.S., exceeded the capacity of sound investment and so
got diverted into non-productive and speculative uses, which in turn invited default and a sudden stop to
the process of lending.[84]

Influenced by Keynes, economic texts in the immediate post-war period put a significant emphasis on
balance in trade. For example, the second edition of the popular introductory textbook, An Outline of
Money,[85] devoted the last three of its ten chapters to questions of foreign exchange management and in
particular the 'problem of balance'. However, in more recent years, since the end of the Bretton Woods
system in 1971, with the increasing influence of Monetarist schools of thought in the 1980s, and
particularly in the face of large sustained trade imbalances, these concerns – and particularly concerns
about the destabilising effects of large trade surpluses – have largely disappeared from mainstream
economics discourse[86] and Keynes' insights have slipped from view.[87] They are receiving some
attention again in the wake of the financial crisis of 2007–08.[88]

Postwar Keynesianism
Keynes's ideas became widely accepted after World War II, and until the early 1970s, Keynesian
economics provided the main inspiration for economic policy makers in Western industrialized
countries.[3] Governments prepared high quality economic statistics on an ongoing basis and tried to base
their policies on the Keynesian theory that had become the norm. In the early era of social liberalism and
social democracy, most western capitalist countries enjoyed low, stable unemployment and modest
inflation, an era called the Golden Age of Capitalism.

In terms of policy, the twin tools of post-war Keynesian economics were fiscal policy and monetary
policy. While these are credited to Keynes, others, such as economic historian David Colander, argue that
they are, rather, due to the interpretation of Keynes by Abba Lerner in his theory of functional finance,
and should instead be called "Lernerian" rather than "Keynesian".[89]

Through the 1950s, moderate degrees of government demand leading industrial development, and use of
fiscal and monetary counter-cyclical policies continued, and reached a peak in the "go go" 1960s, where
it seemed to many Keynesians that prosperity was now permanent. In 1971, Republican US President
Richard Nixon even proclaimed "I am now a Keynesian in economics."[90]

Beginning in the late 1960s, a new classical macroeconomics movement arose, critical of Keynesian
assumptions (see sticky prices), and seemed, especially in the 1970s, to explain certain phenomena better.
It was characterized by explicit and rigorous adherence to microfoundations, as well as use of
increasingly sophisticated mathematical modelling.

With the oil shock of 1973, and the economic problems of the 1970s, Keynesian economics began to fall
out of favour. During this time, many economies experienced high and rising unemployment, coupled
with high and rising inflation, contradicting the Phillips curve's prediction. This stagflation meant that the
simultaneous application of expansionary (anti-recession) and contractionary (anti-inflation) policies
appeared necessary. This dilemma led to the end of the Keynesian near-consensus of the 1960s, and the
rise throughout the 1970s of ideas based upon more classical analysis, including monetarism, supply-side
economics,[90] and new classical economics.

However, by the late 1980s, certain failures of the new classical models, both theoretical (see Real
business cycle theory) and empirical (see the "Volcker recession")[91] hastened the emergence of New
Keynesian economics, a school that sought to unite the most realistic aspects of Keynesian and neo-
classical assumptions and place them on more rigorous theoretical foundation than ever before.

One line of thinking, utilized also as a critique of the notably high unemployment and potentially
disappointing GNP growth rates associated with the new classical models by the mid-1980s, was to
emphasize low unemployment and maximal economic growth at the cost of somewhat higher inflation
(its consequences kept in check by indexing and other methods, and its overall rate kept lower and
steadier by such potential policies as Martin Weitzman's share economy).[92]

Schools
Multiple schools of economic thought that trace their legacy to Keynes currently exist, the notable ones
being Neo-Keynesian economics, New Keynesian economics, and Post-Keynesian economics. Keynes's
biographer Robert Skidelsky writes that the post-Keynesian school has remained closest to the spirit of
Keynes's work in following his monetary theory and rejecting the neutrality of money.[93][94] Today
these ideas, regardless of provenance, are referred to in academia under the rubric of "Keynesian
economics", due to Keynes's role in consolidating, elaborating, and popularizing them.
In the postwar era, Keynesian analysis was combined with neoclassical economics to produce what is
generally termed the "neoclassical synthesis", yielding Neo-Keynesian economics, which dominated
mainstream macroeconomic thought. Though it was widely held that there was no strong automatic
tendency to full employment, many believed that if government policy were used to ensure it, the
economy would behave as neoclassical theory predicted. This post-war domination by Neo-Keynesian
economics was broken during the stagflation of the 1970s. There was a lack of consensus among
macroeconomists in the 1980s. However, the advent of New Keynesian economics in the 1990s,
modified and provided microeconomic foundations for the neo-Keynesian theories. These modified
models now dominate mainstream economics.

Post-Keynesian economists, on the other hand, reject the neoclassical synthesis and, in general,
neoclassical economics applied to the macroeconomy. Post-Keynesian economics is a heterodox school
that holds that both Neo-Keynesian economics and New Keynesian economics are incorrect, and a
misinterpretation of Keynes's ideas. The Post-Keynesian school encompasses a variety of perspectives,
but has been far less influential than the other more mainstream Keynesian schools.

Interpretations of Keynes have emphasized his stress on the international coordination of Keynesian
policies, the need for international economic institutions, and the ways in which economic forces could
lead to war or could promote peace.[95]

Is Keynesianism liberal?
In a 2014 paper, economist Alan Blinder argues that, "for not very good reasons," public opinion in the
United States has associated Keynesianism with liberalism, and he states that such is incorrect. For
example, both Presidents Ronald Reagan (1981-89) and George W. Bush (2001-09) supported policies
that were, in fact, Keynesian, even though both men were conservative leaders. And tax cuts can provide
highly helpful fiscal stimulus during a recession, just as much as infrastructure spending can. Blinder
concludes, "If you are not teaching your students that 'Keynesianism' is neither conservative nor liberal,
you should be."[96]

Other schools of macroeconomic thought

The Keynesian schools of economics are situated alongside a number of other schools that have the same
perspectives on what the economic issues are, but differ on what causes them and how to best resolve
them. Today, most of these schools of thought have been subsumed into modern macroeconomic theory.

Stockholm School
The Stockholm school rose to prominence at about the same time that Keynes published his General
Theory and shared a common concern in business cycles and unemployment. The second generation of
Swedish economists also advocated government intervention through spending during economic
downturns[97] although opinions are divided over whether they conceived the essence of Keynes's theory
before he did.[98]

Monetarism
There was debate between monetarists and Keynesians in the 1960s over the role of government in
stabilizing the economy. Both monetarists and Keynesians agree that issues such as business cycles,
unemployment, and deflation are caused by inadequate demand. However, they had fundamentally
different perspectives on the capacity of the economy to find its own equilibrium, and the degree of
government intervention that would be appropriate. Keynesians emphasized the use of discretionary
fiscal policy and monetary policy, while monetarists argued the primacy of monetary policy, and that it
should be rules-based.[99]

The debate was largely resolved in the 1980s. Since then, economists have largely agreed that central
banks should bear the primary responsibility for stabilizing the economy, and that monetary policy
should largely follow the Taylor rule – which many economists credit with the Great
Moderation.[100][101] The financial crisis of 2007–08, however, has convinced many economists and
governments of the need for fiscal interventions and highlighted the difficulty in stimulating economies
through monetary policy alone during a liquidity trap.[102]

Marxian economics
Some Marxist economists criticized Keynesian economics.[103] For example, in his 1946 appraisal[104]
Paul Sweezy—while admitting that there was much in the General Theory's analysis of effective demand
that Marxists could draw on—described Keynes as a prisoner of his neoclassical upbringing. Sweezy
argued that Keynes had never been able to view the capitalist system as a totality. He argued that Keynes
regarded the class struggle carelessly, and overlooked the class role of the capitalist state, which he
treated as a deus ex machina, and some other points. While Michał Kalecki was generally enthusiastic
about the Keynesian revolution, he predicted that it would not endure, in his article "Political Aspects of
Full Employment". In the article Kalecki predicted that the full employment delivered by Keynesian
policy would eventually lead to a more assertive working class and weakening of the social position of
business leaders, causing the elite to use their political power to force the displacement of the Keynesian
policy even though profits would be higher than under a laissez faire system: The erosion of social
prestige and political power would be unacceptable to the elites despite higher profits.[105]

Public choice
James M. Buchanan[106] criticized Keynesian economics on the grounds that governments would in
practice be unlikely to implement theoretically optimal policies. The implicit assumption underlying the
Keynesian fiscal revolution, according to Buchanan, was that economic policy would be made by wise
men, acting without regard to political pressures or opportunities, and guided by disinterested economic
technocrats. He argued that this was an unrealistic assumption about political, bureaucratic and electoral
behaviour. Buchanan blamed Keynesian economics for what he considered a decline in America's fiscal
discipline.[107] Buchanan argued that deficit spending would evolve into a permanent disconnect between
spending and revenue, precisely because it brings short-term gains, so, ending up institutionalizing
irresponsibility in the federal government, the largest and most central institution in our society.[108]
Martin Feldstein argues that the legacy of Keynesian economics–the misdiagnosis of unemployment, the
fear of saving, and the unjustified government intervention–affected the fundamental ideas of policy
makers.[109] Milton Friedman thought that Keynes's political bequest was harmful for two reasons. First,
he thought whatever the economic analysis, benevolent dictatorship is likely sooner or later to lead to a
totalitarian society. Second, he thought Keynes's economic theories appealed to a group far broader than
economists primarily because of their link to his political approach.[110] Alex Tabarrok argues that
Keynesian politics–as distinct from Keynesian policies–has failed pretty much whenever it's been tried,
at least in liberal democracies.[111]

In response to this argument, John Quiggin,[112] wrote about these theories' implication for a liberal
democratic order. He thought that if it is generally accepted that democratic politics is nothing more than
a battleground for competing interest groups, then reality will come to resemble the model. Paul
Krugman wrote "I don’t think we need to take that as an immutable fact of life; but still, what are the
alternatives?" [113] Daniel Kuehn, criticized James M. Buchanan. He argued, "if you have a problem with
politicians - criticize politicians," not Keynes.[114] He also argued that empirical evidence makes it pretty
clear that Buchanan was wrong.[115][116] James Tobin argued, if advising government officials,
politicians, voters, it's not for economists to play games with them.[117] Keynes implicitly rejected this
argument, in "soon or late it is ideas not vested interests which are dangerous for good or evil."[118][119]

Brad DeLong has argued that politics is the main motivator behind objections to the view that
government should try to serve a stabilizing macroeconomic role.[120] Paul Krugman argued that a
regime that by and large lets markets work, but in which the government is ready both to rein in excesses
and fight slumps is inherently unstable, due to intellectual instability, political instability, and financial
instability.[121]

New classical
Another influential school of thought was based on the Lucas critique of Keynesian economics. This
called for greater consistency with microeconomic theory and rationality, and in particular emphasized
the idea of rational expectations. Lucas and others argued that Keynesian economics required remarkably
foolish and short-sighted behaviour from people, which totally contradicted the economic understanding
of their behaviour at a micro level. New classical economics introduced a set of macroeconomic theories
that were based on optimizing microeconomic behaviour. These models have been developed into the
real business-cycle theory, which argues that business cycle fluctuations can to a large extent be
accounted for by real (in contrast to nominal) shocks.

Beginning in the late 1950s new classical macroeconomists began to disagree with the methodology
employed by Keynes and his successors. Keynesians emphasized the dependence of consumption on
disposable income and, also, of investment on current profits and current cash flow. In addition,
Keynesians posited a Phillips curve that tied nominal wage inflation to unemployment rate. To support
these theories, Keynesians typically traced the logical foundations of their model (using introspection)
and supported their assumptions with statistical evidence.[122] New classical theorists demanded that
macroeconomics be grounded on the same foundations as microeconomic theory, profit-maximizing
firms and rational, utility-maximizing consumers.[122]

The result of this shift in methodology produced several important divergences from Keynesian
macroeconomics:[122]

1. Independence of consumption and current income (life-cycle permanent income hypothesis)

2. Irrelevance of current profits to investment (Modigliani–Miller theorem)
3. Long run independence of inflation and unemployment (natural rate of unemployment)
4. The inability of monetary policy to stabilize output (rational expectations)
5. Irrelevance of taxes and budget deficits to consumption (Ricardian equivalence)
See also
Adam Smith
Economic theories
Game theory
Invisible hand
Job guarantee
Pareto principle

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121. Paul Krugman, "The Instability of Moderation" (November 26, 2010) (https://krugman.blogs.
nytimes.com/2010/11/26/the-instability-of-moderation/)
122. Akerlof, George A. (2007). "The Missing Motivation in Macroeconomics". American
Economic Review. 97 (1): 5–36. doi:10.1257/aer.97.1.5 (https://doi.org/10.1257%2Faer.97.
1.5).

Further reading
Ambrosi, G. Michael (2003). Keynes, Pigou and Cambridge Keynesians. Basingstoke:
Palgrave Macmillan. Thorough and entertaining intellectual history.
Dimand, Robert (1988). The origins of the Keynesian revolution. Aldershot: Edward Elgar.
Study of the evolution of Keynes's ideas.
Gordon, Robert J. (1990). "What Is New-Keynesian Economics?". Journal of Economic
Literature. 28 (3): 1115–71. JSTOR 2727103 (https://www.jstor.org/stable/2727103).
 Hansen, Alvin (1953). A guide to Keynes (https://archive.org/details/guidetokeynes00hansri
ch). New York: McGraw Hill. A thorough and thoughtful reader's guide.
Hazlitt, Henry (1995) [1960]. The critics of Keynesian economics (https://mises.org/library/cr
itics-keynesian-economics). Van Nostrand. ISBN 978-1-57246-013-3. A useful collection of
critical reviews.
Hicks, John (1967). Critical essays in monetary theory. Oxford: OUP. ISBN 978-0-19-
828423-9. Contains “Mr Keynes and the classics” and other essays relating to Keynes.
Khan, Richard (1984). The making of Keynes' General Theory (https://archive.org/details/m
akingofkeynesge0000kahn). Cambridge: CUP. ISBN 978-0-521-25373-4. Lectures and
discussion from a colloquium in 1978.
Keynes, John Maynard (2007) [1936]. The General Theory of Employment, Interest and
Money (http://www.hetwebsite.net/het/essays/keynes/keynescont.htm). Basingstoke,
Hampshire: Palgrave Macmillan. ISBN 978-0-230-00476-4.
Keynes, John Maynard (Feb. 1937). "Reply to Viner" (http://www.hetwebsite.net/het/texts/ke
ynes/keynes1937qje.htm). Quarterly Journal of Economics, vol. 51, no. 2, pp. 209–223. A
valuable paper, in which Keynes restates many of his ideas in the light of criticisms. It has
no agreed title and is also known as The General Theory of Employment or as the 1937
QJE paper.
Keynes, John Maynard (1973). The collected writings of John Maynard Keynes. London
and Basingstoke: Macmillan for the Royal Economic Society. Edited by Sir Austin Robinson
and Donald Moggridge. Vol VII is the General Theory ; Vols XIII and XIV contain writings on
its preparation, defence and development.
Markwell, Donald, John Maynard Keynes and International Relations: Economic Paths to
War and Peace, Oxford University Press, 2006. ISBN 9780198292364
McCann, Charles R., Jr. (1998). John Maynard Keynes: critical responses. Routledge. Not
easily obtainable. Vol 3 contains reviews of the General Theory.
Stein, Herbert. "Tax cut in Camelot." Trans-action (1969) 6: 38-44.
https://doi.org/10.1007/BF02806371Society excerpt (https://doi.org/10.1007%2FBF0280637
1)
Stein, Herbert. The fiscal revolution in America (1969) Online free to borrow (https://archive.
org/details/fiscalrevolution0000stei)
Stein, Jerome L. (1982). Monetarist, Keynesian & New classical economics (https://archive.
org/details/monetaristkeynes0000stei_x3i2). Oxford: Blackwell. ISBN 978-0-631-12908-0.

External links
Works by John Maynard Keynes (https://www.gutenberg.org/author/John_Maynard_Keyne
s) at Project Gutenberg
"We are all Keynesians now" (http://www.time.com/time/magazine/article/0,9171,842353-1,0
0.html) – Historic article from Time magazine, 1965

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