This is the second in the series on famous economists and in this post, we look at the life and times of a man who revolutionalized economics– John Maynard Keynes.
“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some dead economist”
If Adam Smith was the ying with his ‘laissez-faire’ doctrine, Keynes was not quite the yang, but rather the realistic version of Smithian ideals.
Indeed, Keynesian ideas are at the heart of nearly every discourse in advanced societies on how best to recover from the 2008 global financial crisis as they were during the Great Depression of the 1930’s.
John Maynard Keynes was born on the 5th June 1883 in Cambridge, England as the first born to an upper-middle-class family. Keynes was no doubt born with bright genes as he won two scholarships to attend first Eton College and later Kings College Cambridge where he would meet the great ‘marginalist’ Alfred Marshall. If Adam Smith was the forerunner of economics Alfred Marshall was the ‘econ-smith’ who forged the economics in the furnace of mathematics essentially connecting Keynes to the long line of ancestral economics. This is a Keynes entered Cambridge to study mathematics where Marshall also taught graduating at 17 with a first class degree in Mathematics.
At age 19, Keynes joined the civil service attached to the India Office for two years, before returning to the academia citing boredom. Here he came under the influence of Marshall again taking a lectureship. He would pen his first published work titled Indian currency and finance in 1913 which attracted the interest of the UK Treasury on his ability to apply economic theory to practical problems. A year later WWI broke out and Keynes would work with the Chancellor of the Exchequer on the trade.
Away from his government work, Keynes real claim to fame was his work on the ‘dismal science’, indeed economics was in a dismal state when he appeared and Keynes revolutionized it in his seminal epic – The General Theory of Employment, Interest and Money(1936).
For much of the history of economics post 1776, starting from John Mills, David Ricardo and Alfred Marshall, the discipline was being integrated into mathematics via the marginal framework in what we refer today as microeconomics.
At the heart of micro economics is the marginal principle – the extra from the last unit. This is why you have marginal cost, revenue, product, utility etc. this is as economists analyzed the world from the viewpoint of economic agents – individual households, firms and governments. Crucially, classical as the early economists were referred to advocated for limited intervention in the working of markets as the markets would always equilibrate. A famous classicalist once quipped, “supply creates demand”.
The problem with this approach was that equilibrium in each market was arrived at by assuming each individual to be rational i.e he would seek to maximize his utility subject to his constraints. Under this arrangement, the market system would sort things out and imbalances between supply and demand could not exist interminably.
However, the great depression of the 1930s rendered this position untenable as by high unemployment and lower output refused to go away. Keynes saw the problem with this system, a unequal focus by the classical had blinded them to the obvious – supply did not create demand rather it needed demand. With demand not forthcoming, Keynes invented his own field – macroeconomics. He began to view things differently, by viewing markets as the agglomeration of individual rationalizing their behavior, the classical missed it as their analytical framework assumed each economic agent was homogenous and without data assumed this to be true. Keynes subjected this assumption to the test and found that individuals in groups behaved differently and an aggregation was necessary to fully understand the market system.
This approach of viewing aggregates vs. individuals is at the heart of macroeconomics. Keynes had found the wedge: he would agglomerate demand into four groups – consumption (demand by individuals), investment (demand by Firms), government expenditure and net exports to capture demand from the rest of the world. Under this approach Keynes showed demand was crucial in determining supply and more importantly in periods when demand was unable to equilibrate with supply the ‘visible hand’ of government could be used to bolster demand by embarking on expansionary fiscal expenditure. And to the classical argument that the market would clear in the long run, he famously quipped, “in the long run, we are all dead”.
Crucially, Keynes propositions worked – governments from the US, UK and the western world found the intellectual foundation to commence large fiscal programs that steered their economies out of the recession.
Economics is today wrapped in a fierce debate with Keynesian ideals eternally contending with the classicalist thinking it tried to replace with neither party showing a clear upper hand. Keynesian ideals work best during economic downturns but result in inflation as the economy kicks into gear while the classical let things be approach appears foolish during downturns. Modern day Keynesians include Nobel laureates like Paul Samuelson, Simon Kuznets, Robert Shiller, Joseph Stiglitz and Paul Krugman.
His definition of an economist is perhaps one of the most complete:
“The master-economist must possess a rare combination of gifts …. He must be mathematician, historian, statesman, philosopher — in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician”
John Maynard Keynes died of a heart attack at his home in Tilton on the 21st of April 1946 after a trip to the US to negotiate a loan for the UK at Bretton Woods. He left behind a Russian wife Lydia Lopokova whom he married in 1921.