John Maynard Keynes
John Maynard Keynes (English pronunciation: /keɪnz/; Cambridge, June 5, 1883-Sussex, April 21, 1946) was a British economist, considered one of the most influential of the century XX. His ideas had a strong impact on economic theories and policies.
The main novelty of his thought lay in considering that the capitalist system does not tend towards full employment or the equilibrium of the productive factors, but towards an equilibrium that will only accidentally coincide with full employment. Keynes and his postwar followers highlighted not only the rising nature of aggregate supply, in contrast to the classical view, but also the instability of aggregate demand, resulting from shocks in private markets, as a consequence of the ups and downs in investor confidence. The main conclusion of his analysis is a commitment to direct public intervention in public spending, which makes it possible to cover the gap or deficit in aggregate demand.He is also considered one of the founders of modern macroeconomics.
Keynes was a very versatile character. In addition to being a theoretical economist who changed the view of macroeconomics in the 20th century, he also held multiple positions in the economic world He was a professor at the University of Cambridge from 1908, editor of the Economic Journal from 1912, secretary of the Royal Economic Society, a senior official in the British Administration and international negotiator on behalf of England on different occasions. He also worked in the business sector, in the investment management of an insurance company and as a financial adviser to King's College, the Bank of England and the British government itself. Also within the world of economics, he was a great fan of economic history and a biographer of great economists. Outside of the economic world, during his studies at the University of Cambridge he became interested in mathematics, statistics, philosophy, literature and only finally in economics. He was also a director and major shareholder of the Cambridge Theater of Arts and a patron of the Bloomsbury group, a collector of modern paintings and a bibliophile of scientific literature. He was 1st Baron Keynes.
Biography
Keynes Student
John Maynard Keynes was born on June 5, 1883 in the city of Cambridge, into a wealthy family of reputed cultural level. His parents were John Neville Keynes, professor of economics and philosophy at Cambridge University, and Florence Ada Brown, one of the first women to study at British universities, author, and welfare pioneer who became Mayor of Cambridge in 1932. His sister Margaret (1885-1974) married the Nobel Prize winner in physiology Archibald Hill and his younger brother Geoffrey Keynes (1887-1982) was a surgeon and great bibliophile.
In 1897, he was awarded a scholarship to study at Eton College, where he was a brilliant student. In 1902, he entered King's College at the University of Cambridge, where he studied mathematics and probability theory, later turning to economics on the advice of his teachers Alfred Marshall and Arthur Pigou.
During his stay as a university student in Cambridge, he frequented the group of the so-called Apostles and from there he went to the so-called Bloomsbury Circle, an intellectual and artistic group that proposed a new social order, contrary to Victorian moral principles and of which they formed part, among others, the writer Lytton Strachey, Leonard, Virginia Woolf and the painter Duncan Grant, with whom Keynes had a relationship for several years.
Keynes's homoerotic fascination with Sergei Diaghilev led him to meet Lidia Lopujova, a Russian dancer from his Ballets Russes company, in October 1918, whom he married after a trip to Taiwan.
The beginning of his career
In 1906, after passing the entrance exams, he was appointed a civil servant of the Home Civil Service and assigned to the Indian Office, where he accumulated a deep knowledge of the Indian financial system. As a result of his stay in this department, he wrote in 1913 Currency and finance in India . After finding his work in this office disappointing, in June 1908 he resigned from his position to work at Cambridge University on probability theory. In 1909 he obtained a professorship in Pigou's chair at this university. In 1911 he was appointed editor of the economic journal Economics Journal and during the years 1913 and 1914 he was a member of the Royal Commission on Indian Finance and Currency.
In 1916 he began working as an adviser to the British Treasury Department (HM Treasury). Among his responsibilities was the design of credit contracts between the United Kingdom and its continental allies during the war, and foreign procurement systems. In 1919, after the end of the First World War, he was part of the British delegation at the Paris Peace Conference, a position from which he resigned that same year for being dissatisfied with the abusive regime of compensation and reparations imposed on Germany, which he considered a "Carthaginian peace". On this subject he wrote, in 1919, the book The economic consequences of peace, in which he announced the implications and consequences of the economic conditions imposed on Germany in the Treaty of versailles.
The Interwar Period
In 1919, he returned to the University of Cambridge, but divided his time between stays at the family home on Harvey Street in Cambridge and 46 Gordon Square in London, a city where he carried out an intense set of activities. He was a member of several boards of directors of financial and insurance companies, directed the weekly Nation and Athenaeum and Economic Journal and served on the British Prime Minister's Economic Advisory Council. Keynes was also a successful investor, managing to make a great fortune (after establishing himself as an economist, since in his youth he suffered great losses that had to be covered by his father). During the Crack of '29 he almost went bankrupt, but he was able to recover in a short time.
He is considered a great bibliophile, especially when it comes to original editions of the works of Isaac Newton. He was interested in literature in general and drama in particular. He became an impresario for the Cambridge Arts Theatre, a task in which he put great enthusiasm (one day when the doorman was away he could be seen cutting the tickets in the hall). Thanks to this, the institution became for a time the most important British stage outside of London. In 1925, he married the Russian ballerina Lidia Lopujova.
Bertrand Russell said of Keynes: “He is the sharpest, clearest mind I have ever known. When I argued with him, I felt like my life was hanging by a thread and I rarely ended up feeling anything other than stupid." Another well-known comment that Keynes made to his wife was that he had "found God on the 5:15 train" when receiving Ludwig Wittgenstein, Russell's protégé, for his stay in Cambridge.[quote required]
Death
Keynes died on April 21, 1946 of a heart attack. His heart problems were aggravated by the pressure of his work in postwar international financial problems.
Works
The economic consequences of peace
In 1919, Keynes criticized the Treaty of Versailles for the negative consequences that in his opinion the treaty would have on the German economy and on all of Europe, since he stated that "revenge" on the part of Germany would not be long in coming. This work, by somewhat predicting the rise of National Socialism and Hitler's rise to power, catapulted Keynes to prominence.
A Treatise on Probabilities
Keynes published his A Treatise on Probability in 1920, a contribution to the mathematical and philosophical foundations of probability theory.
A Treatise on Monetary Reform
He attacked the deflationary policies of the 1920s in a 1923 Treatise on Monetary Reform, an argument for why countries should aim for domestic price stability while proposing the use of of flexible exchange rates. In the 1930 A Treatise on Money (in two volumes) he expounded his Wicksellian-type theory of the credit cycle.
General theory of employment, interest and money
His seminal work, the General Theory of Employment, Interest, and Money, challenged the dominant economic paradigm when it was published in 1936. In this book, Keynes presents a theory based on the notion of aggregate demand to explain the general variation in economic activity, such as those observed during the Great Depression. According to his theory, the total income of society is defined by the sum of consumption and investment; and in a situation of unemployment and unused productive capacity, employment and total income can "only" be increased by first increasing spending, either on consumption or investment.
The total amount of saving in society is determined by total income, and therefore the economy could achieve an increase in total saving, even if interest rates were lowered to stimulate investment spending. The book advocated active economic policies by the government to stimulate demand in times of high unemployment, for example through spending on public works. The book is often regarded as the founder of modern macroeconomics. Historians agree that Keynes influenced US President Franklin Delano Roosevelt's New Deal, but still dispute the extent of that influence. A policy of deficit spending such as that undertaken in the New Deal began in 1938, which had been called pump priming in 1932 by President Herbert Hoover. Few renowned economists in the United States bought into Keynes's ideas during the 1930s. [citation needed ] Over time, however, his ideas became more widely accepted.
How to pay for the war?
In 1942, Keynes was already a widely recognized economist, as evidenced by his admission to the House of Lords as Baron Keynes of Tilton in the County of Sussex, placing himself on the bench of the Liberal Party. During World War II, Keynes argued in How to Pay for War? (1940) that the war effort should be financed largely through increased colonies in Africa and higher taxes, rather than deficit spending, in order to avoid inflation. It is clear that this algorithm would have its advantages for England, but not for the countries that happened to be "colonies" (William R. Catton Jr. Overshoot ("Overload"), 1980). As Allied victory seemed more certain, Keynes was heavily involved in the negotiations that established the Bretton Woods system, in his role as leader of the British delegation and chairman of the World Bank commission. Keynes's plan, concerning a proposed International Clearing Union for a currency management system, involved a world central bank that would be responsible for a single world exchange unit, the Bancor. However, the weight of the United States in the negotiations was decisive so that the final result was more in line with Harry Dexter White's plans, establishing the use of the United States dollar as a reserve currency, beginning its dominant presence in global finance.
Minor works
Keynes wrote Essays in Biography and Essays in Persuasion, the former providing portraits of economists and other notables, while the latter presents some of the author's attempts to influence policy makers during the Great Depression. Keynes was editor-in-chief of the Economic Journal from 1912.
Inverter
Keynes' brilliant performance as a stock investor is demonstrated by the public disclosure of the fund he managed on behalf of King's College, Cambridge.
From 1928 to 1945, despite taking a huge hit during the Wall Street Crash of 1929, the value of the Keynes fund showed considerable average annual growth of 13.2%, compared to a general market level of the United Kingdom which fell by an average of 0.5% per year.
The approach generally taken by Keynes with his investments was summed up by himself as:
- 1. A firm hold of these relatively large amounts against wind and tide, perhaps for several years, until either they have satisfied the expectation that was on them or evident that their purchase was a mistake.
- 2. A balanced position of investment, i.e. a variety of risks even though individual possessions are large, and risks contraposed if possible (e.g., a possession of gold among other equity investments, as they will probably move in opposite directions when there are general fluctuations).
Keynes argued that:
Investing is intolerably boring and too demanding for anyone who is exempt from the betting instinct; while those who have it must pay for this propensity the right price.
Well-managed industrial companies, as a rule, do not distribute the total of their profits to their shareholders. In good years, if not every year, they retain part of their profits and reinvest them in their business. Therefore there is a composite element operating in favor of a reasonable industrial investment.
Main contributions to economic thought
In his major work, The General Theory of Employment, Interest, and Money, Keynes wrote his views on employment, monetary theory, and the trade cycle, among other topics. His work on employment ran counter to everything the classical economists had taught. Keynes said that the real cause of unemployment was insufficient investment spending. He believed that the quantity of labor delivered is different when the decrease in real wages (the marginal product of labor) is due to the decrease in the money wage than when it is due to an increase in the price level, assuming that the wage currency remains constant.
His contribution can be synthesized in the concept that when the demand becomes temporarily smaller, this may have the consequence, in certain institutional contexts, that the offer also contracts; with which a new market equilibrium would result, but the market itself having lost a certain magnitude between the two moments.
In his theory, the trigger for these movements in demand and supply is the capital market. The demand for capital temporarily becomes lower, after which the supply of capital mimics it downwards, instead of temporarily maintaining or increasing temporarily.
By resolving both movements, that of the demand for capital and that of the supply of capital, both downwards, the market as a whole returns to a new equilibrium. But in this, the amount of capital applied will be less than before, for which reason the new resulting proportion between the other factors of production —labor and resources— and the capital that is last on the market will be altered. By reducing or retaining part of the capital or savings of yesteryear, a part of the other two factors will be surplus and will only be left out of the market; it is realized as an increasing involuntary stock of these other two factors. All this happens in the context of a certain inflexibility in the information that is disseminated and communicated, based on a given institutional framework; which remains more or less anachronistic or extemporaneous to the changes in the capital market, which then trigger unemployment or the involuntary formation of factor stocks.
In his Theory of Money, Keynes said that savings and investment were determined independently. The amount spent on savings had little to do with changes in interest rates, which in turn had little to do with how much was spent on investment. Keynes thought that changes in the amount devoted to saving depended on the willingness to consume that resulted from incremental, marginal changes in income. Therefore, the amount earmarked for investment was determined by the relationship between the expected rate of return on investment and the interest rate.
Keynes, protectionism and free trade
The turning point of the Great Depression
Early in his career, Keynes was a Marshallian economist deeply convinced of the benefits of free trade. From the 1929 crisis, noting the commitment of the British authorities to defend the gold parity of the pound sterling and the rigidity of nominal wages, he progressively adhered to protectionist measures. .
On November 5, 1929, when being heard by the MacMillan Committee to get the British economy out of crisis, Keynes indicated that the introduction of tariffs on imports would help to rebalance the balance of trade. The commission's report states in a section entitled "import control and export support that in an economy where there is not full employment, the introduction of tariffs can improve production and employment. Thus, the reduction of the trade deficit favors the growth of the country.
In January 1930, at the Economic Advisory Council, Keynes proposed the introduction of a protection system to reduce imports. In the fall of 1930, he proposed a uniform 10% tariff for all imports and subsidies of the same type for all exports. In the Treatise on Money, published in the fall of 1930, he resumed the idea of tariffs or other trade restrictions with the goal of reducing the volume of imports and rebalancing the trade balance.
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On March 7, 1931, in the New Statesman and Nation, he wrote an article entitled Proposal for a Tariff Revenue. He points out that lower wages lead to reduced domestic demand, which limits market opportunities. Instead, he proposes the idea of an expansive policy associated with a tariff system to neutralize the effects on the trade balance. The application of customs duties seemed to him "inevitable, whoever the Minister of Finance is." Thus, for Keynes, an economic recovery policy is only fully effective if the trade deficit is eliminated. He proposed a 15% tax on manufactured and semi-manufactured products and 5% on certain foodstuffs and raw materials, leaving others necessary for export exempt (wool, cotton).
In 1932, in an article entitled Los pros y los anti-aranceles, published in The Listener, the protection of farmers and certain sectors such as automobiles and steel was considered, considering them essential for Great Britain. Brittany.
Criticism of the theory of comparative advantage
In the post-1929 crisis, Keynes considered the assumptions of the free trade model unrealistic. He criticizes, for example, the neoclassical assumption of salary adjustment.
As early as 1930, in a note to the Economic Advisory Council, he doubted the intensity of the gain from specialization in the case of manufactured goods. While serving on the MacMillan Committee, he admitted that he no longer "believed in a very high degree of national specialization"; and he refused to "leave any industry that cannot, for the moment, survive." He also criticized the static dimension of the theory of comparative advantage which, according to him, by definitively fixing comparative advantages, leads in practice to a waste of national resources·.
In the Daily Mail of March 13, 1931, he called it "nonsense" the hypothesis of perfect sectoral mobility of labor, since it stipulates that a person who loses his job contributes to reduce the wage rate until he finds a job. However, for Keynes, this job change may involve costs (job search, training) and it is not always possible. In general, for Keynes, the assumptions of full employment and automatic return to equilibrium discredit the theory of comparative advantage·.
In July 1933, he published an article in the New Statesman and Nation entitled National Self-Sufficiency, in which he criticized the argument for the specialization of economies, the basis of free trade. Thus, he proposed the search for a certain degree of self-sufficiency. To the specialization of economies advocated by the Ricardian theory of comparative advantage, he prefers the maintenance of a diversity of activities for nations, in which he refutes the principle of peace trade. His vision of his trade has become that of a system in which foreign capitalists compete to conquer new markets. He defends the idea of producing on national soil when reasonably possible and expresses his sympathy for supporters of protectionism. He notes in National Self-Sufficiency:
A significant degree of international specialization is necessary in a rational world in all cases where it is dictated by major differences in climate, natural resources, native skills, level of culture and population density. But in an increasingly wide range of industrial products, and perhaps also of agricultural products, I have come to doubt that the economic loss of national self-sufficiency is large enough to compensate for the other advantages of gradually placing the product and the consumer within the same national, economic and financial organization. The accumulated experience shows that most modern mass production processes can be carried out in most countries and climates with almost equal efficiency.
He also writes in National Self-Sufficiency:
Therefore, I sympathize with those who want to minimize, more than with those who want to maximize, the economic right among nations. Ideas, knowledge, science, hospitality, travel... are things that, by their nature, should be international. But let the goods be made at home whenever it is reasonable and conveniently possible, and above all, that the finances are primarily national.
In later years, Keynes had a written correspondence with Meade on the subject of import restraint. Keynes and Meade debated the best option between the quota and the tariff. In March 1944, Keynes started a discussion with Fleming after the latter wrote an article entitled Instalments Versus Depreciation. On this occasion, we note that he has definitely adopted a protectionist position after the Great Depression. He believes that quotas may be more effective than currency depreciation in dealing with external imbalances. Thus, for Keynes, the depreciation of the currency was no longer enough and protectionist measures became necessary to avoid trade deficits. To avoid the return of crises due to a self-regulated economic system, it seemed essential to him to regulate trade and stop free trade (deregulation of foreign trade).
He points out that surpluses lead to weak aggregate demand: countries that produce surpluses have a "negative externality" about business partners. Countries that import more than they export weaken their economies. When the trade deficit rises, unemployment rises and GDP slows. And the surplus countries get rich at the expense of the deficit countries. They destroy the production of their trading partners. John Maynard Keynes believed that the products of surplus countries had to be taxed to avoid trade imbalances. Thus, he no longer believes in the theory of comparative advantage (on which free trade is based) which states that the trade deficit does not matters, as trade is mutually beneficial.
This also explains their willingness to replace the liberalization of international trade (free trade) with a regulatory system aimed at eliminating trade imbalances in these proposals for the Bretton Woods agreements.
Influence of Keynes
Keynes's theories were so influential, though disputed, that today an entire subfield of macroeconomics called Keynesian economics continues to develop and discuss his theories and their applications. John Maynard Keynes was interested in various fields of culture and was a central figure in the so-called Bloomsbury group, made up of prominent UK artists and writers. His autobiographical essays Two Memoirs were published in 1949.
Criticism
His 1930 two-volume Treatise on Money was seen as Keynes's best work by one of his most frequent intellectual opponents, Milton Friedman. Friedman and other monetarists have argued that Keynesian economists do not pay enough attention to stagflation.
- Friedrich Von Hayek made a negative review of Money Treaty.[chuckles]required] The Keynes-Hayek conflict was more than one of the battles in the war between Cambridge and the London School of Economy, it was a precursor to the confrontation of the two main dominant economic conceptions since the end of the Second World War and to the present, but contradictory ones.
- Ludwig Von Mises
- Henry Hazlitt wrote a book called The failure of the new economies (The Failure of the New Economics), a critique of the General theory from Keynes.
Posts
- 1913 Indian Currency and Finance / Currency and Finance in India
- 1914 Ludwig von Mises' Theorie des Geldes (EJ)
- 1915 The Economics of War in Germany (EJ)
- 1919 The Economic Consequences of the Peace / The economic consequences of peace
- 1921 A Treatise on Probability / Probability Treaty
- 1922 The Inflation of Currency as a Method of Taxation (MGCRE)
- 1922 Revision of the Treaty
- 1923 A Tract on Monetary Reform / Short paper on monetary reform
- 1925 Am I to Liberal? (N luminous)
- 1926 The End of Laissez-Faire / The Laissez Faire Final
- 1926 Laissez-Faire and Communism / Laissez Faire and Communism
- 1930 Treatise on Money
- 1930 Economic Possibilities for our Grandchildren /The economic possibilities of our grandchildren
- 1931 The End of the Gold Standard (Sunday Express) /
- 1931 Essays in Persuasion / Persuasion Tests
- 1933 An Open Letter to President Roosevelt (New York Times)
- 1936 The General Theory of Employment, Interest and Money
- 1940 How to Pay for the War: A radical plan for the Chancellor of the Exchequer
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