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John Maynard Keynes (1883-1946) was a British economist and one of the most influential economists of the 20th century. His focus was on reviving economies that faced recession through advocacy of fiscal and monetary policies whose implementation would reduce effects of recession. His ideas are considered the foundation of the Keynesian school of thought or Keynesian economics. Among his main theories is the suggestion that, in case of recessions, governments should rescue their states by borrowing money from the people and investing it to boost economic activities. The returns of the investment should be used to repay the debt already owed to the people. He spearheaded a fierce campaign to ease the debt obligations imposed on Germany after World War one and even resigned his public office in protest after the outcome of the Versailles Peace Conference ruled for heavy war repatriations on Germany (Sheffrin, 2003). The subsequent collapse of Germany’s economy led to rise of extremist groups and ultimately to the start of world war II. In this paper, a critical discussion of influence and contributions of John Keynes to the economic world will be carried out.
John Maynard Keynes was born in 1883 in Cambridge. His father was a Lecturer at the Cambridge University also an economist, while his mother a social reformer and the first female mayor of Cambridge. Robert Skidelsky, an economist and biographer remarks that, the Keynes family was close knit and Keynes’s father assisted him during the economic downtime in 1929. His academic life was complex and according to Skidelsky, Keynes was severally kept out of school due to illness (Skidelsky, 2003). He was a brilliant student in Mathematics and History, though his overall rating was just average. He later won a scholarship to Eton, where he displayed exceptional understanding in various disciplines and later attended King’s college on scholarship where he did Masters in Mathematics. According to Harry Johnson, an economist, Keynes efforts were strongly influenced by optimism and a culture that he inherited from his parents and the family status in the society (Sheffrin, 2003). Keynes worked as a civil servant in India as a clerk in 1906. Later he resigned and returned to Cambridge to undertake research in probability theory, where in 1909, he published a paper about an economic recession in India. He also took a lecturer’s job in economics and additionally held private tuition to earn money. He was made editor for the economic journal in 1911. He published his first book called "Indian Currency and Finance" in 1913 and later substantially made economic contributions, based on the economic theory after being appointed to the Indian Royal Commission (Skidelsky, 2003).
Major Influences by Keynes
There were various projects in which John Keynes was involved, as well as famous influential suggestions regarding economic policies by sectors and governments. This section will discuss some of them.
German War Repatriations and the Versailles Peace Conference
After World War I, a conference was held called the Versailles Peace Conference with the aim of discussing the effects of the global war and ways to remedy them (Skidelsky, 2003). One of the major decisions of the conference was to impose heavy war compensation penalties on Germany following her role in the war. Keynes agreed on the idea of compensation, but was thoroughly opposed to extreme compensation demands since, in his view; heavy debt obligations on Germany would put an unbearable burden on Germany and her people, causing global economic hardships. He argued that if Germany’s debt situation left her unable to import goods, all sectors of her economy would be crippled, and that the desperation that would ensue might lead to birth of extremist groups. Keynes view was received negatively and led to his being excluded from vital decisions, and the heavy fines were passed by the conference, leading to Keynes resignation from treasury in frustration (Skidelsky, 2003).
In agreement with his predictions, the effects of unmanageable debt for Germany led to the hyperinflation in 1923, and later to the rise of chaos and intolerance that led to the World War II. His work ‘The economic Consequences of the Peace’ that targeted the decisions of the conference, gained him international recognition, and Keynes again found acceptance in the British Government where he was appointed to lead a major British bank (Skidelsky, 2003).
Opposition of the Gold Standard
During the period between 1920 and 1931, Keynes strongly advocated for the abandonment of the Gold standard adopted by the British government as a cautionary measure against possible inflation effects caused by any further war situations. He argued that, at the same time the government protected its currency from inflation, it was restricting the much needed investment activities in the population, effectively reducing access to employment. His work ‘A Tract on Monetary Policy’ published in 1923 tried to address this issue, but was faced with rejection from the Government. The Gold Standard led to a large decline in the industry, prompting Keynes to write ‘The Economic Consequences of Mr. Churchill’ that focused on the aftermath of the Gold Standard. The government abandoned the Gold Standard policy in 1931(Minsky, 2008).
Contributions to Solutions of the Great Depression
Keynes work ‘A Treatise on Money’ was published in 1930 and focused solely on effects of the Great Depression and the way to mitigate its effects. It looked into unemployment, money and commodity prices. Keynes believed that government deficits were not necessarily disadvantageous when they were products of recessions, and that if the government borrowed money to support industries and prevent their collapse, there were chances of economic recovery (Skidelsky, 2003). In 1933, he published ‘The Means To Prosperity’, which specifically handled unemployment, and the cyclic public spending. It was addressed to the British Government, but it as well as influenced other nations. This work would later lead to acceptance of the ideas of Keynes in large scale as well as laid the foundation for Keynesian economics. In 1939, his work ‘The general Theory of Employment, Interest and Money’ was published.
It deeply attempted to analyze market forces, including the nature of Free Markets and the role of governments in controlling unemployment. He believed that the classical economic theory was just an exceptional case in the wider scope of market economics and was valid only in the 19th century. Classical Economics, which was strongly influenced by Say’s Law, held that in a free market supply drives its own demand, and workers were naturally willing to lower their wages to levels the employers could manage. As a result of this theory, Keynes came up with the concept of price stickiness. This concept suggested that workers would be unwilling to lower their wages even when rationality would suggest that they do so. This led to development of a wider and more inclusive concept, the concept of aggregate markets. Aggregate markets consisted of aggregate demand and aggregate supply elements, which would substantially be affected by the total resources within a society (Skidelsky, 2003).
The Keynes Economics
Keynesian economics, is also known as the Keynesian Theory or Keynesianism. The main underlying concept in Keynesian economics is the interplay of public and private sectors in the economy, and the incorporation of sound monetary policies by the central banks as well as proper fiscal policies by the governments in the regulation of the outcomes of the business cycle (Minsky, 2008). He argued that individual decisions in the micro-economic level, if uncontrolled, might lead to undesirable outcomes in the macro-economic scale. As such, inefficient aggregate outcomes would lead to the economy operating below its optimum output. If aggregate demand for goods was insufficient, he argued that an economic glut would result, and extremely high unemployment levels would be caused by defensive or reactive actions by employers in response to market conditions. In such a situation, Keynes argues that governments can intervene by increasing aggregate demand through such tools as an expansionary monetary policy.
The business cycle amplitude, which most economists of the time viewed as the most serious economic threat, could be controlled if the government implemented proper fiscal policies. The solution to the Great depression, for instance, would be to have governments stimulate the economy by inducing people to invest through a combination of low interest rates and government invest in infrastructure. While classical economics assume full utilization of market resources, Keynes argued that situations arose where full utilization was not achieved, thereby leading to conditions in which a general demand –supply equilibrium would not happen, which led to the Neo-Classical economics (Skidelsky, 2003).
Neo- Classical Economics
This theory combines with Keynesian economics to form the neo-classical synthesis. It is applied variously to analyze market trends through demand and supply dynamics, price control and income distributions in line with the rational decision theory. Though this theory was popularized by other economists, it has heavy reliance and foundation on Keynesian economics (Minsky, 2008).
Keynesian Effects on Economy Today
While Keynes theories faced criticisms and his work has since been vastly improved by economists all over the world, it is vital to note that his contributions to the economic policies has immensely aided governments in decision making and reshaping of economies. For instance, his great predictions regarding the war penalties on Germany and the Gold standard in Britain were actualized. Even more recently, his predictions regarding conditions like those, which led to the 2008 global economic crisis, were already documented. Keynes strongly suggested that, lack of control in the private sector by governments through fiscal and monetary policies would invariably lead to recessions. This truly happened in 2008, when unregulated finance markets and emphasis on (Collateralized Debt Obligations) capsized the global economy, leading to massive losses upward of 2 trillion U.S. dollars (Minsky, 2008)..
If Keynes Lived Today
He would have witnessed his predictions come true in the Dot Com bubble and the American Asset Bubble of 2001-2006, and the consequent crises. He would have reminded the committees that sat to find a way forward after both recessions that he had predicted effects of lack of proper regulation in the private sector more than half a century ago. He would have suggested for international regulation and more government involvement in financial markets.
Keynes was a key contributor to the global economy in many ways. Though not without flaws, his views and theories have contributed positively to economic decisions, thus improving the living conditions of billions of people over the years. His market regulation theories, as well as his emphasis on the fiscal policy and government involvement in fighting economic recessions are solutions that are viable and largely implementable today. It is vital to advance on his strong foundation in the area of economic studies among other notable areas. Consequently, the world will become a better place for all people regardless of their financial, racial or religious backgrounds (Skidelsky, 2003).