The Legacy of John Maynard Keynes

Michael Teague  |

The influence of John Maynard Keynes throughout the 20th century is undeniable. Since the global financial crisis, however, his name has been heard more and more often as governments accross the world scramble to find ways to stimulate growth, hiring, and spending.

Keynes’s economic theories developed concomitant to the momentous events of his day. His first work for the British Government was as a clerk in the India Office, a post he would keep for two years before resigning. In the years leading up to the outbreak of the Great War, he would devote himself to academic work, serve as the editor of The Economic Journal, and publish his first book, Indian Currency and Finance.

His skill in locating the overlap between theory and practice landed him an official position at the Treasury shortly after the commencement of hostilities in 1914, where he oversaw the credit agreements between Britain and its allies in Europe. Keynses’s astuteness and prescience, particularly with regard to matters involving currency, led him to be appointed as the Treasury’s financial representative to the Versailles peace-conference in 1919, where the onerous terms of Germany’s reparation payments were famously established.

The Versailles conference can be counted as one of the most fateful historical events of the 20th century, however, and perhaps nobody would come to understand this as well as Keynes himself. Indeed, among his main goals at Versaies was to make sure that Germany’s reparations payments were not so set so high as to condemn the country’s citizens to economic desperation. But the politics of the day had recently empowered Britain’s conservatives, who had come out on top in the elections of 1918, in large part thanks to a platform that included using economic reparations to punish the Germans..

The adoption of the terms of the Versailles treaty constituted a defeat for Keynes, whose moral revulsion at the harsh final product, no less its lack of economic foresight, led him to resign from his post, and to the publication of another book The Economic Consequences of the Peace, in which he famously predicted that the forced impoverishment of Germany and its Central European allies would lead to a future he described with frightening prescience as “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.”

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But the intellectual and economic legacy of Keynsian ideas is better known to us today through the filter of the Great Depression. During this time, he released several works dealing with the relationship between money, employment, and prices in global recessionary conditions that culminated in what is his best-known book, The General Theory of Employment, Interest, and Money that is often cited as the birthplace of macroeconomics. Keynes had long argued in favor of lower interest rates, as well as moving off the gold standard, and even allowing the value of the national currency to depreciate in order to revive a struggling economy, but the General Theory was his strongest statement about role of government in a dire economic situation.

Indeed, the book made the then-provocative case that demand, rather than supply, was actually the essential determinant in a country's economic activity. and that in certain instances, government expenditures were necessary in order to stimulate consumption and investment. The work prefigured the New Deal in that it urged government to increase spending on public works and infrastructure in order to put more citizens back to work. When one hears an economist described as a "Keynesian", what is often meant is that he or she advocates that the government take an active role in jump-starting economic activity, primarily by creating better conditions for hiring and spending.

Keynes passed away shortly after the second World War in 1946, and thus did not live long enough to see the effects of his economic theories bear out as they became more fully embraced, and eventually ascendant for the better part of three decades after his death (much to his dismay, the only country to fully adopt his economic thinking during his lifetime was pre-war Nazi Germany). Furthermore, by the late seventies and after three decades of unprecedented growth, a free-market ideology had risen to prominence, partly in reaction to Keynesian economics, that emphasized the ability of markets to regulate themselves without interference. The political victory of this ideology was enshrined in the elections of Ronald Reagan and Margaret Thatcher, both of whom would radically alter the Keynesian norms that had become commonplace in some instances.

With the financial crisis of 2007-2008, however, Keynes has once again become a signpost for many who are trying to find a way out of the impasse that continues to drag on economies throughout the world. The increasing resort to stimulus spending, be it of the Quantitative Easing variety, or some other variation, can and has been seen as a return to the Keynesian thinking developped during the Great Depression.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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