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John Maynard Keynes

John Maynard Keynes (1883-1946) was a student of Alfred Marshall at Cambridge University and later served as a Cambridge don himself. He was intimately involved in public policy in Britain, serving in various capacities within the Civil Service, including a position in the Treasury (1915-1919). Even when Keynes returned to academia as a professor, he continued to combine the "life of the mind" with an active role in public policy debates, consulting for the British government, and writing popular pieces for the British press. Indeed, Keynes was one of the key figures involved in the Bretton Woods Conference (1944 in New Hampshire) where influential political and intellectual figures from both sides of the Atlantic came together to rethink international monetary and, more generally, economic policies. The International Monetary Fund and the Bank for Reconstruction and Development were among the institutions to arise out of the rethinking that took place at Bretton Woods.

Keynes concern about proper public policy resulted in his developing new theoretical insights about the macroeconomy. These insights made up a logical framework of thought that has come to be called Keynesian economics or Keynesian macroeconomic theory.

Keynesian macroeconomic theory grew out of the so-called Great Depression of the 1930s when orthodox (neoclassical) economic theory was unable to either explain the causes of the severe economic collapse or to provide an adequate public policy solution. In particular, orthodox economic theory argued against the need for government intervention and in favor of a policy of laissez-faire. Keynes feared that a "do nothing" approach to the economic downturn and rising unemployment would only make conditions worse.

Indeed, Keynes believed that the very mechanism by which the economy was supposed to return to full employment---price adjustments---would only worsen the crisis. In a series of lectures in 1933, Keynes explained why he rejected the idea that price adjustments would provide the means of restoring a "full employment equilibrium", as well as other aspects of the mainstream approach and provided a well constructed alternative theoretical framework. These lectures were the basis for his General Theory of Employment, Interest, and Money, published in 1936. This work is now considered one of the most significant texts in the history of economic thought.

In the General Theory, Keynes identified the catalyst of economic downturns, recessions and depressions, in changes in the investment policies of the boards of directors of capitalist firms. Indeed, Keynes argued that it was precisely the volatility of investment spending, or the demand for investment goods (capital goods and inventory), that created the so-called business cycle. And this volatility resulted from the uncertainties faced by these boards of directors when they attempted to maximize corporate profits: the members of the board are necessarily operating in an environment of uncertainty about future revenues and future costs and form expectations about these variables based on a wide range of factors out of their immediate control, including but not limited to interest rates, as well as variables within their control. If members of boards expect relatively low profit rates from investment spending, then they would be less likely to approve such spending. However, when enough firms cut back on investment spending plans, the overall economy can be hurt. Jobs can disappear, consumers can find their income constrained and be forced to cut back on consumer spending, government revenues---tax revenues are linked to income in a positive relationship---fall, more and more firms find the demand for their goods and services declining---as demand falls, expected future revenues are adjusted downward---and corporate boards may further cut back on investment spending. The result is an economy that can move into a sustained period of decline in gross domestic product. This demand-side analysis of the consequences of changes in profit expectations is at the core of the theoretical rethinking of macroeconomics embodied in Keynes' General Theory.

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again . . . there need be no more unemployment. . . . It would indeed be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."

John Maynard Keynes, The General Theory, p. 129.

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