Henry Morgenthau (on the left) and John Maynard Keynes (on the right) at the Bretton Woods Conference
John Maynard Keynes is one of the most influential world economists, together with Adam Smith (considered to be the father of economic liberalism) and Karl Marx (theorist of Scientific Socialism). Keynes´s ideas had an important role in the solution of the 30s Great Depression and the foundation of the so called Golden Age of Capitalism, which extended from the end of WW2 and the beginning of the 1970s decade.
Keynes was a British economist who studied in Cambridge and belonged to the Bloomsbury group, a heterogenous group of intellectuals who lived, studied and worked together at the beginning of the 20th century. He had a lot of personal interests and worked as an investor and businessman. He opposed to WW1 from pacifism, but collaborated with the British government during the war and was sent to the Conference of Paris as financial representative for the Treasury. He resigned due to his disagreement with the ideas of revenge against Germany and the war reparations imposed to them (40,000 million dollars). His book The Economic Consequences of the Peace (1919) warned about the impossibility of paying these war reparations (2,000 million dollars per year) and the danger of reducing Germany to servitude. He considered that the hard conditions imposed to Germany would be very negative for the future. Here you have two excerpts of his book
The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness, should be abhorrent and detestable.... Nations are not authorised, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers....
The Treaty includes no provisions for the economic rehabilitation of Europe - nothing to make the defeated Central Empires into good neighbours, nothing to stabilise the new States of Europe, nothing to reclaim Russia... The Council of Four paid no attention to these issues, being preoccupied with others - Clemenceau to crush the economic life of his enemy, Lloyd George to bring home something that would pass muster for a week, the President to do nothing that was not just and right.
Keynes, John Maynard (1919) The Economic Consequences of Peace
His main ideas were explained on his book The General Theory of Employment, Interest and Money, written in 1936. Due to this book Keynes is considered to be the father of macroeconomics. He wrote a smaller book called Essays in persuasion, where he explained his ideas in a simpler way. These are the most important ideas he developed:
- He described the mechanism of crises, as it had been observed in 1929: prosperity is characterized by investing euphoria and speculation, there is a credit expansion, which leads to overproduction. Those who got credits can´t give them back and crisis starts. The consequence is credit contraction and this leads to recession.
- Keynes also talked about animals spirits, the human impulses which can´t be explained rationally and produce economic fluctuations, for example consumer confidence in some products or a reduction of consumption which can´t be explained rationally.
- His most important contribution was the idea of the need for a State intervention when there is a macroeconomic void. The State has to intervene in order to correct the problems individuals can´t solve on their own and heal the system. The State intervention he defended didn´t mean ending with capitalism, but strengthening it to make it work better and more efficiently. Keynes didn´t think that the State had to own the means of production (as the Socialists said). The role of the State had to be the one of a regulator, to avoid risk and do what the individuals were not doing, to stimulate economy when it was depressed, in order to recover full employment. That means that the State has to act as an economic agent when the circumstances demand it. Keynes also defended the existence of institutions to control credit and money and collect economic data, so that the State could be ready to intervene when it was necessary.
- Another important idea was that times of prosperity and economic growth are the best moment to reduce deficit. If you do it during recession , you will make things worse.
- Although Keynes wrote a lot of pages of economic theory, he was a pragmatist and considered economics as a practical and instrumental science, whose main objective is providing people with all they needed to live better and have more time to do other things.
- Keynes also warned about the danger of overestimating the importance of economics. This could mean putting economic problems over other people´s needs. He was not an orthodox, but a flexible thinker, ready to prove other solutions if what was being done didn´t work.
Keynes participated in Bretton Woods Conference, the meeting called to design the international economic system after WW2. He defended the idea of creating an International Clearing Union (a World Central Bank) to lend money to the countries in crisis and help them rebalance their accounts. He also proposed the creation of an international currency, the bancor. His ideas were rejected and the USA government imposed its opinion.
As we have studied, Keynes´s ideas were very important to solve the crisis of the 30s and basic for the foundation of the Welfare States as an alternative to non-regulated economic liberalism and Stalinism. Keynes´s influence was decisive for more than 30 years. When a new crisis started in the 1970s decade, his prescriptions were forgotten and neo-liberal economists focused their interest on controlling inflation and public deficit. The recent recession has revived Keynes´s ideas and some of the most influential current economists, such as Nobel Prize Winners Joseph Stiglitz and Paul Krugman, define themselves as Neo- Keynesian.
Here you have two curious videos about a theoretical combat between John Maynard Keynes and Friedrich Von Hayek (defender of the free market and the non intervention of the State in economy):