Keynes, John Maynard

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John Maynard Keynes

A major British economist. He provided much of the intellectual foundation for the theory that government intervention is necessary to ensure an active and vibrant economy. According to this theory, government should stimulate demand for goods and services in order to encourage economic growth. It thus recommends tax cuts and increased government spending during recessions to reinvigorate growth; likewise, it recommends tax increases and spending cuts during economic expansion in order to combat inflation. His thought was extremely popular for much of the 20th century prior to the 1970s, when stagflation (which under Keynesian theory should not be possible) was prevalent in the UK and the US. However, Keynesianism resurged at the end of the first decade of the 2000s. Keynes lived from 1883 to 1946.

Keynes, John Maynard

(1883–1946) an English economist who offered an explanation of mass UNEMPLOYMENT and suggestions for government policy to cure unemployment in his influential book The General Theory of Employment, Interest and Money (1936). Prior to Keynes, CLASSICAL ECONOMICS had maintained that in a market economy the economic system would spontaneously tend to produce full employment of resources because the exchange mechanism would ensure a correspondence between supply and demand (SAY'S LAW). Consequently, the classicists were confident that business recessions would cure themselves, with interest rates falling under the pressure of accumulating savings, so encouraging businessmen to borrow and invest more; and with wage rates falling, so reducing production costs and encouraging businessmen to employ more workers. Keynes’ concern about the extent and duration of the worldwide interwar DEPRESSION led him to look for other explanations of recession.

Keynes argued that classical political economists were concerned with the relative shares in national output of the different factors of production rather than the forces that determine the level of general economic activity, so that their theories of value and distribution related only to the special case of full employment. Concentrating upon the economic aggregates of NATIONAL INCOME, CONSUMPTION, SAVINGS and INVESTMENT, Keynes provided a general theory for explaining the level of economic activity. He argued that there is no assurance that savings would accumulate during a depression and depress interest rates, since savings depend on income and with high unemployment, incomes are low.

Furthermore, he argued that investment depends primarily on business confidence, which would be low during a depression, so the investment would be unlikely to rise even if interest rate fell. Finally, he argued that the wage rate would be unlikely to fall much during a depression given its ‘stickiness’, and even if it did fall, this would merely exacerbate the depression by reducing consumption.

Keynes saw the cause of a depression as reduced AGGREGATE DEMAND, and in the absence of any automatic stimulus to demand, he argued that governments must intervene to increase aggregate demand and end depression. He suggested that governments stimulate consumption by putting money into consumers’ pockets through tax cuts or directly increase governments’ own expenditure to add to aggregate demand. See EQUILIBRIUM LEVEL OF NATIONAL INCOME.