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John Maynard Keynes Contribution To Economics History Essay

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Published: Mon, 5 Dec 2016

Keynes is among some of the most recognized economists of all times. According to Skidelsky (2010) this is hardly surprising because of two very important reasons. To begin with, his works and contribution to economics was perhaps the most significant work even produced for several decades and ended up changing the entire face of post war economic policy. Secondly, it must be because he is the only economist who had the entire branch of economics bearing his name. This work gives a discussion of some of the most important contributions Keynes has made in the world of economics.

Historical background

Keynes was born to a middle class family in Cambridge. His father was known as John Neville Keynes: he was also an economist and most of all a lecturer at the University of Cambridge (Skidelsky, 2010). His mother going by the name Florence Ada Keynes was a local social reformer. Keynes was the first born in a family of three: a brother Geoffrey Keynes and a younger sister Margaret Keynes. His father being an economist, he provided Keynes with enough support in academics that enabled him pass his scholarship exams.

Keynes was a bright student all the way from his kindergarten. His teachers always described him as a brilliant but somehow careless student who lacks in determination. This was a period when his health was not all that good making him miss so many classes. He later won a scholarship to study at Eton where he did not stay for long before changing to Kings College Cambridge on a mathematics scholarship. Skidelsky (2010) explains that even upon graduation in 1905, Arthur Pigou and Alfred Marshall begged him to remain and become an economist even though he always wanted to be pursue philosophy. After leaving Cambridge, he later took up a position as a civil servant in Britain. It is from here that he collected material that helped him write his first book Indian Currency and Finance. This book gives a description of how the Indian monetary system works.

According to Skousen (2007) Keynes later returned to Cambridge in 1908 and became a lecturer for a while before taking leave to go work in Ministry of Treasury. His hard work so him rise quickly to become the Principle representative of the treasury in the peace conference held at Versailles in 1919. However, he later resigned from the Treasury because he felt that the Treaty of Versailles seemed to be a huge burden to the Germans. It was at this point that he went back to Cambridge to continue with teaching. Other than being a good lecturer, he was also a prominent journalist and a good speaker. He later got married in 1925 to Lydia Lopokova, the Russian ballet dancer and made a lord in 1942. On April 21, 1946, Keynes passed on to leave behind his beloved father and economist John Neville Keynes.

Keynes contribution to economics

His first major contribution to the world of economics was through his composition of the condemnation of the Versailles settlement which later on reached the stores in the name of “The Economic consequence of the Peace.” This essay was very important to the economic analysis of kind of reparations that were being done upon the German economy together with the improbability that Germany would ever be paid. While he was still employed in the Treasury, Keynes was determined to stop the compensation payments made against Germany (Skousen, 2007). These payments were being set so high to an extent that the innocent Germans would also be traumatized considering that it was the tax payers’ money that was to make the payments. Moreover, the payments would damage the ability of the country to pay back and make it impossible for Germany to import goods from other countries.

The effects of these activities would not only heart the economy of Germany but it would also affect the economy of the entire world. Unfortunately, Keynes was excluded from taking part in the high level talks that would have influenced the decisions concerning reparation. Keynes was only left with the option of trying to make some influence behind the scenes because this was the only chance he hard. Skousen (2007) explains that he even came up with a plan to write down the war debts which he felt had the capacity to increase international trade. However, the US rejected the plan and considering that is was the largest creditor it had started thinking in terms of the advantages of a harsh peace. As much as Keynes resigned from the treasury without having achieved his plan, his contributions were definitely a representation of what the world would have wished to see. It’s this experience that also led him to write his first book which of course has a great contribution to the world of economics.

This book also represents his passion fro economics through his economic analysis of the entire situation. For instance, he talks of not being able to let go the subject of reparation against Germany as though it was all bout some economic facts or pledges. In the book, he laments that the idea of reducing Germany to a point where it becomes like a servitude generation was unacceptable especially bearing in mind what the innocent citizens were to go through. Keynes argues that even if the effects of such decisions were not to be felt by the rest of Europe, they were not right. As Markwell (2006) puts it, this concern for the economy of another country was a huge contribution to the world of economics because analysis can now be made to understand why the Germany economy was the way it was and what was made to change it around. If it were not for his contribution, may be no one would have really understood what was going on at that time. His predictions upon the disaster upon the German economy were borne out when its economy was faced with a hyperinflation in 1923.

In the 1920s Keynes came up with a plan to examine the relationship between money, unemployment and prices. This theoretical work was later reflected in his work “The Treatise on Money” which was later published in 1930. The main idea in this work was the fact that the amount of money that people were saving was more than that which was being invested. He explains that this can happen when the interest rates for savings are high and therefore people will want to make more money from their savings. However, this leads to rising in the rates of unemployment. This could be brought about when people do not want to spend much of what they are being paid by their employers and therefore making in harder in aggregate for employers to make more money (Markwell, 2006).

Keynes also made another publication in 1933 when the great depression had reached its height. The Means to Prosperity was a piece of work that provided a number of policy recommendations that countries could use to tackle unemployment in times of global recession. This is definitely a very huge contribution to the world of economics bearing in mind the effects of unemployment to an economy. According to Welch & Welch (2009) the book also mentions the multiplier effect. Even though this book was mainly addressed to the British government it proved to be very useful for other countries around the globe that were affected by recession. Copies of this book were sent to various leaders across the world. It is for this reason that most people came to accept the Keynesian ideas later on.

Policies similar to those that were being pushed for by Keynes were also adopted by countries like Germany and Sweden. However, Sweden was regarded as a small nation to command great attention. Similarly Keynes deliberately kept off talking about the successful efforts that Germany had put in place because of its inhuman treatment of the Jews and their imperialist ambitions. Apart from his contributions on Great Britain, Keynes attention was also focused upon the US. In fact he received so much support about the views he aired about counter-cyclical public spending (Welch & Welch, 2009).

Towards the end of 1933, Felix Frankfurter persuaded Keynes to talk to President Roosevelt which he actually did both through lattes and on face to face terms in 1934. However, record has it that the real consensus is that efforts pushed by Keynes only begun to have an impact on the economic policies of the US in 1939.

Keynes general theory of employment, interest and money came to be published in 1936. This was a highly technical explosion of new issues that had not been addressed by the earlier treatise of money. As Minsky (2008) puts it the main message here was that during a depression, there was no wage that was very low that it could eliminate unemployment. It also explains the issue of unemployment by aggregate demand which comprises of the total spending of business investors, consumers and public agencies. He explained that sales and jobs suffered in cases where the aggregate demand was low and everything was well when it was high. These generalities brought about some powerful and comprehensive view on economic behavior.

These generalities by Keynes brought about some comprehensive and powerful view of economic behavior. Considering the fact that consumers were somehow limited in spending because of the little amount of salary they earned, they were not considered as a source of fluctuations in business cycle. This is also a great contribution from him to the world of economics. According to Keynes teachings, the best thing to do during depressions was either to come up with public substitutes for deficiencies of private investment or to enlarge the private investment (Minsky, 2008). Such teachings are still very important in decision making up to this point in time. in times of mild economic contractions, Keynes suggests that monetary policy in form of easier credit together with lower interest rates would stimulate investments in business and therefore bring back the aggregate demand to normalcy by full employment. This is definitely a huge contribution from Keynes.

Another contribution from Keynes to economics was through the General Theory which revolutionized the manner in which economists think about issues to do with economics. Dillard (2005) explains that this theory was path breaking so many ways. For instance it was in opposition with earlier policies that explained that the market would establish full employment by itself as long as the government that does interfere in its running. Here, Keynes in fact encouraged the government to be active members in the market to ensure that unemployment was is reduced or done away with. This theory introduced the idea of aggregate demand as the total sum of investment, consumption, and all forms of government spending. However, economists still have so many arguments going on what Keynes thinks to be the cause of unemployment. Some economics think that he blamed it on wages which take quite some time to fall. On the contrary, he never wanted the wages to fall. He in fact advocates for the idea of keeping wages stable. He argued that if wages were cut down, several factors like aggregate demand, income and consumption will be reduced. This would get rid of any benefits that would have been brought about by lower prices of labor.

Keynes argues that there is no reason why the government should not help out in business through hiring the unemployed and in investment in public works when need arises. In the beginning this conclusion met so much resistance considering that this was a time when balanced budgets were commonly used by governments. However, the idea was later embraced by government with the US being the first to put people back to work on various projects within the docket of public works. It reaches a point when policymakers embraced the idea of deficit spending and did not want to let it go. In the current time, the general theory is considered as a foundation of microeconomics (Dillard, 2005). Even though very few economists agreed with views from Keynes during the 1930s, his ideas have been embraced my economists in various parts of the world with renowned professors like Alvin Hansen also agreeing to his views before the Second World War began.

Lastly, in his book ‘How to Pay for the War, Keynes argues that in order to prevent inflation during times of war, there is a need to finance it by high taxation and compulsory savings instead of deficit spending which has been the scenario in most cases (Dillard, 2005). He argues that compulsory savings should help in dampening domestic demand and therefore assist in directing some resources towards efforts in war. This would not only be fair but would also help to prevent post war slump.

Summary

As it has been illustrated in the paper, Keynes is one economist with so much influence on what economics is all about in the current time. Even though he accidentally got into the field of economics, he has surely shaped so much in the field and much of what we know to day is owned unto him. Through his series of writings, we can still understand the state of events in the beginning of the 20th century and therefore act according to what he teaches us. Keynes has therefore shaped the way world economies are run and the way in which countries deal with issues like unemployment. If it were not for his clever thoughts, its possible that governments would still be isolating themselves from supporting the business market through institutions like the public works sector.


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