Keynes, John Maynard (1883–1946)

John Maynard Keynes, born in Cambridge to John Neville Keynes and Florence Ada Brown, was a British economist and one of the most influential thinkers of the twentieth century. He was created Baron Keynes of Tilton in 1942. Educated at Eton, he read and taught at the University of Cambridge, where he was a fellow of King's College. He served in the Indian Office and advised His Majesty's Treasury during World War I, being appointed financial representative to the Versailles Peace Conference. On that occasion, he took a stance against the heavy reparations imposed on Germany (which resulted in his Economic Consequences of the Peace of 1919), displaying considerable foresight, and straightway became a public character. A prolific author, he wrote on a range of academic and policy issues, from probability to money to ethics to international relations (and most of his books and papers are now collected in the Collected Writings), though Keynes's name is inevitably linked to his masterpiece, The General Theory of Employment, Interest and Money (1936).

This work was a theoretical reaction to the Great Depression and revolutionized for some decades the world of economics. It would also exert an enduring influence on the economic policies of Western governments in the postwar period. Keynes overturned the so-called Say's law, a keystone of (neo)classical economics, which postulated the natural tendency of the economy toward equilibrium on the grounds that production created a market for the commodities produced. Instead, he argued that demand for goods and services was the primum movens, emphasizing consumer spending. Keynes extolled consumption over thrift, which had been held as a virtue in the Victorian era. Thrift was a “paradox” for it actually led to recession.

In The General Theory, Keynes defined consumption as a function of real income. “The relationship between the community's income and what it can be expected to spend on consumption,” he wrote, “will depend on the psychological characteristic of [Page 829]the community, which we shall call its propensity to consume. That is to say, consumption will depend on the level of aggregate income and, therefore, on the level of employment, … except when there is some change in the propensity to consume” (28).

The relationship between consumption and income hypothesized by Keynes can be written as a linear function whereby the former, beyond a subsistence level called “autonomous consumption” (the y-intercept), is given by the latter multiplied by a parameter, which represents the “marginal propensity to consume,” that is, what proportion of an increase in income will not be saved. This is supposed to be a positive quantity, but lower than the increase itself, and dependent on both objective and subjective factors (see Keynes 1936, book 3). Subjective factors are psychologically, culturally, and historically determined; they are assumed to be constant for any given context.

When a depression occurs, as in 1929, state intervention is needed to get the economy going again. Increase in public expenditure compensates for the stagnation in private consumption and breaks the vicious circle of the recession, causing the growth of production and a greater disposable income. Expansionary fiscal policy might also take the form of a reduced tax burden, which should prove useful to cure milder business cycle recessions through direct stimulation of household consumption.

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