John Maynard Keynes, born on June 5, 1883, had a greater influence on economic theory and policy than any other economist of the 1900’s. Keynes emphasized the instability of the capitalist economy and assigned a much greater role to government in managing the economy than did previous economists.
Keynes was born in Cambridge, England. He wrote his most important work, General Theory of Employment, Interest, and Money (1936), during the Great Depression. The Great Depression had begun with the United States stock market crash of 1929. A major economic downturn quickly spread throughout the rest of the world. Millions of people lost their jobs, and after several years, the economy showed only gradual signs of recovery. Keynes believed that classical economic theory could not explain the depression. He sought to develop a new theory to address the crisis.
Keynes thought economists had been wrong in assuming that free-market economies tended towards full employment. He thought they had overlooked the importance of aggregate demand. Aggregate demand is the total amount of money that people are willing to spend on goods and services in the economy. Classical economists had assumed that aggregate demand always equaled aggregate supply (the total amount of goods and services offered by producers in the economy). They assumed people spent all of their income on either consumption or investment. But Keynes believed these economists had overlooked the fact that expectations and uncertainty about the future influence how people save and spend their money.
Keynes noted that people often want to have a certain amount of money on hand to cover both routine and unexpected expenses. The amount of money desired for such purposes depends on expectations about the future. If there is a lot of uncertainty as to whether investments will be profitable, people will want to hold onto more money. This could cause problems for the economy as a whole. If people held onto money instead of spending it, aggregate demand could fall below what the economy could supply—leading to unemployment. Keynes thought that only the government could ensure that the economy always operated at full employment. Keynes argued that the government should make up for declines in private spending during recessions by temporarily increasing public spending, lowering taxes, and running deficits.
Keynes died on April 21, 1946. His ideas greatly informed the policies of most countries from the 1940’s to the 1970’s. In the mid-1970’s, the United States and other countries experienced severe inflation and high unemployment. An increasing number of economists began to question some of Keynes’s ideas. Countries began to base more of their policies on other economic theories. However, when the Great Recession began in late 2007, many economists and policy makers once again looked to Keynes. His ideas continue to play an important role in understanding modern economic problems.