John Maynard Keynes

John Maynard Keynes

Overview
John Maynard Keynes, Baron Keynes of Tilton, CB FBA (icon ; 5 June 188321 April 1946), was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...

, as well as the economic policies of governments. He greatly refined earlier work on the causes of business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...

s, and advocated the use of fiscal
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....

 and monetary measures to mitigate the adverse effects of economic recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

s and depressions
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....

.
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Quotations

I work for a Government I despise for ends I think criminal.

Letter to Duncan Grant|Duncan Grant (15 December 1917)

In truth, the gold standard is already a barbarous relic.

Monetary Reform (1924), p. 172

If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.

"The Future" Ch. 5, Essays in Persuasion (1931)

Most men love money and security more, and creation and construction less, as they get older.

"The Future", Essays in Persuasion (1931)

Words ought to be a little wild, for they are the assault of thoughts on the unthinking.

New Statesman and Nation (15 July 1933)

His peculiar gift was the power of holding continuously in his mind a purely mental problem until he had seen it through.

On Isaac Newton, in Essays in Biography (1933)
Encyclopedia
John Maynard Keynes, Baron Keynes of Tilton, CB FBA (icon ; 5 June 188321 April 1946), was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...

, as well as the economic policies of governments. He greatly refined earlier work on the causes of business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...

s, and advocated the use of fiscal
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....

 and monetary measures to mitigate the adverse effects of economic recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

s and depressions
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....

. His ideas are the basis for the school of thought known as Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...

, as well as its various offshoots.

In the 1930s, Keynes spearheaded a revolution
Keynesian Revolution
The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework: neoclassical economics....

 in economic thinking, overturning the older ideas of neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...

 that held that free markets would in the short to medium term automatically provide full employment, as long as workers were flexible in their wage demands. Keynes instead argued that aggregate demand
Aggregate demand
In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...

 determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment. Following the outbreak of World War II, Keynes's ideas concerning economic policy were adopted by leading Western economies. During the 1950s and 1960s, the success of Keynesian economics resulted in almost all capitalist governments adopting its policy recommendations, promoting the cause of social liberalism
Social liberalism
Social liberalism is the belief that liberalism should include social justice. It differs from classical liberalism in that it believes the legitimate role of the state includes addressing economic and social issues such as unemployment, health care, and education while simultaneously expanding...

.

Keynes's influence waned in the 1970s, partly as a result of problems that began to afflict the Anglo-America
Anglo-America
Anglo-America is a region in the Americas in which English is a main language, or one which has significant British historical, ethnic, linguistic, and cultural links...

n economies from the start of the decade, and partly because of critiques from Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

 and other economists who were pessimistic about the ability of governments to regulate the business cycle with fiscal policy. However, the advent of the global financial crisis in 2007 caused a resurgence in Keynesian thought
2008–2009 Keynesian resurgence
In 2008 and 2009, there was a resurgence of interest in Keynesian economics among policy makers in the world's industrialized economies. This has included discussions and implementation of economic policies in accordance with the recommendations made by John Maynard Keynes in response to the Great...

. Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the crisis by Presidents George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....

 and Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...

 of the United States, Prime Minister Gordon Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...

 of the United Kingdom, Prime Minister Kevin Rudd
Kevin Rudd
Kevin Michael Rudd is an Australian politician who was the 26th Prime Minister of Australia from 2007 to 2010. He has been Minister for Foreign Affairs since 2010...

 of Australia, and other global leaders.

Keynes is widely considered to be one of the founders of modern macroeconomics
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...

, and to be the most influential economist of the 20th century. In 1999, Time magazine included Keynes in their list of the 100 most important and influential people of the 20th century
Time 100: The Most Important People of the Century
Time 100: The Most Important People of the Century is a compilation of the 20th century's 100 most influential people, published in Time magazine in 1999....

, commenting that: "His radical idea that governments should spend money they don't have may have saved capitalism." In addition to being an economist, Keynes was also a civil servant, a director of the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...

, a patron of the arts and an art collector, a part of the Bloomsbury Group
Bloomsbury Group
The Bloomsbury Group or Bloomsbury Set was a group of writers, intellectuals, philosophers and artists who held informal discussions in Bloomsbury throughout the 20th century. This English collective of friends and relatives lived, worked or studied near Bloomsbury in London during the first half...

 of intellectuals, an advisor to several charitable trusts, a writer, a private investor, and a farmer.

Early life and education



John Maynard Keynes was born in Cambridge
Cambridge
The city of Cambridge is a university town and the administrative centre of the county of Cambridgeshire, England. It lies in East Anglia about north of London. Cambridge is at the heart of the high-technology centre known as Silicon Fen – a play on Silicon Valley and the fens surrounding the...

 to an upper-middle-class family. His father John Neville Keynes
John Neville Keynes
John Neville Keynes was a British economist and father of John Maynard Keynes.-Biography:Born in Salisbury, he was the son of Dr John Keynes and his wife Anna Maynard Neville . He was educated at Amersham Hall School, University College London and Pembroke College, Cambridge, where he became a...

 was an economist and a lecturer in moral sciences at the University of Cambridge and his mother Florence Ada Keynes
Florence Ada Keynes
Florence Ada Keynes was a British author, social reformer, and Mayor of Cambridge in 1932.- Family :She was the daughter of the Rev. John Brown of Bunyan's Chapel, Bedford. Her brother was the Regius Professor of Physic Sir Walter Langdon-Brown.She married the economist John Neville Keynes...

 a local social reformer. Keynes was the first born, and was followed by two more children – Margaret Neville Keynes in 1885 and Geoffrey Keynes
Geoffrey Keynes
Sir Geoffrey Langdon Keynes was an English biographer, surgeon, physician, scholar and bibliophile...

 in 1887.

According to economist and biographer Robert Skidelsky, Keynes's parents were loving and attentive. They remained in the same house throughout their lives, where the children were always welcome to return. Keynes would receive considerable support from his father, including expert coaching to help him pass his scholarship exams and financial help both as a young man and when he was nearly wiped out at the onset of Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

 in 1929. Keynes's mother made her children's interests her own, and according to Skidelsky, "because she could grow up with her children, they never outgrew home".

Keynes had his early education at home and in kindergarten. He attended Perse School as a day pupil from 1892–1897. Teachers described Keynes as brilliant, but on occasion, careless and lacking in determination. His health was often poor during this period, leading to several long absences.

Keynes won a scholarship to Eton
Eton College
Eton College, often referred to simply as Eton, is a British independent school for boys aged 13 to 18. It was founded in 1440 by King Henry VI as "The King's College of Our Lady of Eton besides Wyndsor"....

, where he displayed talent in a wide range of subjects, particularly mathematics, classics
Classics
Classics is the branch of the Humanities comprising the languages, literature, philosophy, history, art, archaeology and other culture of the ancient Mediterranean world ; especially Ancient Greece and Ancient Rome during Classical Antiquity Classics (sometimes encompassing Classical Studies or...

 and history. At Eton, Keynes experienced the first "love of his life" in Dan Macmillan, older brother of the future Prime Minister Harold Macmillan
Harold Macmillan
Maurice Harold Macmillan, 1st Earl of Stockton, OM, PC was Conservative Prime Minister of the United Kingdom from 10 January 1957 to 18 October 1963....

. Despite his middle-class background, Keynes mixed easily with upper-class pupils. In 1902 Keynes left Eton for King's College, Cambridge
King's College, Cambridge
King's College is a constituent college of the University of Cambridge, England. The college's full name is "The King's College of our Lady and Saint Nicholas in Cambridge", but it is usually referred to simply as "King's" within the University....

 after receiving a scholarship for this also to study mathematics
Mathematics
Mathematics is the study of quantity, space, structure, and change. Mathematicians seek out patterns and formulate new conjectures. Mathematicians resolve the truth or falsity of conjectures by mathematical proofs, which are arguments sufficient to convince other mathematicians of their validity...

. Alfred Marshall
Alfred Marshall
Alfred Marshall was an Englishman and one of the most influential economists of his time. His book, Principles of Economics , was the dominant economic textbook in England for many years...

 begged Keynes to become an economist,
although Keynes's own inclinations drew him towards philosophy – especially the ethical system of G. E. Moore. Keynes was an active member of the semi-secretive Cambridge Apostles
Cambridge Apostles
The Cambridge Apostles, also known as the Cambridge Conversazione Society, is an intellectual secret society at the University of Cambridge founded in 1820 by George Tomlinson, a Cambridge student who went on to become the first Bishop of Gibraltar....

 society, a debating club largely reserved for the brightest students. Like many members, Keynes retained a bond to the club after graduating and continued to attend occasional meetings throughout his life. Before leaving Cambridge, Keynes became the President of the Cambridge University Liberal Club. In May 1904 he received a first class B.A. in mathematics. Aside from a few months spent on holidays with family and friends, Keynes continued to involve himself with the university over the next two years. He took part in debates, further studied philosophy and attended economics lectures informally as a graduate student. He also studied for his 1905 Tripos
Tripos
The University of Cambridge, England, divides the different kinds of honours bachelor's degree by Tripos , plural Triposes. The word has an obscure etymology, but may be traced to the three-legged stool candidates once used to sit on when taking oral examinations...

 and 1906 civil service exams.

The economist Harry Johnson
Harry Gordon Johnson
Harry Gordon Johnson was a Canadian economist who studied topics such as International trade and International finance.He was born on 26 May 1923 in Toronto, Canada, the elder son of two children of Henry Herbert Johnson, newspaperman and later secretary of the Liberal Party of Ontario, and his...

 wrote that the optimism imparted by Keynes's early life is key to understanding his later thinking.
Keynes was always confident he could find a solution to whatever problem he turned his attention to, and retained a lasting faith in the ability of government officials to do good.
Keynes's optimism was also cultural, in two senses – he was of the last generation raised by an empire still at the height of its power, in its own eyes and by much of the world (at least outwardly) seen as preeminent in both power and benevolence. Keynes was also of the last generation who felt entitled to govern by culture, rather than by expertise. According to Skidelsky, the sense of cultural unity current in Britain from the 19th century to the end of World War I provided a framework with which the well-educated could set various spheres of knowledge in relation to each other and to life, enabling them to confidently draw from different fields when addressing practical problems.

Career


Keynes's Civil Service career began in October 1906, as a clerk in the India Office
India Office
The India Office was a British government department created in 1858 to oversee the colonial administration of India, i.e. the modern-day nations of Bangladesh, Burma, India, and Pakistan, as well as territories in South-east and Central Asia, the Middle East, and parts of the east coast of Africa...

. He enjoyed his work at first, but by 1908 had become bored and resigned his position to return to Cambridge and work on probability theory
Probability theory
Probability theory is the branch of mathematics concerned with analysis of random phenomena. The central objects of probability theory are random variables, stochastic processes, and events: mathematical abstractions of non-deterministic events or measured quantities that may either be single...

, at first privately funded only by two Dons
University don
A don is a fellow or tutor of a college or university, especially traditional collegiate universities such as Oxford and Cambridge in England.The term — similar to the title still used for Catholic priests — is a historical remnant of Oxford and Cambridge having started as ecclesiastical...

 at the university – his father and the economist Arthur Pigou
Arthur Cecil Pigou
Arthur Cecil Pigou was an English economist. As a teacher and builder of the school of economics at the University of Cambridge he trained and influenced many Cambridge economists who went on to fill chairs of economics around the world...

. In 1909 Keynes published his first professional economics article in the Economics Journal, about the effect of a recent global economic downturn on India.
Also in 1909, Keynes accepted a lectureship in economics funded personally by Alfred Marshall
Alfred Marshall
Alfred Marshall was an Englishman and one of the most influential economists of his time. His book, Principles of Economics , was the dominant economic textbook in England for many years...

. Keynes's earnings rose further as he began to take on pupils for private tuition, and on being elected a fellow. In 1911 Keynes was made editor of the Economic Journal
Economic journal
The Economic Journal is one of the leading scholarly journals of economics. It is published on behalf of the Royal Economic Society by Wiley-Blackwell....

. By 1913 he had published his first book, Indian Currency and Finance. He was then appointed to the Royal Commission
Royal Commission
In Commonwealth realms and other monarchies a Royal Commission is a major ad-hoc formal public inquiry into a defined issue. They have been held in various countries such as the United Kingdom, Australia, Canada, New Zealand, and Saudi Arabia...

 on Indian Currency and Finance – the same topic as his book – where Keynes showed considerable talent at applying economic theory to practical problems.

World War I


The British Government called on Keynes's expertise during the First World War. While he did not formally re-join the civil service in 1914, Keynes travelled to London at the government's request a few days before hostilities started. Bankers had been pushing for the suspension of specie
Hard money (policy)
Hard money policies are those which are opposed to fiat currency and thus in support of a specie standard, usually gold or silver, typically implemented with representative money....

 payments – the convertibility
Convertibility
Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies must be exchanged....

 of bank notes into gold – but with Keynes's help the Chancellor of the Exchequer
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...

 (then Lloyd George
David Lloyd George
David Lloyd George, 1st Earl Lloyd-George of Dwyfor OM, PC was a British Liberal politician and statesman...

) was persuaded that this would be a bad idea, as it would hurt the future reputation of the city if payments were suspended before absolutely necessary.

In January 1915 Keynes took up an official government position at the Treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...

. Among his responsibilities were the design of terms of credit between Britain and its continental allies during the war, and the acquisition of scarce currencies. According to economist Robert Lekachman
Robert Lekachman
Robert Lekachman was an economist known for his extensive advocacy of state intervention, and for a debating style characterized by slow, sing-song speech and circumlocution....

, Keynes's "nerve and mastery became legendary" because of his performance of these duties, as in the case where he managed to assemble – with difficulty – a small supply of Spanish pesetas
Spanish peseta
The peseta was the currency of Spain between 1869 and 2002. Along with the French franc, it was also a de facto currency used in Andorra .- Etymology :...

. The secretary of the Treasury was delighted to hear Keynes had amassed enough to provide a temporary solution for the British Government. But Keynes did not hand the pesetas over, choosing instead to sell them all to break the market: his boldness paid off, as pesetas then became much less scarce and expensive. In the 1917 King's Birthday Honours, Keynes was appointed Companion of the Order of the Bath for his wartime work, and his success led to the appointment that would have a huge effect on Keynes's life and career; Keynes was appointed financial representative for the Treasury to the 1919 Versailles peace conference
Treaty of Versailles
The Treaty of Versailles was one of the peace treaties at the end of World War I. It ended the state of war between Germany and the Allied Powers. It was signed on 28 June 1919, exactly five years after the assassination of Archduke Franz Ferdinand. The other Central Powers on the German side of...

. He was also appointed Officer of the Belgian Order of Leopold.

The Versailles peace conference



Keynes's experience at Versailles
Treaty of Versailles
The Treaty of Versailles was one of the peace treaties at the end of World War I. It ended the state of war between Germany and the Allied Powers. It was signed on 28 June 1919, exactly five years after the assassination of Archduke Franz Ferdinand. The other Central Powers on the German side of...

 was influential in shaping his future outlook, yet it was not a successful one for him. Keynes's main interest had been in trying to prevent Germany's compensation payments being set so high it would traumatise innocent German people, damage the nation's ability to pay and sharply limit her ability to buy exports from other countries – thus hurting not just Germany's own economy but that of the wider world. Unfortunately for Keynes, conservative powers in the coalition that emerged from the 1918 coupon election
United Kingdom general election, 1918
The United Kingdom general election of 1918 was the first to be held after the Representation of the People Act 1918, which meant it was the first United Kingdom general election in which nearly all adult men and some women could vote. Polling was held on 14 December 1918, although the count did...

 were able to ensure that both Keynes himself and the Treasury were largely excluded from formal high-level talks concerning reparations. Their place was taken by the Heavenly Twins
Heavenly Twins (Sumner and Cunliffe)
The Heavenly Twins was the name assigned to two British delegates, the Judge Lord Sumner and the Banker Lord Cunliffe, during the 1919 Treaty of Versailles negotiations that were to set the terms of the peace to be imposed on Germany following the end of World War I.The two lords, together with...

 – the judge Lord Sumner
John Hamilton, 1st Viscount Sumner
John Andrew Hamilton, 1st Viscount Sumner GCB, PC was a British lawyer and judge. He was appointed a judge of the High Court of Justice in 1909, a Lord Justice of Appeal in 1912 and a Lord of Appeal in Ordinary in 1913...

 and the banker Lord Cunliffe
Walter Cunliffe, 1st Baron Cunliffe
Walter Cunliffe, 1st Baron Cunliffe GBE was Governor of the Bank of England from 1913 to 1918, during the critical World War I era. He was created 1st Baron Cunliffe in 1914.-Early life and education:...

 whose nickname derived from the "astronomically" high war compensation they wanted to demand from Germany. Keynes was forced to try to exert influence mostly from behind the scenes.

The three principal players at Versailles were Britain's Lloyd George
David Lloyd George
David Lloyd George, 1st Earl Lloyd-George of Dwyfor OM, PC was a British Liberal politician and statesman...

, France's Clemenceau
Georges Clemenceau
Georges Benjamin Clemenceau was a French statesman, physician and journalist. He served as the Prime Minister of France from 1906 to 1909, and again from 1917 to 1920. For nearly the final year of World War I he led France, and was one of the major voices behind the Treaty of Versailles at the...

 and America's President Wilson
Woodrow Wilson
Thomas Woodrow Wilson was the 28th President of the United States, from 1913 to 1921. A leader of the Progressive Movement, he served as President of Princeton University from 1902 to 1910, and then as the Governor of New Jersey from 1911 to 1913...

.
It was only Lloyd George to whom Keynes had much direct access; until the 1918 election he had some sympathy with Keynes's view but while campaigning had found his speeches were only well-received by the public if he promised to harshly punish Germany, and had therefore committed to extracting high payments. Lloyd George did however win some loyalty from Keynes with his actions at the Paris conference by intervening against the French to ensure the dispatch of much-needed food supplies to German civilians. Clemenceau also pushed for high reparations; generally France argued for an even more severe settlement than Britain. Wilson initially favoured relatively lenient treatment of Germany – he feared too harsh conditions could foment the rise of extremism, and wanted Germany to be left sufficient capital to pay for imports. To Keynes's dismay, Lloyd George and Clemenceau were able to pressure Wilson to agree to very high repayments being imposed. Towards the end of the conference, Keynes came up with a plan that he argued would not only help Germany and other impoverished central European powers but also be good for the world economy as a whole. It involved the writing down of war debts which would have the effect of increasing international trade all round. Lloyd George agreed it might be acceptable to the British electorate. However America was against it, the US then being the largest creditor and by this time Wilson had started to believe in the merits of a harsh peace as a warning to future aggressors. Hence despite his best efforts, the end result of the conference was a treaty which disgusted Keynes both on moral and economic grounds, and led to his resignation from the Treasury.

In June 1919 he turned down an offer to become chairman of the British Bank of Northern Commerce
British Bank of Northern Commerce
Knut Agathon Wallenberg of the Stockholms Enskilda Bank and Emil Glückstadt of Landmansbanken founded the British Bank of Northern Commerce in February 1912, together with several other banks including Centralbanken for Norge , Banque de Commerce de l`Azoff-Don , and Banque de Paris et des Pays Bas...

, a job that promised a salary of £2000 in return for a morning per week of work.

Keynes's analysis on the predicted damaging effects of the treaty appeared in the highly influential book, The Economic Consequences of the Peace
The Economic Consequences of the Peace
The Economic Consequences of the Peace is a book written and published by John Maynard Keynes. Keynes attended the Versailles Conference as a delegate of the British Treasury and argued for a much more generous peace. It was a bestseller throughout the world and was critical in establishing a...

, published in 1919. This work has been described as Keynes's best book, where he was able to bring all his gifts to bear – his passion as well as his skill as an economist. In addition to economic analysis, the book contained pleas to the reader's sense of compassion
Compassion
Compassion is a virtue — one in which the emotional capacities of empathy and sympathy are regarded as a part of love itself, and a cornerstone of greater social interconnection and humanism — foundational to the highest principles in philosophy, society, and personhood.There is an aspect of...

:
Also present was striking imagery such as "...that year by year Germany must be kept impoverished and her children starved and crippled..." along with bold predictions which were later justified by events:
Keynes's predictions of disaster were borne out when the German economy suffered the hyperinflation of 1923
Inflation in the Weimar Republic
The hyperinflation in the Weimar Republic was a three year period of hyperinflation in Germany between June 1921 and July 1924.- Analysis :...

, and again by the collapse of the Weimar Republic
Weimar Republic
The Weimar Republic is the name given by historians to the parliamentary republic established in 1919 in Germany to replace the imperial form of government...

 and the outbreak of World War II. Only a fraction of reparations were ever paid. The Economic Consequences of the Peace gained Keynes international fame, but also caused him to be regarded as anti-establishment – it was not until after the outbreak of World War II that Keynes was offered a directorship of a major British Bank, or an acceptable offer to return to government with a formal job. However, Keynes was still able to influence government policy making – through his network of contacts, his published works and by serving on government committees, including attending high-level policy meetings as a consultant.

In the 1920s



Keynes had completed his A Treatise on Probability
A Treatise on Probability
A Treatise on Probability was published by John Maynard Keynes while at Cambridge University in 1921. The Treatise attacked the classical theory of probability and proposed a "logical-relationist" theory instead...

before the war, but published it in 1921. The work was a notable contribution to the philosophical and mathematical underpinnings of probability theory
Probability theory
Probability theory is the branch of mathematics concerned with analysis of random phenomena. The central objects of probability theory are random variables, stochastic processes, and events: mathematical abstractions of non-deterministic events or measured quantities that may either be single...

, championing the important view that probabilities were no more or less than truth values intermediate between simple truth and falsity. Keynes developed the first upper-lower probabilistic interval
Interval (mathematics)
In mathematics, a interval is a set of real numbers with the property that any number that lies between two numbers in the set is also included in the set. For example, the set of all numbers satisfying is an interval which contains and , as well as all numbers between them...

 approach to probability in chapters 15 and 17 of this book, as well as having developed the first decision weight approach with his conventional coefficient of risk and weight, c, in chapter 26. In addition to his academic work, the 1920s saw Keynes active as a journalist selling his work internationally and working in London as a financial consultant. In 1924 Keynes wrote an obituary
Obituary
An obituary is a news article that reports the recent death of a person, typically along with an account of the person's life and information about the upcoming funeral. In large cities and larger newspapers, obituaries are written only for people considered significant...

 for his former tutor
Alfred Marshall
Alfred Marshall
Alfred Marshall was an Englishman and one of the most influential economists of his time. His book, Principles of Economics , was the dominant economic textbook in England for many years...

 which Schumpeter called "the most brilliant life of a man of science I have ever read."
Marshall's widow was "entranced" by the memorial, while Lytton Strachey rated it as one of Keynes's "best works".

In 1922 Keynes continued to advocate reduction of German reparations with A Revision of the Treaty. He attacked the post World War I deflation policies with A Tract on Monetary Reform in 1923 – a trenchant argument that countries should target stability of domestic prices, avoiding deflation even at the cost of allowing their currency to depreciate. Britain suffered from high unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

 through most of the 1920s, leading Keynes to recommend the depreciation of sterling
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...

 to boost jobs by making British exports more affordable. From 1924 he was also advocating a fiscal response, where the government could create jobs by spending on public works. During the 1920s Keynes's pro stimulus views had only limited effect on policy makers and mainstream academic opinion – according to Hyman Minsky one reason was that at this time his theoretical justification was "muddled" . The Tract had also called for an end to the gold standard. Keynes advised it was no longer a net benefit for countries such as Britain to participate in the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...

, as it ran counter to the need for domestic policy autonomy. It could force countries to pursue deflationary policies at exactly the time when expansionary measures were called for to address rising unemployment. The Treasury and Bank of England were still in favour of the gold standard and in 1925 they were able to convince the then Chancellor Winston Churchill
Winston Churchill
Sir Winston Leonard Spencer-Churchill, was a predominantly Conservative British politician and statesman known for his leadership of the United Kingdom during the Second World War. He is widely regarded as one of the greatest wartime leaders of the century and served as Prime Minister twice...

 to re-establish it, which had a depressing effect on British industry. Keynes responded by writing The Economic Consequences of Mr. Churchill and continued to argue against the gold standard until Britain finally abandoned it in 1931.

During the Great Depression


Keynes had begun a theoretical work to examine the relationship between unemployment, money and prices back in the 1920s. The work, Treatise on Money
A Treatise on Money
A Treatise on Money is a work on economics by English economist John Maynard Keynes. In the Treatise Keynes drew a distinction between savings and investment, arguing that where saving exceeded investment, recession would occur....

, was published in 1930 in two volumes. A central idea of the work was that if the amount of money being saved exceeds the amount being invested – which can happen if interest rates are too high – then unemployment will rise. This is in part a result of people not wanting to spend too high a proportion of what employers pay out, making it difficult, in aggregate, for employers to make a profit.

Keynes was deeply critical of the British government's austerity measures during the Great Depression. He believed that budget deficits were a good thing, a product of recessions. He wrote, "For Government borrowing of one kind or another is nature's remedy, so to speak, for preventing business losses from being, in so severe a slump as to present one, so great as to bring production altogether to a standstill."

At the height of the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

, in 1933, Keynes published The Means to Prosperity, which contained specific policy recommendations for tackling unemployment in a global recession, chiefly counter cyclical public spending. The Means to Prosperity contains one of the first mentions of the multiplier effect. While it was addressed chiefly to the British Government, it also contained advice for other nations affected by the global recession. A copy was sent to the newly elected President Roosevelt and other world leaders. The work was taken seriously by both the American and British governments, and according to Skidelsky, helped pave the way for the later acceptance of Keynesian ideas, though it had little immediate practical influence. In the 1933 London Economic Conference
London Economic Conference
The London Economic Conference was a meeting of representatives of 66 nations from June 12 to July 27, 1933, at the Geological Museum in London. Its purpose was to win agreement on measures to fight global depression, revive international trade, and stabilize currency exchange rates.The Conference...

 opinions remained too diverse for a unified course of action to be agreed upon.
Keynesian-like policies were adopted by Sweden and Germany, but Sweden was seen as too small to command much attention, and Keynes was deliberately silent about the successful efforts of Germany as he was dismayed by their imperialist ambitions and their treatment of Jews. Apart from Great Britain, Keynes's attention was primarily focused on the United States. In 1931, he received considerable support for his views on counter-cyclical public spending in Chicago, then America's foremost centre for economic views alternative to the mainstream. However, orthodox economic opinion remained generally hostile regarding fiscal intervention to mitigate the depression, until just before the outbreak of war. In late 1933 Keynes was persuaded by Felix Frankfurter
Felix Frankfurter
Felix Frankfurter was an Associate Justice of the United States Supreme Court.-Early life:Frankfurter was born into a Jewish family on November 15, 1882, in Vienna, Austria, then part of the Austro-Hungarian Empire in Europe. He was the third of six children of Leopold and Emma Frankfurter...

 to address President Roosevelt directly, which he did by letters and face to face in 1934, after which the two men spoke highly of each other. However according to Skidelsky, the consensus is that Keynes's efforts only began to have a more than marginal influence on US economic policy after 1939.

Keynes's magnum opus
Magnum opus
Magnum opus , from the Latin meaning "great work", refers to the largest, and perhaps the best, greatest, most popular, or most renowned achievement of a writer, artist, or composer.-Related terms:Sometimes the term magnum opus is used to refer to simply "a great work" rather than "the...

, the General Theory of Employment, Interest and Money was published in 1936. It was researched and indexed by one of Keynes's favourite students, later the economist David Bensusan-Butt
David Bensusan-Butt
David Miles Bensusan-Butt was an English economist who spent much of his career in Australia. Known as David, he published his work as D. M...

. The work served as a theoretical justification for the interventionist policies Keynes favoured for tackling a recession. The General Theory challenged the earlier neo-classical economic paradigm, which had held that provided it was unfettered by government interference, the market would naturally establish full employment
Full employment
In macroeconomics, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....

 equilibrium. In doing so Keynes was partly setting himself against his former teachers Marshal and Pigou. Keynes believed the classical theory was a "special case" that applied only to the particular conditions present in the 19th century, his own theory being the general one. Classical economists had believed in Say's Law
Say's law
Say's law, or the law of market, is an economic principle of classical economics named after the French businessman and economist Jean-Baptiste Say , who stated that "products are paid for with products" and "a glut can take place only when there are too many means of production applied to one kind...

, which, simply put, states that "supply creates its own demand
Supply creates its own demand
"Supply creates its own demand" is the formulation of Say's law by John Maynard Keynes, and is considered by him one of the defining characteristics of classical economics...

", and that in a free market workers would always be willing to lower their wages to a level where employers could profitably offer them jobs. An innovation from Keynes was the concept of price stickiness
Sticky (economics)
Sticky, in the social sciences and particularly economics, describes a situation in which a variable is resistant to change. Sticky prices are an important part of macroeconomic theory since they may be used to explain why markets might not reach equilibrium right away. Nominal wages are often said...

 – the recognition that in reality workers often refuse to lower their wage demands even in cases where a classical economist might argue it is rational
Rationality
In philosophy, rationality is the exercise of reason. It is the manner in which people derive conclusions when considering things deliberately. It also refers to the conformity of one's beliefs with one's reasons for belief, or with one's actions with one's reasons for action...

 for them to do so. Due in part to price stickiness, it was established that the interaction of "aggregate demand" and "aggregate supply" may lead to stable unemployment equilibria – and in those cases, it is the state, and not the market, that economies must depend on for their salvation.

The General Theory argues that demand, not supply, is the key variable governing the overall level of economic activity. Aggregate demand
Aggregate demand
In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...

, which equals total un-hoarded income in a society, is defined by the sum of consumption and investment. In a state of unemployment and unused production capacity, one can only enhance employment and total income by first increasing expenditures for either consumption or investment. Without government intervention to increase expenditure, an economy can remain trapped in a low employment equilibrium – the demonstration of this possibility has been described as the revolutionary formal achievement of the work.
The book advocated activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works
Public works
Public works are a broad category of projects, financed and constructed by the government, for recreational, employment, and health and safety uses in the greater community...

. "Let us be up and doing, using our idle resources to increase our wealth," he wrote in 1928. "With men and plans unemployed, it is ridiculous to say that we cannot afford these new developments. It is precisely with these plants and these men that we shall afford them."

The General Theory is often viewed as the foundation of modern macroeconomics
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...

. Few senior American economists agreed with Keynes through most of the 1930s.
Yet his ideas were soon to achieve widespread acceptance, with eminent American professors such as Alvin Hansen
Alvin Hansen
Alvin Harvey Hansen , often referred to as "the American Keynes," was a professor of economics at Harvard, a widely read author on current economic issues, and an influential advisor to the government who helped create the Council of Economic Advisors and the Social security system...

 agreeing with the General Theory before the outbreak of World War II.
Keynes himself had only limited participation in the theoretical debates that followed the publication of the General Theory as he suffered a heart attack in 1937, requiring him to take long periods of rest. Hyman Minsky
Hyman Minsky
Hyman Philip Minsky was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises...

 and other post-Keynesian economists
Post-Keynesian economics
Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...

 have argued that as result of this, Keynes's ideas were diluted by those keen to compromise with classical economists or to render his concepts with mathematical models like the IS/LM model
IS/LM model
The IS/LM model is a macroeconomic tool that demonstrates the relationship between interest rates and real output in the goods and services market and the money market...

 (which, they argue, distort Keynes's ideas). Keynes began to recover in 1939, but for the rest of his life his professional energies were largely directed towards the practical side of economics – the problems of ensuring optimum allocation of resources for the War efforts, post-War negotiations with America, and the new international financial order that was presented at Bretton Woods, New Hampshire
Bretton Woods, New Hampshire
Bretton Woods is an area within the town of Carroll, New Hampshire, USA, whose principal points of interest are three leisure and recreation facilities...

.

World War II



During World War II, Keynes argued in How to Pay for the War, published in 1940, that the war effort should be largely financed by higher taxation and especially by compulsory saving (essentially workers lending money to the government), rather than deficit spending
Deficit spending
Deficit spending is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of budget surplus....

, in order to avoid inflation. Compulsory saving would act to dampen domestic demand, assist in channelling additional output towards the war efforts, would be fairer than punitive taxation and would have the advantage of helping to avoid a post war slump by boosting demand once workers were allowed to withdraw their savings. In September 1941 he was proposed to fill a vacancy in the Court of Directors of the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...

, and subsequently carried out a full term from the following April. In June 1942, Keynes was rewarded for his service with a hereditary peerage in the King's Birthday Honours. On 7 July his title was gazetted
London Gazette
The London Gazette is one of the official journals of record of the British government, and the most important among such official journals in the United Kingdom, in which certain statutory notices are required to be published...

 as "BARON KEYNES, of Tilton, in the County of Sussex." and he took his seat in the House of Lords
House of Lords
The House of Lords is the upper house of the Parliament of the United Kingdom. Like the House of Commons, it meets in the Palace of Westminster....

 on the Liberal Party
Liberal Party (UK)
The Liberal Party was one of the two major political parties of the United Kingdom during the 19th and early 20th centuries. It was a third party of negligible importance throughout the latter half of the 20th Century, before merging with the Social Democratic Party in 1988 to form the present day...

 benches. As Allied victory began to look certain, Keynes was heavily involved, as leader of the British delegation and chairman of the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

 commission, in the mid-1944 negotiations that established the Bretton Woods system
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...

. The Keynes-plan, concerning an international clearing-union argued for a radical system for the management of currencies. He proposed the creation of a common world unit of currency, the Bancor
Bancor
The Bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940-42 and which the United Kingdom proposed to introduce after the Second World War...

 and of new global institutions – a world central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

 and the International Clearing Union
International Clearing Union
The International Clearing Union was one of the institutions proposed to be set up at the 1944 United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire by British economist John Maynard Keynes...

. Keynes envisaged these institutions managing an international trade and payments system with strong incentives for countries to avoid substantial trade deficits or surpluses. The USA's greater negotiating strength, however, meant that the final outcomes accorded more closely to the less radical plans of Harry Dexter White
Harry Dexter White
Harry Dexter White was an American economist, and senior U.S. Treasury department official, participating in the Bretton Woods conference...

.
According to US economist Brad Delong, on almost every point where he was overruled by the Americans, Keynes was later proved correct by events.

The two new institutions, later known as the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

 and International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 (IMF), were founded as a compromise that primarily reflected the American vision. There would be no incentives for states to avoid a large trade surplus; instead, the burden for correcting a trade imbalance would continue to fall only on the deficit countries, which Keynes had argued were least able to address the problem without inflicting economic hardship on their populations. Yet Keynes was still pleased when accepting the final agreement, saying that if the institutions stayed true to their founding principles, "the brotherhood of man will have become more than a phrase."

Postwar


After the war, Keynes continued to represent the United Kingdom in international negotiations despite his deteriorating health. He succeeded in obtaining preferential terms from the United States for new and outstanding debts to facilitate the rebuilding of the British economy.

Just before his death in 1946, Keynes told Henry Clay, a professor of Social Economics and Advisor to the Bank of England

of his hopes that Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

's 'invisible hand
Invisible hand
In economics, invisible hand or invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. This is a metaphor first coined by the economist Adam Smith...

' can help Britain out of the economic hole it is in: "I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago."

Legacy



The Keynesian ascendancy 1939–1979


From the end of the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

 to the mid-1970s, Keynes provided the main inspiration for economic policy makers in Europe, America and much of the rest of the world. While economists and policy makers had become increasingly won over to Keynes's way of thinking in the mid and late 1930s, it was only after the outbreak of World War II that governments started to borrow money for spending on a scale sufficient to eliminate unemployment. According to economist John Kenneth Galbraith
John Kenneth Galbraith
John Kenneth "Ken" Galbraith , OC was a Canadian-American economist. He was a Keynesian and an institutionalist, a leading proponent of 20th-century American liberalism...

 (then a US government official charged with controlling inflation), in the rebound of the economy from wartime spending, "one could not have had a better demonstration of the Keynesian ideas."

The Keynesian Revolution was associated with the rise of modern liberalism
Social liberalism
Social liberalism is the belief that liberalism should include social justice. It differs from classical liberalism in that it believes the legitimate role of the state includes addressing economic and social issues such as unemployment, health care, and education while simultaneously expanding...

 in the West during the post-war period. Keynesian ideas became so popular that some scholars point to Keynes as representing the ideals of modern liberalism, as Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

 represented the ideals of classical liberalism
Classical liberalism
Classical liberalism is the philosophy committed to the ideal of limited government, constitutionalism, rule of law, due process, and liberty of individuals including freedom of religion, speech, press, assembly, and free markets....

. After the war Winston Churchill
Winston Churchill
Sir Winston Leonard Spencer-Churchill, was a predominantly Conservative British politician and statesman known for his leadership of the United Kingdom during the Second World War. He is widely regarded as one of the greatest wartime leaders of the century and served as Prime Minister twice...

 attempted to check the rise of Keynesian policy-making in the United Kingdom, and used rhetoric critical of the mixed economy
Mixed economy
Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety...

 in his 1945 election campaign
United Kingdom general election, 1945
The United Kingdom general election of 1945 was a general election held on 5 July 1945, with polls in some constituencies delayed until 12 July and in Nelson and Colne until 19 July, due to local wakes weeks. The results were counted and declared on 26 July, due in part to the time it took to...

. Despite his popularity as a war hero Churchill suffered a landslide defeat to Clement Attlee
Clement Attlee
Clement Richard Attlee, 1st Earl Attlee, KG, OM, CH, PC, FRS was a British Labour politician who served as the Prime Minister of the United Kingdom from 1945 to 1951, and as the Leader of the Labour Party from 1935 to 1955...

 whose government's economic policy continued to be influenced by Keynes's ideas.

Neo-Keynesian economics




In the late 1930s and 1940s, economists (notably John Hicks
John Hicks
Sir John Richard Hicks was a British economist and one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economics were his statement of consumer demand theory in microeconomics, and the IS/LM model , which...

, Franco Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...

, and Paul Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...

) attempted to interpret and formalise Keynes's writings in terms of formal mathematical models. In a process termed "the neoclassical synthesis
Neoclassical synthesis
Neoclassical synthesis is a postwar academic movement in economics that attempts to absorb the macroeconomic thought of John Maynard Keynes into the thought of neoclassical economics...

", they combined Keynesian analysis with neo-classical economics to produce Neo-Keynesian economics
Neo-Keynesian Economics
Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes. A group of economists , attempted to interpret and formalize Keynes' writings, and to synthesize it with the neo-classical models of economics...

, which came to dominate mainstream macroeconomic thought
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...

 for the next 40 years.

By the 1950s, Keynesian policies were adopted by almost the entire developed world and similar measures for a mixed economy were used by many developing nations. By then, Keynes's views on the economy had become mainstream in the world's universities. Throughout the 1950s and 1960s, the developed and emerging free capitalist economies enjoyed exceptionally high growth and low unemployment.
Professor Gordon Fletcher has written that the fifties and sixties, when Keynes's influence was at its peak, appear in retrospect as a Golden Age of Capitalism.

In late 1965 Time magazine ran a cover article with the title inspired by a possibly tongue-in-cheek comment from Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

, a comment later echoed by U.S. President Richard Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...

, that "We are all Keynesians now
We are all Keynesians now
"We are all Keynesians now" is a now-famous phrase coined by Milton Friedman and attributed to U.S. president Richard Nixon. It is popularly associated with the reluctant embrace in a time of financial crisis of Keynesian economics by individuals such as Nixon who had formerly favored monetarist...

". The article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government." The article also states that Keynes was one of the three most important economists who ever lived, and that his General Theory was more influential than the magna opera of other famous economists, like Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

's The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...

.

Economics: out of favour 1979–2007



Keynesian economics were officially discarded by the British Government in 1979, but forces had begun to gather against Keynes's ideas over 30 years earlier. Friedrich von Hayek had formed the Mont Pelerin Society
Mont Pelerin Society
The Mont Pelerin Society is an international organization composed of economists , philosophers, historians, intellectuals, business leaders, and others who favour classical liberalism...

 in 1947, with the explicit intention of nurturing intellectual currents to one day displace Keynesianism and other collectivist influences. Its members included Austrian school
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

 economist Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...

 along with the then young Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

. Initially the society had little impact on the wider world – Hayek was to say it was as if Keynes had been raised to sainthood after his death and that people refused to allow his work to be questioned.
Friedman however began to emerge as a formidable critic of Keynesian economics from the mid-1950s, and especially after his 1963 publication of A Monetary History of the United States.

On the practical side of economic life, big government had appeared to be firmly entrenched in the 1950s but the balance began to shift towards private power in the sixties. Keynes had written against the folly of allowing "decadent and selfish" speculators and financiers the kind of influence they had enjoyed after World War I. For two decades after World War II public opinion was strongly against private speculators, the disparaging label Gnomes of Zürich
Gnomes of Zürich
Gnomes of Zürich is a disparaging term for Swiss bankers.Swiss bankers are popularly associated with extremely secretive policies, while gnomes in fairy tales live underground, in secret, counting their riches...

 being typical of how they were described during this period. International speculation was severely restricted by the capital controls in place after Bretton Woods. Journalists Larry Elliott
Larry Elliott
Larry Elliott is a British journalist and author focusing on economic issues. He is currently Economics editor at The Guardian, and has published four books on related issues, often in partnership with Dan Atkinson.-Education:Elliott was educated at St...

 and Dan Atkinson
Dan Atkinson
Dan Atkinson is a British journalist and author.He has been economics editor of The Mail on Sunday since 2000, before which he was for ten years a financial correspondent with The Guardian, in which role he specialised in issues of regulation and fraud...

 say 1968 was a pivotal year when power shifted in the favour of private agents such as currency speculators. They pick out a key 1968 event as being when America suspended the conversion of the dollar into gold except on request of foreign governments, which they identify as when the Bretton Woods system first began to break down.
Intellectually, attacks against Keynes's ideas had begun to gain significant acceptance from the early 1970s as they were able to make a credible case that Keynesian models no longer reflected economic reality. Keynes himself had included few formulæ and no explicit mathematical models in his General Theory. For commentators such as economist Hyman Minsky
Hyman Minsky
Hyman Philip Minsky was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises...

, Keynes's limited use of mathematics was partly the result of his scepticism about whether phenomena as inherently uncertain as economic activity could ever be adequately captured by mathematical models. Nevertheless, many models were developed by Keynesian economists, with a famous example being the Phillips curve
Phillips curve
In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation...

 which predicted an inverse relationship between unemployment and inflation. It implied that unemployment could be reduced by government stimulus with a calculable cost to inflation. In 1968 Milton Friedman published a paper arguing that the fixed relationship implied by the Philips curve did not exist.
Friedman suggested that sustained Keynesian policies could lead to both unemployment and inflation rising at once—a phenomenon that soon became known as stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...

. In the early 1970s stagflation appeared in both the US and Britain just as Friedman had predicted, with economic conditions deteriorating further after the 1973 oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...

. Aided by the prestige gained from his successful forecast, Friedman led increasingly successful attacks against the Keynesian consensus, convincing not only academics and politicians but also much of the general public with his radio and television broadcasts. The academic credibility of Keynesian economics was further undermined by additional criticism from other Monetarists
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...

 trained in the Chicago school of economics, by the Lucas Critique
Lucas critique
The Lucas critique, named for Robert Lucas′ work on macroeconomic policymaking, argues that it is naïve to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.The basic idea...

 and by attacks from Hayek's Austrian School. So successful were these attacks that by 1980 Robert Lucas
Robert Lucas, Jr.
Robert Emerson Lucas, Jr. is an American economist at the University of Chicago. He received the Nobel Prize in Economics in 1995 and is consistently indexed among the top 10 economists in the Research Papers in Economics rankings. He is married to economist Nancy Stokey.He received his B.A. in...

 was saying economists would often take offence if described as Keynesians.
Keynesian principles fared increasingly poorly on the practical side of economics—by 1979 they had been displaced by Monetarism as the primary influence on Anglo-American economic policy. However many officials on both sides of the Atlantic retained a preference for Keynes, and in 1984 the Federal Reserve officially discarded monetarism, after which Keynesian principles made a partial comeback as an influence on policy making.
Not all academics accepted the criticism against Keynes—Minsky has argued that Keynesian economics had been debased by excessive mixing with neo-classical ideas from the 1950s, and that it was unfortunate the branch of economics had even continued to be called "Keynesian". Writing in The American Prospect
The American Prospect
The American Prospect is a monthly American political magazine dedicated to American liberalism. Based in Washington, DC, The American Prospect is a journal "of liberal ideas, committed to a just society, an enriched democracy, and effective liberal politics" which focuses on United States politics...

Robert Kuttner
Robert Kuttner
Robert Kuttner is an American journalist and writer. Kuttner is the co-founder and current co-editor of The American Prospect, which was created in 1990 as "an authoritative magazine of liberal ideas," according to its mission statement...

 argued it was not so much excessive Keynesian activism that caused the economic problems of the 1970s but the breakdown of the Bretton Woods system of capital controls, which allowed capital flight from regulated economies into unregulated economies in a fashion similar to Gresham's Law
Gresham's Law
Gresham's law is an economic principle that states: "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation." It is commonly...

 (where weak currencies undermine strong currencies).
Historian Peter Pugh has stated a key cause of the economic problems afflicting America in the 1970s was the refusal to raise taxes to finance the Vietnam War
Vietnam War
The Vietnam War was a Cold War-era military conflict that occurred in Vietnam, Laos, and Cambodia from 1 November 1955 to the fall of Saigon on 30 April 1975. This war followed the First Indochina War and was fought between North Vietnam, supported by its communist allies, and the government of...

, which was against Keynesian advice.

A more typical response was to accept some elements of the criticisms while refining Keynesian economic theories to defend them against arguments that would invalidate the whole Keynesian framework—the resulting body of work largely composing New Keynesian economics
New Keynesian economics
New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New Classical macroeconomics.Two main assumptions define the New...

. In 1992 Alan Blinder
Alan Blinder
Alan Stuart Blinder is an American economist. He serves at Princeton University as the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs in the Economics Department, Vice Chairman of The Observatory Group, and as co-director of Princeton’s Center for Economic Policy Studies,...

 was writing about a "Keynesian Restoration" as work based on Keynes's ideas had to some extent become fashionable once again in academia, though in the mainstream it was highly synthesised with Monetarism and other neo-classical thinking. In the world of policy making, free-market influences broadly sympathetic to Monetarism remained very strong at government level—in powerful normative institutions like the World Bank, IMF and US Treasury, and in prominent opinion-forming media such as the Financial Times and The Economist.

Economics: the Keynesian resurgence of 2008–2009




The Financial crisis of 2007–2010 led to public scepticism about the free market consensus even from some on the economic right. In March 2008, Martin Wolf
Martin Wolf
Martin Wolf, CBE is a British journalist, widely considered to be one of the world's most influential writers on economics. He is associate editor and chief economics commentator at the Financial Times.-Early life:...

, chief economics commentator at the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....

, announced the death of the dream of global free-market capitalism. In the same month macroeconomist James K. Galbraith
James K. Galbraith
James Kenneth Galbraith is an American economist who writes frequently for mainstream and liberal publications on economic topics. He is currently a professor at the Lyndon B. Johnson School of Public Affairs and at the Department of Government, University of Texas at Austin. He is also a Senior...

 used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack against the consensus for monetarist economics and argued that Keynesian economics were far more relevant for tackling the emerging crises.
Economist Robert Shiller
Robert Shiller
Robert James "Bob" Shiller is an American economist, academic, and best-selling author. He currently serves as the Arthur M. Okun Professor of Economics at Yale University and is a Fellow at the Yale International Center for Finance, Yale School of Management...

 had begun advocating robust government intervention to tackle the financial crises, specifically citing Keynes.
Nobel laureate Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 also actively argued the case for vigorous Keynesian intervention in the economy in his columns for the New York Times.
Other prominent economic commentators arguing for Keynesian government intervention to mitigate the financial crisis include George Akerlof
George Akerlof
George Arthur Akerlof is an American economist and Koshland Professor of Economics at the University of California, Berkeley. He won the 2001 Nobel Prize in Economics George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of...

, Brad Delong,
Robert Reich
Robert Reich
Robert Bernard Reich is an American political economist, professor, author, and political commentator. He served in the administrations of Presidents Gerald Ford and Jimmy Carter and was Secretary of Labor under President Bill Clinton from 1993 to 1997....

,
and Joseph Stiglitz.
Newspapers and other media have also cited work relating to Keynes by Hyman Minsky
Hyman Minsky
Hyman Philip Minsky was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises...

, Robert Skidelsky, Donald Markwell
Donald Markwell
For the Montgomery, Alabama, talk radio personality, Don Markwell, see Don Markwell Professor Donald John 'Don' Markwell is an Australian social scientist and college president...


and Axel Leijonhufvud
Axel Leijonhufvud
Axel Leijonhufvud is a Swedish economist, currently professor emeritus at the University of California Los Angeles and professor at the University of Trento, Italy....

.

A series of major bail-outs were pursued during the financial crisis, starting on 7 September with the announcement that the U.S. government was to nationalise the two government-sponsored enterprise
Government-sponsored enterprise
A government-sponsored enterprise is a financial services corporation created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent...

s which oversaw most of the U.S. subprime mortgage market—Fannie Mae and Freddie Mac. In October, the British Chancellor of the Exchequer
Alistair Darling
Alistair Maclean Darling is a Scottish Labour Party politician who has been a Member of Parliament since 1987, currently for Edinburgh South West. He served as the Chancellor of the Exchequer from 2007 to 2010...

 referred to Keynes as he announced plans for substantial fiscal stimulus to head off the worst effects of recession, in accordance with Keynesian economic thought. Similar policies have been adopted by other governments worldwide.
This is in stark contrast to the action permitted to Indonesia during its financial crisis of 1997, when it was forced by the IMF to close 16 banks at the same time, prompting a bank run.
Much of the recent discussion reflected Keynes's advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the IMF and the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

, which many had argued should be reformed at a "new Bretton Woods" even before the crises broke out.
IMF and United Nations economists advocated a coordinated international approach to fiscal stimulus.
Donald Markwel argued that in the absence of such an international approach, there would be a risk of worsening international relations and possibly even world war arising from similar economic factors to those present during the depression of the 1930s.

By the end of December 2008, the Financial Times reported that "the sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades"
In December 2008, Paul Krugman released his book, The Return of Depression Economics and the Crisis of 2008, arguing that economic conditions similar to that which existed during the earlier part of the century had returned, making Keynesian policy prescriptions more relevant than ever. In February 2009 Shiller and George Akerlof published Animal Spirits
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism is a book written to promote the understanding of the role played by emotions in influencing economic decision making...

, a book where they argue the current US stimulus package is too small as it does not take into account Keynes's insight on the importance of confidence and expectations in determining the future behaviour of businessmen and other economic agents.

In a March 2009 speech entitled Reform the International Monetary System, Zhou Xiaochuan
Zhou Xiaochuan
Zhou Xiaochuan is a Chinese economist, banker, reformist and bureaucrat. As governor of the People's Bank of China since December 2002, he has been in charge of the monetary policy of the People's Republic of China....

, the governor of the People's Bank of China
People's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...

 came out in favour of Keynes's idea of a centrally managed global reserve currency. Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's Bancor
Bancor
The Bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940-42 and which the United Kingdom proposed to introduce after the Second World War...

. Zhou proposed a gradual move towards increased use of IMF Special Drawing Rights
Special Drawing Rights
Special Drawing Rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund . Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged...

 (SDRs).
Although Zhou's ideas have not yet been broadly accepted, leaders meeting in April at the 2009 G-20 London summit
2009 G-20 London summit
The 2009 G-20 London Summit is the second meeting of the G-20 heads of state in discussion of financial markets and the world economy, which was held in London on 2 April 2009 at the ExCeL Exhibition Centre. It followed the first G-20 Leaders Summit on Financial Markets and the World Economy, which...

 agreed to allow $250 billion of Special Drawing Rights
Special Drawing Rights
Special Drawing Rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund . Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged...

 to be created by the IMF, to be distributed globally. Stimulus plans have been credited for contributing to a better than expected economic outlook by both the OECD
and the IMF, in reports published in June and July 2009. Both organisations warned global leaders that recovery is likely to be slow, so counter recessionary measures ought not be rolled back too early.

While the need for stimulus measures has been broadly accepted among policy makers, there has been much debate over how to fund the spending. Some leaders and institutions such as Angela Merkel
Angela Merkel
Angela Dorothea Merkel is the current Chancellor of Germany . Merkel, elected to the Bundestag from Mecklenburg-Vorpommern, has been the chairwoman of the Christian Democratic Union since 2000, and chairwoman of the CDU-CSU parliamentary coalition from 2002 to 2005.From 2005 to 2009 she led a...


and the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...


have expressed concern over the potential impact on inflation, national debt and the risk that a too large stimulus will create an unsustainable recovery.

Among professional economists the revival of Keynesian economics has been even more divisive. Although many economists, such as George Akerlof
George Akerlof
George Arthur Akerlof is an American economist and Koshland Professor of Economics at the University of California, Berkeley. He won the 2001 Nobel Prize in Economics George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of...

, Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

, Robert Shiller
Robert Shiller
Robert James "Bob" Shiller is an American economist, academic, and best-selling author. He currently serves as the Arthur M. Okun Professor of Economics at Yale University and is a Fellow at the Yale International Center for Finance, Yale School of Management...

, and Joseph Stiglitz, support Keynesian stimulus, over 300 economists signed a petition stating that they do not believe higher government spending will help the United States economy. Some economists, such as Robert Lucas
Robert Lucas, Jr.
Robert Emerson Lucas, Jr. is an American economist at the University of Chicago. He received the Nobel Prize in Economics in 1995 and is consistently indexed among the top 10 economists in the Research Papers in Economics rankings. He is married to economist Nancy Stokey.He received his B.A. in...

, expressed scepticism over whether stimulus packages can work at all. Others, like Robert Barro
Robert Barro
Robert Joseph Barro is an American classical macroeconomist and the Paul M. Warburg Professor of Economics at Harvard University. The Research Papers in Economics project ranked him as the 4th most influential economist in the world as of August 2011 based on his academic contributions...

 and Gary Becker
Gary Becker
Gary Stanley Becker is an American economist. He is a professor of economics, sociology at the University of Chicago and a professor at the Booth School of Business. He was awarded the Nobel Memorial Prize in Economic Sciences in 1992, and received the United States' Presidential Medal of Freedom...

, say that empirical evidence for the beneficial effects of Keynesian stimulus does not exist.

Praise


Keynes's economic thinking only began to achieve close to universal acceptance in the last few years of his life. On a personal level, Keynes's charm was such that he was generally well received wherever he went – even those who found themselves on the wrong side of his occasionally sharp tongue rarely bore a grudge.
Keynes's speech at the closing of the Bretton Woods negotiations was received with a lasting standing ovation, rare in international relations, as delegates acknowledged the scale of his achievements made despite poor health.

Hayek


Austrian School economist Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...

 was Keynes's most prominent contemporary critic, with sharply opposing views on the economy. Yet after Keynes's death he wrote:
For his part, Keynes praised Hayek's book The Road to Serfdom, writing to the Austrian economist that, "Morally and philosophically I find myself in agreement with virtually the whole of it."

Lionel Robbins


Lionel Robbins
Lionel Robbins
Lionel Charles Robbins, Baron Robbins, FBA was a British economist and head of the economics department at the London School of Economics...

, former head of the economics department at the London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...

, who had many heated debates with Keynes in the 1930s, had this to say after observing Keynes in early negotiations with the Americans while drawing up plans for Bretton Woods:

LePan


Douglas LePan
Douglas LePan
Douglas Valentine LePan, OC, FRSC was a Canadian diplomat, poet, novelist and professor of literature.Born in Toronto, Ontario, LePan was educated at the University of Toronto, at Harvard , and at Merton College, Oxford University...

, an official from the Canadian High Commission
High Commission of Canada in London
The High Commission of Canada in the United Kingdom in London is the diplomatic mission from Canada to the United Kingdom. It is housed in two buildings in London.-History:...

, wrote:

Russell


Bertrand Russell
Bertrand Russell
Bertrand Arthur William Russell, 3rd Earl Russell, OM, FRS was a British philosopher, logician, mathematician, historian, and social critic. At various points in his life he considered himself a liberal, a socialist, and a pacifist, but he also admitted that he had never been any of these things...

 named Keynes one of the most intelligent people he had ever known, commenting:

The Times


Keynes's obituary in The Times included the comment:

Critiques


As a man of the centre described as undoubtedly having the greatest impact of any 20th century economist, Keynes attracted considerable criticism from both sides of the political spectrum. In the 1920s, Keynes was seen as anti-establishment and was mainly attacked from the Right. In the "red 1930s" many young economists favoured Marxist views even in Cambridge, and while Keynes was engaging principally with the Right to try to persuade them of the merits of more progressive policy, the most vociferous criticism against him came from the Left, who saw him as a supporter of capitalism. From the 1950s and onwards most of the attacks against Keynes have again been from the Right.

Hayek



In 1931 Friedrich von Hayek extensively critiqued Keynes's 1930 Treatise on Money, however, Keynes replied that the Treatise no longer reflected his thinking. After reading Hayek's The Road to Serfdom
The Road to Serfdom
The Road to Serfdom is a book written by the Austrian-born economist and philosopher Friedrich von Hayek between 1940–1943, in which he "warned of the danger of tyranny that inevitably results from government control of economic decision-making through central planning," and in which he argues...

, Keynes wrote to Hayek saying: "Morally and philosophically I find myself in agreement with virtually the whole of it" but concluded the same letter with the recommendation: On the pressing issue of the time, whether deficit spending could lift a country from depression, Keynes replied to Hayek's criticism in the following way:
Hayek explained the letter by saying:
Hayek felt that application of Keynes's policies would give too much power to the state and would lead to socialism.

Friedman


While Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

 described The General Theory as "a great book", he argues that its implicit separation of nominal from real magnitudes is neither possible nor desirable; macroeconomic policy, Friedman argues, can reliably influence only the nominal.
He and other monetarists have consequently argued that Keynesian economics can result in stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...

, the combination of low growth and high inflation that developed economies suffered in the early 1970s. More to Friedman's taste was the Tract on Monetary Reform (1923), which he regarded as Keynes's best work because of its focus on maintaining domestic price stability.

Schumpeter


Joseph Schumpeter
Joseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...

 was an economist of the same age as Keynes and one of his main rivals. He was among the first reviewers to argue that Keynes's General Theory was not a general theory, but was in fact a special case.
He said the work expressed "the attitude of a decaying civilisation". After Keynes's death Schumpeter wrote a brief biographical piece called Keynes the Economist – on a personal level he was very positive about Keynes as a man ; praising his pleasant nature, courtesy and kindness. He assessed some of Keynes biographical and editorial work as among the best he'd ever seen. Yet Schumpeter remained critical about Keynes's economics, linking Keynes's childlessness to what Schumpeter saw as an essentially short term view. He considered Keynes to have a kind of unconscious patriotism that caused him to fail to understand the problems of other nations. For Schumpeter "Practical Keynesianism is a seedling which cannot be transplanted into foreign soil: it dies there and becomes poisonous as it dies."

Hazlitt


Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

 economic commentator and journalist Henry Hazlitt
Henry Hazlitt
Henry Stuart Hazlitt was an American economist, philosopher, literary critic and journalist for such publications as The Wall Street Journal, The Nation, The American Mercury, Newsweek, and The New York Times...

's The Failure of the New Economics
The Failure of the New Economics
The Failure of the "New Economics" is a book by Henry Hazlitt offering a detailed critique of John Maynard Keynes' work The General Theory of Employment, Interest and Money .-Overview:...

is a paragraph-by-paragraph critique of The General Theory. In 1960 he published the book The Critics of Keynesian Economics where he gathered together the major criticisms of Keynes made up to that year.

Harry Truman


President Truman was skeptical of Keynesian theorizing. "Nobody can ever convince me that Government can spend a dollar that it's not got," he told Leon Keyserling
Leon Keyserling
Leon Hirsch Keyserling was an American economist and lawyer. During his career he helped draft major pieces of New Deal legislation and advised President Harry S. Truman as head of the Council of Economic Advisers....

, a Keynesian economist who chaired Truman's Council of Economic Advisers
Council of Economic Advisers
The Council of Economic Advisers is an agency within the Executive Office of the President that advises the President of the United States on economic policy...

.

Allegations of racism


Keynes was on occasion heard making statements which could be perceived as racist: for example, he would use the word "niggers" to refer to black people
Black people
The term black people is used in systems of racial classification for humans of a dark skinned phenotype, relative to other racial groups.Different societies apply different criteria regarding who is classified as "black", and often social variables such as class, socio-economic status also plays a...

 in casual conversations. This term may have been used neutrally in some British circles at that time, and not necessarily an expression of negative feelings, as when, for example, he wrote to Duncan Grant that “the only really
sympathetic and original thing in America are the niggers, who are charming”. Nonetheless fellow British observers recount being shocked by some statements he made, such as the following, apropos the Washington summer: "It's far too hot. Much too hot for white men. All right for niggers." He also wrote that there was "beastliness in the Russian nature” as well as "cruelty and stupidity”, and other comments which may be construed as anti-Russian. Some critics, such as Rothbard, have sought to infer that Keynes had sympathy with Nazism, and a number of writers have described him as anti-Semitic. Keynes's private letters express portraits and descriptions some of which can be characterised as anti-Semitic, while others as pro-Semitic. Scholars have suggested that these reflect clichés current at the time that he accepted uncritically, rather than any racism. Keynes had many Jewish friends, including Isaiah Berlin
Isaiah Berlin
Sir Isaiah Berlin OM, FBA was a British social and political theorist, philosopher and historian of ideas of Russian-Jewish origin, regarded as one of the leading thinkers of the twentieth century and a dominant liberal scholar of his generation...

 and Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...

. Keynes several times used his influence to help his Jewish friends, most notably when he successfully lobbied for Wittgenstein to be allowed residency in Great Britain explicitly in order to rescue him from being deported to Nazi-occupied Austria. Keynes was, furthermore, a supporter of Zionism, serving on committees supporting the cause.

Allegations that he was racist or had totalitarian beliefs have been rejected by biographers such as Robert Skidelsky. Professor Gordon Fletcher writes that "the suggestion of a link between Keynes and any support of totalitarianism cannot be sustained". Once the aggressive tendencies of the Nazis towards Jews and other minorities became apparent, Keynes made clear his loathing of Nazism. As a lifelong pacifist he had initially favoured peaceful containment, yet he began to advocate for a forceful resolution while many conservatives were still arguing for appeasement. After the war started he roundly criticised the Left for losing their nerve to confront Hitler.

Allegations of pro-inflationary views


Keynes has been characterised as being indifferent or even positive about inflation.
Keynes had indeed expressed a preference for inflation over deflation, saying that if one has to choose between the two evils its "better to disappoint the rentier" than to inflict pain on working class families. However, Keynes was consistently adamant about the need to avoid inflation where possible.

In The Economic Consequences of the Peace, Keynes had written:

Keynes remained convinced of the dangers of inflation to the end of his life, during World War II he argued strongly for policies that would minimise post-war inflation.

Personal life



Keynes's early romantic and sexual relationships were almost exclusively with men. At Eton and at Cambridge, Keynes had been prolific in his homosexual activity; significant among these early partners were Dillwyn Knox and Daniel Macmillan. Keynes was open about his homosexual affairs, and between 1901 to 1915, kept separate diaries in which he tabulated his many homosexual encounters. Keynes's relationship and later close friendship with Macmillan was to be fortuitous; through Dan, Macmillan & Co
Macmillan Publishers
Macmillan Publishers Ltd, also known as The Macmillan Group, is a privately held international publishing company owned by Georg von Holtzbrinck Publishing Group. It has offices in 41 countries worldwide and operates in more than thirty others.-History:...

 first published his Economic Consequences of the Peace. Attitudes in the Bloomsbury Group
Bloomsbury Group
The Bloomsbury Group or Bloomsbury Set was a group of writers, intellectuals, philosophers and artists who held informal discussions in Bloomsbury throughout the 20th century. This English collective of friends and relatives lived, worked or studied near Bloomsbury in London during the first half...

, in which Keynes was avidly involved, were relaxed about homosexuality. Keynes, together with writer Lytton Strachey
Lytton Strachey
Giles Lytton Strachey was a British writer and critic. He is best known for establishing a new form of biography in which psychological insight and sympathy are combined with irreverence and wit...

, had reshaped the Victorian attitudes of the influential Cambridge Apostles
Cambridge Apostles
The Cambridge Apostles, also known as the Cambridge Conversazione Society, is an intellectual secret society at the University of Cambridge founded in 1820 by George Tomlinson, a Cambridge student who went on to become the first Bishop of Gibraltar....

; "since [their] time, homosexual relations among the members were for a time common", wrote Bertrand Russell
Bertrand Russell
Bertrand Arthur William Russell, 3rd Earl Russell, OM, FRS was a British philosopher, logician, mathematician, historian, and social critic. At various points in his life he considered himself a liberal, a socialist, and a pacifist, but he also admitted that he had never been any of these things...

. One of Keynes's greatest loves was the artist Duncan Grant
Duncan Grant
Duncan James Corrowr Grant was a British painter and designer of textiles, potterty and theatre sets and costumes...

, whom he met in 1908. Like Grant, Keynes was also involved with the writer Lytton Strachey
Lytton Strachey
Giles Lytton Strachey was a British writer and critic. He is best known for establishing a new form of biography in which psychological insight and sympathy are combined with irreverence and wit...

, though they were for the most part love rivals, and not lovers. Keynes had won the affections of Arthur Hobhouse
Arthur Hobhouse
Sir Arthur Lawrence Hobhouse was a long-serving English local government Liberal politician, who is best remembered as the architect of the system of National parks of England and Wales....

, as well as Grant, both times falling out with a jealous Strachey for it. Strachey had previously found himself put off by Keynes, not least because of his manner of "treat[ing] his love affairs statistically".

An early heterosexual interest of Keynes's had been Ray Costelloe
Ray Strachey
Ray Strachey, née Costelloe was a British novelist, born Rachel Costelloe in London, England.-Early life:She is the elder of the two girls in her family...

, who was later to marry Oliver Strachey
Oliver Strachey
Oliver Strachey , a British civil servant in the Foreign Office was a cryptographer from World War I to World War II....

. Of this infatuation, Keynes had written "I seem to have fallen in love with Ray a little bit, but as she isn't male I haven't [been] able to think of any suitable steps to take." In 1921, Keynes fell "very much in love" with Lydia Lopokova, a well-known Russian ballerina
Ballerina
A ballerina is a title used to describe a principal female professional ballet dancer in a large company; the male equivalent to this title is danseur or ballerino...

, and one of the stars of Sergei Diaghilev
Sergei Diaghilev
Sergei Pavlovich Diaghilev , usually referred to outside of Russia as Serge, was a Russian art critic, patron, ballet impresario and founder of the Ballets Russes, from which many famous dancers and choreographers would arise.-Early life and career:...

's Ballets Russes
Ballets Russes
The Ballets Russes was an itinerant ballet company from Russia which performed between 1909 and 1929 in many countries. Directed by Sergei Diaghilev, it is regarded as the greatest ballet company of the 20th century. Many of its dancers originated from the Imperial Ballet of Saint Petersburg...

. For the first years of the courtship, Keynes maintained an affair with a younger man, Sebastian Sprott, in tandem with Lopokova, but eventually chose Lopokova exclusively, on marrying her. They married in 1925. The union was happy, with biographer Peter Clarke writing that the marriage gave Keynes "a new focus, a new emotional stability and a sheer delight of which he never wearied".
Lydia became pregnant in 1927 but miscarried.
Among Keynes's Bloomsbury friends, Lopokova was, at least initially, subjected to criticism for her manners, mode of conversation and supposedly humble social origins – the latter of the ostensible causes being particularly noted in the letters of Vanessa
Vanessa Bell
Vanessa Bell was an English painter and interior designer, a member of the Bloomsbury group, and the sister of Virginia Woolf.- Biography and art :...

 and Clive Bell
Clive Bell
Arthur Clive Heward Bell was an English Art critic, associated with formalism and the Bloomsbury Group.- Origins :Clive Bell was born in East Shefford, Berkshire, in 1881...

, and Virginia Woolf
Virginia Woolf
Adeline Virginia Woolf was an English author, essayist, publisher, and writer of short stories, regarded as one of the foremost modernist literary figures of the twentieth century....

. In her novel Mrs Dalloway
Mrs Dalloway
Mrs Dalloway is a novel by Virginia Woolf that details a day in the life of Clarissa Dalloway in post-World War I England. It is one of Woolf's best-known novels....

(1925), Woolf bases the character of Rezia Warren Smith on Lopokova. E. M. Forster
E. M. Forster
Edward Morgan Forster OM, CH was an English novelist, short story writer, essayist and librettist. He is known best for his ironic and well-plotted novels examining class difference and hypocrisy in early 20th-century British society...

 would later write in contrition: "How we all used to underestimate her".

Keynes was ultimately a successful investor, building up a private fortune. He was nearly wiped out following the Stock Market Crash
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...

 of 1929, which he failed to foresee, but he soon recouped. At Keynes's death, in 1946, his worth stood just short of £500,000 – equivalent to about £11 million ($16.5 million) in 2009. The sum had been amassed despite lavish support for various causes and his personal ethic which made him reluctant to sell on a falling market that if too many did that it could deepen a slump.

Keynes built up a substantial collection of fine art
Fine art
Fine art or the fine arts encompass art forms developed primarily for aesthetics and/or concept rather than practical application. Art is often a synonym for fine art, as employed in the term "art gallery"....

, including works, not all of them minor, by Paul Cézanne
Paul Cézanne
Paul Cézanne was a French artist and Post-Impressionist painter whose work laid the foundations of the transition from the 19th century conception of artistic endeavour to a new and radically different world of art in the 20th century. Cézanne can be said to form the bridge between late 19th...

, Edgar Degas
Edgar Degas
Edgar Degas[p] , born Hilaire-Germain-Edgar De Gas, was a French artist famous for his work in painting, sculpture, printmaking and drawing. He is regarded as one of the founders of Impressionism although he rejected the term, and preferred to be called a realist...

, Amedeo Modigliani
Amedeo Modigliani
Amedeo Clemente Modigliani was an Italian painter and sculptor who worked mainly in France. Primarily a figurative artist, he became known for paintings and sculptures in a modern style characterized by mask-like faces and elongation of form...

, Georges Braque
Georges Braque
Georges Braque[p] was a major 20th century French painter and sculptor who, along with Pablo Picasso, developed the art style known as Cubism.-Early Life:...

, Pablo Picasso
Pablo Picasso
Pablo Diego José Francisco de Paula Juan Nepomuceno María de los Remedios Cipriano de la Santísima Trinidad Ruiz y Picasso known as Pablo Ruiz Picasso was a Spanish expatriate painter, sculptor, printmaker, ceramicist, and stage designer, one of the greatest and most influential artists of the...

, and Georges Seurat (some of which can now be seen at the Fitzwilliam Museum
Fitzwilliam Museum
The Fitzwilliam Museum is the art and antiquities museum of the University of Cambridge, located on Trumpington Street opposite Fitzwilliam Street in central Cambridge, England. It receives around 300,000 visitors annually. Admission is free....

). He enjoyed collecting books: for example, he collected and protected many of Isaac Newton
Isaac Newton
Sir Isaac Newton PRS was an English physicist, mathematician, astronomer, natural philosopher, alchemist, and theologian, who has been "considered by many to be the greatest and most influential scientist who ever lived."...

's papers. It is in part on the basis of these papers that Keynes wrote of Newton as "the last of the magicians."
He was interested in literature in general and drama in particular and supported the Cambridge Arts Theatre
Cambridge Arts Theatre
Cambridge Arts Theatre is a 666-seat theatre on Peas Hill in central Cambridge, England. The theatre presents a varied mix of drama, dance, opera and pantomime. It attracts some of the highest-quality touring productions in the country, as well as many shows direct from, or prior to, seasons in the...

 financially, which allowed the institution, at least for a while, to become a major British stage outside of London.
Like several other notable British authors of his time, Keynes was a member of the Bloomsbury Group
Bloomsbury Group
The Bloomsbury Group or Bloomsbury Set was a group of writers, intellectuals, philosophers and artists who held informal discussions in Bloomsbury throughout the 20th century. This English collective of friends and relatives lived, worked or studied near Bloomsbury in London during the first half...

. Virginia Woolf
Virginia Woolf
Adeline Virginia Woolf was an English author, essayist, publisher, and writer of short stories, regarded as one of the foremost modernist literary figures of the twentieth century....

's biographer tells an anecdote on how Virginia Woolf, Keynes and T. S. Eliot
T. S. Eliot
Thomas Stearns "T. S." Eliot OM was a playwright, literary critic, and arguably the most important English-language poet of the 20th century. Although he was born an American he moved to the United Kingdom in 1914 and was naturalised as a British subject in 1927 at age 39.The poem that made his...

 would discuss religion at a dinner party, in the context of their struggle against Victorian era
Victorian era
The Victorian era of British history was the period of Queen Victoria's reign from 20 June 1837 until her death on 22 January 1901. It was a long period of peace, prosperity, refined sensibilities and national self-confidence...

 morality.
Keynes had attended church up to his teens,
but by university he had become agnostic, which he remained until his death.
At the end of the said dinner party, a disturbance reminded Keynes "of his theme", and he remarked that "the youth had no religion save Communism and this was worse than nothing." Marxism "was founded upon nothing better than a misunderstanding of Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...

", and, given time, he, Keynes, "would deal thoroughly with the Marxists" and other economists to solve the economic problems their theories "threaten[ed] to cause".

In 1931 Keynes went on to write the following on Marxism:

Involvement with the Liberal Party


Keynes was a life-long member of the Liberal party
Liberal Party (UK)
The Liberal Party was one of the two major political parties of the United Kingdom during the 19th and early 20th centuries. It was a third party of negligible importance throughout the latter half of the 20th Century, before merging with the Social Democratic Party in 1988 to form the present day...

, which until the 1920s had been one of the two main political parties in the United Kingdom, and as late as 1916 had often been the dominant power in government. Keynes had helped campaign for the Liberals at elections from as early as 1906, yet he always refused to run for office himself, despite being asked to do so on three separate occasions in 1920. From 1926 when Lloyd George became leader of the Liberals, Keynes took a major role in defining the party's economics policy, but by then the Liberals had been displaced into third party status by the Labour party
Labour Party (UK)
The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...

.

In 1939 Keynes had the option to enter Parliament as an independent MP with the University of Cambridge seat
Cambridge University (UK Parliament constituency)
Cambridge University was a university constituency electing two members to the British House of Commons, from 1603 to 1950.-Boundaries, Electorate and Election Systems:...

. A by-election for the seat was to be held due to the illness of an elderly Tory, and the master of Magdalene College had obtained agreement that none of the major parties would field a candidate if Keynes chose to stand. Keynes declined the invitation as he felt he would wield greater influence on events if he remained a free agent.

Support for the arts


Keynes's personal interest in Classical Opera and Dance led him to support the Royal Opera House
Royal Opera House
The Royal Opera House is an opera house and major performing arts venue in Covent Garden, central London. The large building is often referred to as simply "Covent Garden", after a previous use of the site of the opera house's original construction in 1732. It is the home of The Royal Opera, The...

 at Covent Garden and the Ballet Company at Sadler's Wells. During the War as a member of CEMA (Council for the Encouragement of Music and the Arts) Keynes helped secure government funds to maintain both companies while their venues were shut. Following the War Keynes was instrumental in establishing the Arts Council of Great Britain
Arts Council of Great Britain
The Arts Council of Great Britain was a non-departmental public body dedicated to the promotion of the fine arts in Great Britain. The Arts Council of Great Britain was divided in 1994 to form the Arts Council of England , the Scottish Arts Council, and the Arts Council of Wales...

 and was the founding Chairman in 1946. Unsurprisingly from the start the two organisations that received the largest grant from the new body were the Royal Opera House and Sadler's Wells.

Support for eugenics


Keynes was a proponent of eugenics
Eugenics
Eugenics is the "applied science or the bio-social movement which advocates the use of practices aimed at improving the genetic composition of a population", usually referring to human populations. The origins of the concept of eugenics began with certain interpretations of Mendelian inheritance,...

. He served as Director of the British Eugenics Society from 1937 to 1944. As late as 1946, shortly before his death, Keynes declared eugenics to be "the most important, significant and, I would add, genuine branch of sociology which exists."

Death


Throughout his life Keynes worked energetically for the benefit both of the public and his friends – even when his health was poor he laboured to sort out the finances of his old college and to try to design an international monetary system
International monetary systems
International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and...

 that would benefit the whole world at Bretton Woods
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...

. Keynes suffered a series of heart attacks, which ultimately proved fatal, beginning during negotiations for an Anglo-American loan
Anglo-American loan
The Anglo-American Loan Agreement was a post World War II loan made to the United Kingdom by the United States on 15 July 1946, and paid off 29 December 2006...

 in Savannah, Georgia
Savannah, Georgia
Savannah is the largest city and the county seat of Chatham County, in the U.S. state of Georgia. Established in 1733, the city of Savannah was the colonial capital of the Province of Georgia and later the first state capital of Georgia. Today Savannah is an industrial center and an important...

 he was trying to secure on favourable terms for the United Kingdom from the United States, a process he described as "absolute hell." A few weeks after returning from America, Keynes died of a heart attack at Tilton, his farmhouse home near Firle
Firle
For the suburb of Adelaide, South Australia, see Firle, South Australia.Firle is a village and civil parish in the Lewes District of East Sussex, England. Firle refers to an old-English/Anglo-Saxon word fierol meaning overgrown with oak...

, East Sussex, UK, on 21 April 1946 at age 62. Both of Keynes's parents outlived him: father John Neville Keynes
John Neville Keynes
John Neville Keynes was a British economist and father of John Maynard Keynes.-Biography:Born in Salisbury, he was the son of Dr John Keynes and his wife Anna Maynard Neville . He was educated at Amersham Hall School, University College London and Pembroke College, Cambridge, where he became a...

 (1852–1949) by three years, and mother Florence Ada Keynes
Florence Ada Keynes
Florence Ada Keynes was a British author, social reformer, and Mayor of Cambridge in 1932.- Family :She was the daughter of the Rev. John Brown of Bunyan's Chapel, Bedford. Her brother was the Regius Professor of Physic Sir Walter Langdon-Brown.She married the economist John Neville Keynes...

 (1861–1958) by 12 years. Keynes's brother Sir Geoffrey Keynes
Geoffrey Keynes
Sir Geoffrey Langdon Keynes was an English biographer, surgeon, physician, scholar and bibliophile...

 (1887–1982) was a distinguished surgeon
Surgery
Surgery is an ancient medical specialty that uses operative manual and instrumental techniques on a patient to investigate and/or treat a pathological condition such as disease or injury, or to help improve bodily function or appearance.An act of performing surgery may be called a surgical...

, scholar and bibliophile. His nephews include Richard Keynes
Richard Keynes
Richard Darwin Keynes, CBE, FRS was a British physiologist. He was a great-grandson of Charles Darwin, and edited accounts and illustrations of Darwin's famous voyage aboard the HMS Beagle into The Beagle Record: Selections From the Original Pictorial Records and Written Accounts of the Voyage of...

 (1919–2010) a physiologist; and Quentin Keynes
Quentin Keynes
Quentin George Keynes was a bibliophile.Keynes was born in London, the second son of Geoffrey Keynes and his wife Margaret, the daughter of George Howard Darwin who in turn was the son of Charles Darwin, making him the great-grandson of Charles Darwin . He was also the nephew of the renowned...

 (1921–2003), an adventurer and bibliophile. His widow, Lydia Lopokova, lived on until 1981.

Publications

  • 1913 Indian Currency and Finance
  • 1914 Ludwig von Mises's Theorie des Geldes (EJ)
  • 1915 The Economics of War in Germany (EJ)
  • 1919 The Economic Consequences of the Peace
    The Economic Consequences of the Peace
    The Economic Consequences of the Peace is a book written and published by John Maynard Keynes. Keynes attended the Versailles Conference as a delegate of the British Treasury and argued for a much more generous peace. It was a bestseller throughout the world and was critical in establishing a...

  • 1921 A Treatise on Probability
    A Treatise on Probability
    A Treatise on Probability was published by John Maynard Keynes while at Cambridge University in 1921. The Treatise attacked the classical theory of probability and proposed a "logical-relationist" theory instead...

  • 1922 The Inflation of Currency as a Method of Taxation (MGCRE)
  • 1922 Revision of the Treaty
  • 1923 A Tract on Monetary Reform
  • 1925 Am I a Liberal? (N&A)
  • 1926 The End of Laissez-Faire
  • 1926 Laissez-Faire and Communism
  • 1930 A Treatise on Money
    A Treatise on Money
    A Treatise on Money is a work on economics by English economist John Maynard Keynes. In the Treatise Keynes drew a distinction between savings and investment, arguing that where saving exceeded investment, recession would occur....

  • 1930 Economic Possibilities for our Grandchildren
  • 1931 The End of the Gold Standard (Sunday Express)
  • 1931 Essays in Persuasion
  • 1933 An Open Letter to President Roosevelt (New York Times)
  • 1936 The General Theory of Employment, Interest and Money
  • 1940 How to Pay for the War: A radical plan for the Chancellor of the Exchequer

See also



  • Animal spirits (Keynes)
    Animal spirits (Keynes)
    "Animal spirits" is the term John Maynard Keynes used in his 1936 book The General Theory of Employment, Interest and Money to describe emotions which influence human behavior and can be measured in terms of consumer confidence. Trust is also included or produced by "animal spirits"...

  • Global financial system
    Global financial system
    The global financial system is the financial system consisting of institutions and regulators that act on the international level, as opposed to those that act on a national or regional level...

  • History of economic thought
    History of economic thought
    The history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day...



  • Keynes World War II loan
  • Post-war consensus
    Post-war consensus
    The post-war consensus is a name given by historians to an era in British political history which lasted from the end of World War II in 1945 to the election of Margaret Thatcher as Prime Minister of the United Kingdom in 1979....

  • Stockholm School


External links