Keynes, John Maynard (1883–1946)

One of the leading economists of the twentieth century, Keynes held academic positions at the University of Cambridge and also worked from time to time within the British civil service. His significance lies both in his contribution to economic theory and in his influence on public policy.

Keynes's major work is The General Theory of Employment, Interest, and Money (1935). Writing in the context of global economic depression and mass unemployment, Keynes rejected the prevailing assumption that economic recovery could be left to market forces. In the orthodox view, markets were seen as creating and recreating equilibria through changes in the demand for and supply of goods and services. Keynes argued that, under certain conditions, the market search for equilibrium was incapable of resolving depression and alleviating unemployment. If aggregated demand was low, then depression would remain endemic. In such circumstances, one should look to government action in the form of public spending, rather than market forces, to create economic revival.

This theoretical insight had a significant impact on public policy from the 1930s until the 1980s. Government demand management became a pillar of Western economic policy, and the basis for welfare states and national economic planning. Under the impact of Keynesian economics, social programs to promote welfare had an economic as well as a social rationale. In addition to this emphasis on the Keynesian welfare state and Social Keynesianism, Keynes strongly influenced the architecture of global economic recovery after World War II. Institutions such as the International Monetary Fund and the World Bank originated in the Bretton Woods conference of 1944 which Keynes attended. They were designed, in large measure, to provide an interventionist framework at the international level, to parallel national economic policy initiatives.

Keynesian approaches fell out of favor from the 1970s. This occurred in part through the simultaneous onset of inflation and stagnation (stagflation), not anticipated in Keynes's theoretical framework, and in part because demand management neglected supply-side reforms of labor markets and public-sector efficiency. Deregulation and the rolling back of state activity were more widely advocated as means of optimizing national competitiveness and reaping the benefits of globalization.