John Maynard Keynes
A play about John Maynard Keynes recently opened in London. People are paying to see a play about an economist? I hope it’s a comedy. Or at least a musical like Hamilton.
Keynes was born in England in 1883. He was educated at Eton and Cambridge. His father was a professor at Cambridge. His mother was mayor of Cambridge in 1932-33.
He spent the first 10 years of his professional life analyzing or thinking about the English economy that was at the end of 100 years of England’s political and economic dominance of the global economy (including English colonies) through advanced manufacturing technology, exports, and overseas capital investment. But already, by 1910, Germany and the United States had larger industrial output with better and more innovative technology (new industries). England was falling behind. The United States had higher productivity in key British industries of cotton textiles and coal. The country was living off of the income from past domestic and foreign capital investments. Part of England’s middle class relied on foreign income as England’s landowning aristocracy had relied on owning land.
Keynes then spent most of his adult life in England between 1914 and 1945, a period containing World War I, economic stagnation of the 1920s, the Great Depression of the 1930s and World War II. He spent World War I in the government’s Treasury Department, worrying mostly about how the war affected the relative value of currencies. His fellow Etonians also did their duty; 1,100 died fighting the war.
After the war, Keynes was the Treasury Department’s representative to the English delegation at the Versailles peace treaty conference. He sat in many of the discussions about German war reparations. He believed they were harshly punitive and would lead to disruption of international finances. Disgusted, he resigned, went back to England and wrote The Economic Consequences of the Peace. It became a best-seller, partly because of the caustic portraits of the main actors at the conference, including a particularly nasty one of England’s Prime Minister.
Keynes lived long enough to help England and the United States to avoid making the same mistakes after World War II. He was the primary driver of the creation of post-war financial institutions the World Bank and the International Monetary Fund (IMF). The World Bank provided funds for countries to recover from the destruction of the war; the IMF provided funds to countries with balance of payment problems.
Keynes opposed the 1925 decision to return to the gold standard in his pamphlet, The Economic Consequences of Mr. Churchill. It was Churchill's decision as Chancellor of the Exchequer. Keynes tried very hard to talk Churchill out of putting England back on the gold standard. His overall criticism was that returning to the gold standard would make England’s post-World War I stagnation worse.
He criticized the policy on three issues:
· Overvalued Currency: Keynes argued that returning the pound to the pre-war rate of $4.86 overvalued the British pound by about 10%. This made British exports artificially expensive and uncompetitive globally. England continued to run merchandise trade deficits but continued to earn interest and dividends from its massive foreign investments. Attempting to maintain the parity created financial strains in England and the United States, as the New York Fed under Benjamin Strong sometimes changed interest rates to support Britain’s monetary policies.
· Domestic Deflation & Unemployment:
To sustain parity with other countries, the government had to force down domestic wages and prices. Keynes predicted this would lead to mass unemployment, labor unrest, and industry lockouts.
· He accused Winston Churchill of deliberately used unemployment as a tool to drive down working-class wages. Wages were already falling. Wage cuts in the large coal industry triggered the massive 1926 General Strike.
(Historical coincidence. Churchill was at the New York Stock Exchange when the American stock market started to collapse. A few days later he was hit by a New York taxi when looking the wrong way crossing a street. He was not seriously injured.)
In 1930, he wrote an essay titled The Economic Possibilities for our Grandchildren. In it, he envisioned rising standards of living over the next 100 years. This forecast was based mostly on the assumption of long-term compound growth in productivity. There was little discussion about how this would happen or an equally important discussion about why it was not happening in England. The current economic problems were caused, he argued, by technological unemployment, that is, unemployment caused by productivity gains. This is ironic for two reasons. 1930 was the first year of the Great Depression. Also, England’s stagnation was partly the result of falling behind, a lack of technological change and innovation (see linked essay below). The one concrete example of industrial innovation he cited – the chemical industry – was dominated by Germany.
Keynes was hopeful that even low compound rates of technological change and improvements could happen assuming no major wars and no large increases in population. World War II was nine years away; the post-war period experienced a global population explosion. Fortunately, technological change and innovation in new and better products and services led to large improvements in standards of living. Very little of it originated in England.
Keynes is famous for a book he published in 1936, usually referred to by the shortened title The General Theory. The whole title would put off any potential reader except an Economics major (personal opinion base on being forced to read it at a tender and impressable age). The main argument was that recessions and depressions are not necessarily self-correcting. Lower income leads to lower consumption and lower business sales and profits leads to lower investment. Unemployment rises but prices and wages are somewhat sticky. Tax revenue falls and fiscal deficits occur without stimulating the economy. To counter these recessions, government could increase total spending through larger deficits financed by borrowing, and then spending it and/or giving it to households to spend or businesses to invest. Keynes was not too concerned how governments did it; he facetiously suggested burying money in bottles for people to find and dig up. Milton Friedman later suggested the alternative of throwing money out of helicopters (or delivering it in Amazon drones?).
In May, 1934 Keynes met Franklin Roosevelt. The meeting didn’t go well. Roosevelt wasn’t impressed; it is doubtful he understood what Keynes was talking about. Neither was Keynes impressed. One reason was that Keynes tended to judge people by their hands. He was proud of his elegant hands, which he attributed to centuries of inbreeding by aristocratic types stretching back to a knight who accompanied William the Conqueror. He thought Roosevelt’s hands were big and rough, with blunt fingers, the hands of a farmer.
Roosevelt didn’t learn his lessons from his tutor. In 1937 Roosevelt decided to channel Herbert Hoover by moving towards a smaller deficit and also have the Fed raise interest rates and reserve requirements. The budget for fiscal year 1937 was almost balanced. A sharp recession followed. Roosevelt was forced to revert to the prior policy of government deficits. But unemployment was still around 15% in 1940, the same as 1931, and didn’t fall below 10% until 1941, partly because the U.S. started gearing up for war.
Keynes saw his policy recommendations as short-run solutions to temporary problems. Once aggregate demand and total income rose, the internal dynamics of the capitalist economy would kick in and economic growth would resume. What was missed was that in the 1930s the United States and England began a permanent shift in the role of government in the economy. The New Deal was mostly about social and economic reforms managed by the central government. The scope and size of these reforms would continue to grow after World War II. In 1946, the Labor Party government would initiate similar reforms.
Keynes was a facile writer but the General Theory is unnecessarily turgid and dense (personal opinion based on being forced to read it at a tender and impressionable age). But later politicians and their economic lap dogs latched onto the main idea - that recessions and depressions could be corrected by governments running larger deficits. The idea of giving money to voters also appealed to politicians. But with the tremendous expansion of government programs in the 1930s, during World War II and after the war, something changed. Keynes’ idea was that government deficits during recessions would be followed by smaller deficits or surpluses during the recovery. This also tended to damp down inflationary tendencies at the end of economic expansions.
With the tremendous expansion of government programs in the 1930s, during World War II and after the war, Keynes’ prescription of cyclical government deficits morphed into structural deficits. Rich country politicians such as “New Deal” Democrats in the U.S. and the Labor Party in England created and expanded new government programs of social insurance, pensions and health care, subsidies, and income transfer programs without thinking about the long-run consequences. And voters didn’t like tax increases to pay for them; politicians responded by giving citizens cuts in tax rates.
All rich countries’ government finances are now being overwhelmed by debt. National debt has been rising faster than nominal GDP. For rich countries as a whole, debt is over 100% of GDP and rising. Some economists believe that this is an inflection point where debt begins to decrease economic growth.
A combination of rising national debt ($40 trillion in the U.S., rising at a yearly deficit of $2 trillion a year) and rising interest rates since 2022 mean that interest expense on national debts is eating annual budgets. In the United States, interest expense is greater than national defense spending. Interest expense on the national debt is half of the yearly deficit. A few economists think a financial crisis is coming. None of them work for governments.
As China has shown, there is nothing inherently wrong with deficits if the money is spent on public investment in new or improved infrastructure (smart electrical grids, high-speed railroads) and funding new technology (solar panels and EVs). Governments spend money on basic scientific and medical research. Some, like the U.S., fund new products and services if they think they will have military application. It is hard to find a new post-war technology in the U.S that was not originally funded by the government or the government was not an early customer. If you enjoy the internet or the GPS in your car, thank the U.S. government.
If governments were forced to do their financial reporting like private corporations, you wouldn’t buy stock in them. But, of course, you would be betting they could create money indefinitely without consequences. But there are consequences. Since the end of World War II, about 30 governments have gone through a bankruptcy (a “financial restructuring”). Some have been bailed out by the IMF and even the U.S. government. Other countries “print money” and suffer high rates of inflation. The increased risks from war or runaway inflation destroy the value of financial wealth including government bonds. In 1914, two of the safest investments in the world were German and Russian gold-backed bonds.
As discussed in other essays on this blog, this financial situation has political consequences for democracies. Centrist political parties, in power since the end of World War II, appear to voters as unable to manage the public part of the country. Just this month (October, 2026) there were riots in France protesting bad public schools and demonstrations in Spain protesting high rents. England’s public health system is overwhelmed with long waits in emergency rooms and for surgery. Attempts at even modest reforms are met with fierce opposition, riots and punishment at the polls. Frustration is one reason voters are supporting far-right wing political parties.
Keynes concluded Economic Possibilities for our Grandchildren with this rather snarky comment:
But, chiefly, do not let us overestimate the importance of the economic
problem. It should be a matter for specialists-like dentistry. If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!
Then maybe economists would learn how to fill budgetary holes, like dentists fill cavities.
Later, in The General Theory, Keynes changed his opinion. In a famous quote:
"The ideas of economists and political philosophers … are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."
Keynes was an elitist policy wonk. In some ways, he was assuming the continuation of the Victorian world of his youth. In a possible parallel, Churchill played the same role in politics. By the end of their working lives, 1946 (Keynes died and Churchill was voted out of office), the world had changed dramatically.
The type of national income accounting countries adopted assumed that government spending was a separate part of “aggregate demand.” In some ways, yes. Governments did demand large amounts of products and services supplied by the private sector. Also government was on the supply side. But many government policies to bring about fairer or better societies were based on income transfers that changed post-tax income distribution and consumption. And an unintended consequence is that the U.S. government’s deficit (new borrowing) is greater than the entire net investment of the private sector (before data centers).
Maybe, a recession or depression is a short-run demand problem and long-run economic growth is a long-run supply problem. But a recession or depression may be a supply problem caused by non-economic or financial factors. Non-economic (political and geopolitical) factors have included wars, OPEC cutting off oil, disruptions of global trade, and international financial and currency problems. In a way, government running deficits or increasing money for incomes in the short-run is a product of static thinking - solve the immediate problem without thinking about the longer-run consequences of the future costs of a larger national debt.
There is now the danger that government fiscal and monetary policies could interfere with the economic mechanisms and incentives that lead to long-term growth, productivity increases and innovation. At some point, governments will be forced to adopt policies of financial stabilization along with short-run stabilization (countering recessions and inflation) and long-run economic growth.
There was another danger - that the political goals of the powerful substitute for the economic goal of a better society for all. This is happening in many countries. In the United States, the worst sort of macroeconomic policy is evolving – nationalist trade and tariff policies interfering with the global economy and government policies for the personal and political benefit of President Trump and his family.
Keynes spent his life trying to influence “practical men” in government. I doubt if “madmen in authority” like Hitler or even Stalin were much influenced by the thinking of past “academic scribblers.” Let us hope the elected officials of democracies are more receptive.
This essay is related to a number of other essays on this blog.
For the story of England’s relative decline because of lack of technological innovation,
Innovate or Fall Behind. A Cautionary Tale - England and the Industrial Revolution
For the disruption and chaos in the aftermath of World War I,
The Immediate and Long-Run Historical Consequences of World War I
For the causes of the American stock market crash of 1929 and an analysis of the Great Depression,
The Stock Market Crash of 1929 and the Beginning of the Great Depression
Causes of the Great Depression
For rising financial risk from increased national debts and interest expense in the United States,
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