John Maynard Keynes (1883–1946)

This chapter discusses John Maynard Keynes’s theory of output and employment, his monetary economics, the role of monetary and fiscal policies, his ideas on war finance and international economic architecture, and the idea of reforming capitalism by ending laissez faire. Keynes emphasized the role of aggregate demand in the short-term determination of output and employment. Particularly, investment tended to be volatile in view of changing business expectations. If the aggregate demand fell short of the full employment level of output, expansionary monetary and fiscal policies could be used to give a boost to aggregate demand to attain full employment equilibrium. Keynes believed that fiscal policy was better at building business confidence than conventional monetary policy. In the Great Depression of the 1930s, Keynes was unable to persuade the authorities to try unconventional instruments in the form of open-market operations. Keynes believed that laissez faire had to end and policy had to be supplemented with collective action and socialization of investment. Capitalism, if wisely managed, was better at meeting economic ends than any other economic system in sight. The financial crisis of 2008, following in the wake of the New York stock market crash, brought Keynes’s relevance to the forefront and Krugman remarked that the Keynesian economics remained the best framework for making sense of recessions and depressions.