Many business people think they are rational and cleverly run their businesses without being influenced by false theories. However, John Maynard Keynes, one of the greatest economists, pointed out that “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
The hidden assumptions behind how we conduct businesses or even how governments direct economies need to be carefully examined. Keynes learned that the best way to operate was to investigate the facts and, if he was wrong, to admit this and change. He famously told someone, “When the facts change, I change my mind – what do you do, sir?”
The Economic Theories of Keynes
When he was young, Keynes followed his father, John Neville Keynes, an economist and a follower of entirely free markets. Then, in the great depression in 1929, Keynes saw the suffering of millions. As a result, Keynes felt that democracies must change the way they directed economies.
Keynes wrote down a new economics theory in a famous book, “The General Theory of Employment, Interest, and Money.” Keynes felt strongly that governments must spend money in times of crisis, create jobs, and thus increase demand. Even if governments have to run high budget deficits, the focus should be on reducing unemployment by helping demand in an economy increase.
The critics of Keynes said that government spending would lead to inflation, compete with private investment and finally end up with big bureaucratic governments.
Application of Keynes’ Theories
Keynes greatly influenced President Franklin Roosevelt’s New Deal economic policies that helped the US during the 1930s. Again in 2007/8, after the US subprime crisis, President Obama put in place a vast government stimulus package worth US$ 787 billion. In 2020 and 2021, the US has again followed Keynes’ advice with significant stimulus. All these immensely helped the US and other world economies get back on their feet.
Keynes’ View – Capitalism v/s Socialism
There is a mistaken belief that Keynes and his theories were socialist. Keynes firmly believed in looking at the facts and formulating policies that worked best under a particular circumstance. He cannot be stereotyped or boxed into one category. For example, in 1946, he advocated greater free markets for Britain and said that Adam Smith’s “invisible hand” (the tendency of free markets to foster a correct balance of demand and supply) was the path to follow. At other times, such as during the great depression, Keynes felt it was essential for governments to spend more money.
Aspects of his Personal Life
Keynes did not study economics as a student! He went to Cambridge and was a student of the classics and mathematics. He became an economist later but without any formal training. He was at the forefront of women’s rights at a time when this was not a movement.
For many people, Keynes’ most radical idea was that everyday work is only helpful if it gave people more time for leisure. He felt that every person should spend time on their own creative endeavors and was always against people working mindlessly just to make more money. Instead, he felt the world would be a better place if we paused and gave thought to creative and higher purposes.
Keynes said that “Ideas shape the course of history.” He was so right. Keynes’ ideas have been the foundation of much of economics in modern democracies. They have alleviated the pain and suffering of millions. Thank you, Keynes.