John Maynard Keynes was born in Cambridge, England. His father, Dr. John Neville Keynes, occupied a high level administrative position at the university. Maynard's mother was one of the earliest female students to attend Cambridge. It therefore can be seen that Maynard had a very enriched childhood.
After attending Eton, Keynes went to Cambridge.1 His first dissertation (King's) was on the theory of probability. And while it certainly did look like Keynes, at first, was going to concentrate his abilities on mathematics, it was to economics he was to turn. Indeed, he was tempted to go to the bar, which would normally lead to positions of political power; but, instead, he chose a course which would lead him to be an advisor to those in political power: he chose the civil service. After the competition (he came second) he was appointed to a position in Foreign Affairs, specifically, the department that extended advice on the administration of India, which then was one of England's Dominions. (He would have preferred the Treasury Department.2) Fortunately, in his first position with the civil service, - boredom overtook him.3
As a result of a reorganization of the economics department at Cambridge, an opportunity opened up for Keynes (he had earlier come under the influence of its head, Alfred Marshall). And so, we see that Keynes resigned his position with government and went back to Cambridge to teach.
With the First World War having put a huge strain on the British economy (which, for the previous 150 years, had been the engine for the entire world) a call went out for fresh young minds. In 1915, Keynes was finally offered a job at the British Treasury. Given his position at Treasury, Keynes was to take an active part in the war effort, and, indeed, he was part of the British team sent to the Paris Peace Conference of 1919. The result of the conference was not, however, to Keynes' liking. On his return to England, Keynes resigned his position with Treasury and turned bitterly to writing out his thoughts on the peace process. In the fall of 1919, out came his book, The Economic Consequences of the Peace. Basically, Keynes was of the view that the amount and the manner by which Germany was to pay war reparations to the victorious allies would lead to future problems. Initially, these provisions in the treaty would hamper Germany's post war economy; and, ultimately, it would lead Germany's repudiation of it and a rearming of all Europe. Quite a controversy sprung up over Keynes' views and predictions. This particular controversy over the treaty signed in Paris in 1919 was soon to die away (mainly because the predictions almost immediately started to materialize). My point, however, is, that this controversy, it seems, was to ever put Keynes right in the middle of any economic controversy that thereafter came along. The principal Keynesian controversy - the one we shall come to shortly - would survive the death of Keynes; is yet with us today; and, will remain for a long time yet to come.
With the world wide slump, post 1929, Keynes set himself to the task of explaining and of coming up with new methods to control trade-cycles. In the result two books were spawned: A Treatice on Money (London: MacMillan, 1930) and The General Theory of Employment, Interest and Money (London: MacMillan, 1936). In these books Keynes pronounced that there should be both national and international programs that would lead to a unified monetary policy. Further, Keynes came to the view that a national budget was to serve not only the purpose of good financial planning for government revenues and expenditures; but, that, it ought to be used as a major instrument in the planning of the national economy. What was needed, in Keynes's view, were policies that would regulate the booms and slumps of the trade cycle, viz., that it was the responsibility of government to regulate the levels of employment and investment. He was of the view that economic equilibrium could, and should, be restored and maintained by official action. In such a scheme there was not much room for the classical theory that espoused laissez-faire.4
Keynesian theory, of course, is very appealing to politicians; it has ever since its pronouncement. What has occurred, and this is its great defect, is that politicians not only spend in the slumps (as is called for by Keynesian theory), but they also spend during the boom years.5 In 1936, the United States, in the person F. D. Roosevelt, quite out of keeping with its constitution, was to embrace Keynesian theory with the announcement of the "New Deal."6
What Keynes' General Theory did, was to throw economists into two violently opposed camps.7 However, as it turned out, and principally because of its appeal to free spending politicians, the Keynesians, up to the 1980s, were to have their way. The fact is, that Keynesian economics applied during good times, - bring on bad times. Countries, such as Canada and Great Britain, in the 1960s and 1970s, went about setting up massive government systems based on the Platonic visions had by the "liberals" among us; in the process these social designers imposed on the working citizens an ever increasing debt; and in the process profaned Keynes. The servicing of this debt took an ever larger bite out of government operating budgets, and, reality gradually seeped back in, as the option of more taxing disappeared.8
2 See The Life of John Maynard Keynes by R. F. Harrod (London: MacMillan, 1951).
3 This first stint with government, and in particular his involvement with Indian affairs, was to serve Keynes well; first, he became familiar with government operations; and, second, more importantly, because of his work in assisting in the devisement of a new monetary policy for India, there was sparked within Keynes, a life long interest in monetary policy.
4 Laissez-faire, in the area of economics and politics, is a doctrine holding that an economic system functions best when there is no interference by government. It is based on the belief that the natural economic order tends, when undisturbed by artificial stimulus or regulation, to secure the maximum well-being for the individual and therefore for the community. This description of the natural state of affairs has long been with us. (See Quesnay.) The story is that Colbert, the chief minister of Louis XIV, once asked a group of businessmen what he could do for them. One of these businessmen, replied, laissez nous faire - leave us alone. At times a phrase is added suggesting the social theory behind the slogan: le monde va de lui meme - the world goes by itself. In Britain: Adam Smith, Jeremy Bentham, and J.S. Mill developed laissez-faire into a tenet of classical economics and a philosophy of individualism.
5 The idea is, that over the period of the cycle, government should only spend what they can raise within the cycle: there is no room in the theory that government should indefinitely carry debt over from one cycle to another.
6 For those who support the Keynesian approach, the proposition would be that the "New Deal" brought the American economy (and therefore the world economy) back to high levels of employment, once again. The other side, would argue that there was another event which brought the American economy back: it was called the Second World War.
7 The principal legacy, for good or bad, which Keynes left to the world was his book, The General Theory; he also, it is to be noted, left us with the international banking institution known as the International Monetary Fund and the World Bank, which was set up as a result of a post World War II conference in the United States at "Bretton Woods" and which was dominated by the presence and works of John Maynard Keynes.
8 Keynesian Macro-Economics have caused us an incalculable loss. "... the countries that ignored Keynes, not the least Germany and Japan and for many years the United States, have prospered with negligible unemployment." (Seldon, Capitalism, p. 157.)