"In the long-run we are all dead"

"The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones."

"The ideas of economists . . . are more powerful than is commonly understood. Indeed the world is ruled by little else."

John Maynard Keynes (1883 - 1946)

John Maynard Keynes was born into an academic family. His father, John Nevile Keynes, was a lecturer at the University of Cambridge where he taught logic and political economy. John Nevile published Formal Logic four months after John Maynard was born. John Maynard's mother, Florence Ada Brown, was a remarkable woman who was a highly successful author, and also a great pioneer in social reform. It is worth commenting at this stage that, although John Maynard Keynes lived to the age of 63, his parents both outlived him.

In 1902 he won a scholarship to King's College, Cambridge, in mathematics and classics. He had many interests at Cambridge beyond his academic work, spending much time with literary friends, reading, and involving himself in political activity.

Keynes' Theories

In the General Theory Keynes comprehensively challenged the Classical orthodoxy. He argued that a slump was not a long-run phenomenon that we should all get depressed about and leave the markets to sort out. A slump was simply a short-run problem stemming from a lack of demand. If the private sector was not prepared to spend to boost demand, the government should instead. It could do this by running a budget deficit. When times were good again and the private sector was spending again, the government could trim its spending and pay off the debts they accumulated in the slump. The idea, according to Keynes, should be to balance your budget in the medium term, but not in the short run.

So his theory was that the government should actively intervene in the economy to manage the level of demand. These policies are often known as demand management policies, aptly named since the idea of them is to manage the level of aggregate demand. These policies can also be called as counter-cyclical demand management policies. They are termed this because the government should be doing the exact opposite to the trade cycle. When economic activity is depressed (perhaps because it had been reading too much Classical economics!) the government should spend more, and when the economy is booming the government should spend less.

We can see these policies on the diagram below:

If aggregate demand in low (AD1) then the government should pursue reflationary policies such as cutting taxes or boosting government spending to push aggregate demand higher and boost employment and output. However, if aggregate demand is too high (AD4) and causing demand-pull inflation then the government should pursue deflationary policies. These may include increasing taxes or cutting government spending to reduce demand.

Sources of information: biz/ed, University of St. Andrews