British economist Keynes was born in Cambridge, educated at Eton and began his career as a lecturer at Cambridge University.
In the 1930s, he spearheaded a revolution in economic thinking, challenging the ideas of neoclassical economics that held that free markets would in the short term to medium term ( he did not believe in long run ), automatically provide full employment ( of labor), as long as workers were flexible in their wage demand.
He argued that inadequate aggregate demand could lead to prolonged periods of high unemployment.
During the Second World War, Keynes argued in “how to pay for the war”, published in 1940, that the war effort should be largely financed by higher taxation and especially by compulsory saving, rather than deficit financing in order to avoid inflation.
He forecasted about the ‘Great Depression’ which was proved as truth.
During the Great Depression, he had published his most important work “The General Theory Employment, Interest and Money (1936)”.
While discussing about the supply of money, Keynes identified the propensity to consume, inducement to invest, the marginal efficiency of capital, liquidity preference ( the theory of interest) and the multiplier effect a variables which determine the level of economy’s output, employment and the level of price.
He argued that if savings were being kept away from investment through financial markets, total spending falls which further leads to reduced income and unemployment, which reduces savings again.
Keynes argued that employment depends on total spending. This is composed of consumer spending and business investment in private sector, where consumers spend ‘passively’ according to their income fluctuations and businesses are induced to invest by the expected rate of return on investment (ROI, the benefits) and the rate of interest paid (the cost).
Interest rates, in turn, depend on the quantity of money and the desire to hold money in bank accounts (as opposed to investing).
Keyes advocated low interest rates and easy credit, to combat unemployment.
In June 1942, Keynes was rewarded as “Baron Keynes of Tilton, in the county of Sussex”.
The Keynesian revolution was associated with the rise of modern liberalism during the post war period.
Economist Milton Friedman and US president Richard Nixon said “We all are Keynesians now”.
Austrian economist Friedrich Hayek was Keynes’s most prominent critic but after Keynes’s death he wrote:
“He was the one really great man I ever knew, and for whom I had unbounded admiration. The world will be a very much poorer place without him.“