Who is Considered the Father of Macroeconomics?
John Maynard Keynes (1883–1966) was a British economist active in the early 20th century. He is best known as the creator of Keynesian economics and the father of contemporary macroeconomics, studying how economies—markets and other large-scale systems—behave. The General Theory of Employment, Interest, and Money (1935–1936) and other publications proposed a theoretical foundation for full-employment government policy. Until the 1970s, it was the preeminent macroeconomics school and exemplified how most Western governments approached economic policy.
While some economists contend that if wages are allowed to decline to lower levels, full employment may be restored, Keynesians contend that firms won't hire people to make items that won't be sold. Keynesianism is regarded as a "demand-side" theory that concentrates on short-run economic fluctuations because they think that unemployment is caused by a lack of demand for products and services.
Early Life and Education
Keynes' father, John Neville Keynes, a lecturer in economics at Cambridge University, had a significant role in stoking the young man's interest in economics. His mother was involved in philanthropic work for the poor and was one of the first women to graduate from Cambridge.
He was raised in a middle-class family and won scholarships to two of England's most prestigious universities, Eton College and Cambridge University, where he graduated with a bachelor's degree in mathematics in 1904. Keynes worked on probability theory early in his career and taught economics as a Fellow of King's College at Cambridge University. He held posts in the British Treasury and the British Civil Service and assignments to royal committees on money and finance. In 1919, he also served as the Treasury's financial representative at the Versailles peace conference, which concluded World War I.
Keynes' father supported laissez-faire economics, a free-market capitalist theory that rejects government interference. Keynes was a traditional proponent of the free market throughout his time at Cambridge (as well as a frequent stock market investor).
However, after the 1929 stock market crash that precipitated the Great Depression, Keynes began to feel that unrestrained free-market capitalism was fundamentally defective and needed to be recast to perform better than other systems like communism and in its own right.
Proponents of Government Economic Intervention
Keynes' father supported laissez-faire economics, a free-market capitalist theory that rejects government interference. Keynes was a traditional proponent of the free market throughout his time at Cambridge (as well as a frequent stock market investor).
However, after the 1929 stock market crash that precipitated the Great Depression, Keynes began to feel that unrestrained free-market capitalism was fundamentally defective and needed to be recast to perform better than other systems like communism and in its own right.
As a result, he started to promote government action to end unemployment and the current economic downturn. Along with government job programmes, he said that higher government expenditure was required to lower unemployment—even if it resulted in a budget deficit.
What Exactly is Keynesian Economics?
The core principle of John Maynard Keynes' theories, or Keynesian economics, is that governments should actively participate in the economy of their nations rather than merely allowing the free market to operate unchecked. To reduce economic cycle downturns, Keynes specifically favoured more federal expenditure.
Demand, not supply, is what drives an economy, according to the most fundamental tenet of Keynesian economics. The mainstream economic thinking of the day held the contrary belief that supply drives demand. All economic outcomes, from the production of commodities to the employment rate, are determined by total expenditure because aggregate demand, or the sum of the private sector and government spending on and consumption of goods and services, drives supply.
According to another key tenet of Keynes economics, the government increasing demand by injecting money into the market is the greatest approach to getting an economy out of a recession. Spending and consumption, in other words, are the two main drivers of economic growth.
According to Keynes, demand is so crucial that the government should spend even if it means going into debt to do so. His opinion is based on these two principles. Keynes argued that by stimulating consumer demand, which stimulates production and secures full employment, the government will be able to increase the economy.
Arguments against Keynesian Economics
Keynesian economics has received a lot of criticism since the 1930s, even though it was extensively accepted after World War II.
The idea of large government—the growth of federal programmes that must take place for the government to participate effectively in the economy—is subject to significant criticism. According to rival economists like the Chicago School of Economics, economic recessions and booms are a normal feature of business cycles. Direct government intervention simply makes the recovery process worse, and federal expenditure deters private investment.
Milton Friedman, an American economist most known for supporting free-market capitalism, is Keynesian economics' most illustrious opponent. Friedman, who is regarded as the most significant economist of the second half of the 20th century (as opposed to Keynes, who was most significant in the first half) favored monetarism, which challenged significant elements of Keynesian economics.
Friedman and his fellow monetarists held that governments could promote economic stability by focusing on the rate of growth of the money supply, in contrast to Keynes' view that monetary policy—control of the overall supply of money available to banks, consumers, and businesses—is more important than fiscal policy in influencing economic conditions. Keynesian economists favour government spending, whereas Friedman and monetarist economists favour controlling the flow of money through the economy.
For example, Friedman criticised deficit spending and argued for a return to the free market, including smaller government and deregulation in most areas of the economy—supplemented by a steady increase in the money supply. Keynes believed that an interventionist government could moderate recessions by using fiscal policy to prop up aggregate demand, encourage consumption, and reduce unemployment.
Modern Keynesian Theory
The critics of the Keynesian theory in the 1970s were known as rational expectations theorists. They claimed that taxpayers would anticipate the debt brought on by deficit spending. People would start saving today to pay off the debt in the future. Savings would be encouraged via deficit spending rather than demand or economic growth.
The New Keynesians were motivated by the rational expectations theory. According to them, monetary policy has greater influence than fiscal policy. Expansive monetary policy, if implemented properly, would eliminate the need for deficit expenditure. Politicians are not necessary for central banks to govern the economy. They merely would change the money supply.
Keynesian Economics Examples
The start of the Great Depression in the 1930s had a big impact on Keynes' economic ideas, and numerous of his policies were widely adopted as a result.
The Keynesian notion that even a free-enterprise capitalist system needs some governmental monitoring was explicitly represented in the New Deal, a set of government measures that President Franklin Roosevelt implemented to alleviate the crisis in the United States.With the New Deal, the American government took extraordinary steps to boost the economy, including establishing several new organisations tasked with helping jobless Americans find work and regulating the cost of consumer products. To increase demand, Roosevelt also accepted Keynes' idea of increased deficit spending, which included initiatives for public housing, slum eradication, railroad building, and other significant public works.
President Barack Obama made several actions in response to the Great Recession of 2007–2009 that were consistent with Keynesian economic theory. Several industries had federal government bailouts of indebted businesses. Fannie Mae and Freddie Mac, the two main market makers and guaranteeing agencies for mortgages and home loans, were also placed under conservatorship.
To preserve current employment and generate new ones, President Obama signed the $831 billion American Recovery and Reinvestment Act in 2009. It also featured family unemployment benefits, tax breaks, and spending allocations for infrastructure, education, and healthcare.
Conclusion
Keynesian economics, pioneered by John Maynard Keynes in the 1930s, had a significant influence on post-World War II economies in the middle of the 20th century. His beliefs have been criticised since the 1970s, resurfacing in the 2000s, and are still being discussed.
A core element of Keynesian economics is that the best method to bring an economy out of a recession is for the government to boost demand by injecting capital into the economy. Consumption (or spending), in other words, is the key to the economy's revival.
One lasting contribution made by Keynes is the idea that governments must contribute to the economic prosperity of people and enterprises. What has to be determined is the size of the government's role and the best way to carry it out.
FAQs on John Maynard Keynes: The Originator of Macroeconomics
1. Why is John Maynard Keynes called the 'Father of Macroeconomics'?
John Maynard Keynes is called the 'Father of Macroeconomics' because he fundamentally revolutionised economic thought by shifting the focus from individual markets (microeconomics) to the economy as a whole. Before Keynes, classical economics assumed that economies were self-regulating. His 1936 book, 'The General Theory of Employment, Interest and Money', introduced concepts like aggregate demand and the role of government intervention to manage economic downturns, thus establishing macroeconomics as a distinct field.
2. What is the central idea of Keynesian economic theory?
The central idea of Keynesian economics is that aggregate demand—the total spending by households, businesses, and the government—is the most important driving force in an economy. Keynes argued that in a recession, aggregate demand is often insufficient to maintain full employment. Therefore, he proposed active government intervention through fiscal policy (like increased government spending and tax cuts) to boost demand, stimulate production, and reduce unemployment.
3. How does Keynesian economics differ from classical economic theory?
The primary difference lies in their view on government intervention and market self-correction. Here's a breakdown:
Classical Economics: Believes that markets are self-regulating. It argues that prices, wages, and interest rates are flexible and will naturally adjust to restore full employment. It advocates for a laissez-faire (hands-off) approach from the government.
Keynesian Economics: Argues that prices and wages can be sticky and may not adjust quickly during a recession. It suggests that economies can get stuck in a state of high unemployment and that active government intervention is necessary to manage aggregate demand and stabilise the economy.
4. What is 'aggregate demand' and why is it so important in Keynesian thought?
'Aggregate demand' (AD) is the total demand for all final goods and services produced in an economy at a given price level. It is calculated as the sum of consumption (C), investment (I), government spending (G), and net exports (X-M). It is critically important in Keynesian theory because Keynes believed that the level of economic output and employment is determined by the level of aggregate demand. A shortfall in AD leads to recession and unemployment, while excessive AD can lead to inflation.
5. How does government spending actually stimulate the economy according to Keynes?
According to Keynes, government spending stimulates the economy through a process called the 'multiplier effect'. When the government spends money, for instance on building a new highway, it pays wages to workers and buys materials from suppliers. These workers and suppliers then spend a portion of their new income, creating further demand and income for others. This initial injection of government spending leads to a much larger total increase in the nation's income and output, thereby stimulating economic activity.
6. What is the real-world importance of Keynes's theories for a country's economy?
The real-world importance of Keynes's theories is most evident during economic crises. His ideas provide a clear justification for governments to combat recessions instead of waiting for market forces to self-correct. For example, the large-scale government stimulus packages, infrastructure projects, and tax cuts enacted by many countries during the 2008 global financial crisis and the COVID-19 pandemic were direct applications of Keynesian principles to prevent a deeper economic collapse and support employment.
7. If Keynes is the father of macroeconomics, does that make him the father of all economics?
No, John Maynard Keynes is not considered the father of all economics. That title is generally given to Adam Smith, an 18th-century philosopher whose work 'The Wealth of Nations' laid the foundation for classical economics and microeconomics. The key difference is their focus:
Adam Smith (Father of Economics/Microeconomics): Focused on individual markets, the actions of firms and consumers, and the concept of the 'invisible hand'.
John Maynard Keynes (Father of Macroeconomics): Focused on the economy as a whole, analysing aggregates like national income, unemployment, and inflation.
8. What role does inflation have in Keynesian economics?
In Keynesian economics, inflation is typically seen as a consequence of excess aggregate demand—a situation where total spending in the economy outpaces the economy's ability to produce goods and services. To combat this 'demand-pull' inflation, Keynesian theory recommends contractionary fiscal policies. This involves the government increasing taxes and/or reducing its spending to cool down the economy, decrease aggregate demand, and bring inflation under control.
