John Maynard Keynes
Born: 5 June 1883 in Cambridge,
Cambridge shire, England
Died: 21 April 1946 in Firle,
Sussex, England
John Maynard Keynes



John Maynard Keynes was probably
the most influential economist of
the first half of the twentieth
century.
The son of a professor of
economics, john Neville Keynes,
and destined by family connection
to be influential in the narrow
British university world.
He studied at Cambridge
Member of the "Bloomsbury
Group”
That glittering group of bohemian
thinkers and doers who revolted against
the manners and morals of Victorian
England included the great economist
john Maynard Keynes; Virginia Woolf and
her husband, Leonard, a famed British
civil servant; The novelist E.M.
Forester; And any number of poets,
philosophers, artists and titled
eccentrics. They flaunted convention,
scoffed at religion, and had mad
affairs with one another, writing down
every word in diaries and letters in
the secure belief history would want to
know.
Quotes by Keynes:

I do not know which makes a man more
conservative --to know nothing but the
present, or nothing but the past.

The day isn't far off when the economic
problem will take the back seat where
it belongs, and the heart and head will
be occupied or reoccupied, by our real
problems of life and of human
relations, of creation and behavior and
religion.
It is ideas, not vested interests,
which are dangerous for good or evil.

Quotes by Keynes (cont):

The difficulty lies, not in the
new ideas, but in escaping from
the old ones which ramify . . .
into every corner of our minds.

Most men love money and security
more, and creation and
construction less, as they get
older.
Quotes by Keynes (cont):

Keynes was on the staff of the British
delegation that negotiated peace after
World War I, but he regarded the terms
as the seeds of disaster, resigned in
protest, and wrote his criticisms in
The Economic Consequences of the Peace
(1919), "...bursting" (as Schumpeter
wrote) "into international fame when
men of equal insight but less courage
and men of equal courage but less
insight kept silent."
Between the Wars

Between the wars he worked with the
British treasury and increase the
wealth of the treasury by performing
brilliant international transactions.

He was an economist who made important
contributions to probability theory and
mathematical economics. He became a
lecturer in economics at Cambridge,
where he was educated, until the start
of World War I when he worked for the
government.
Probability

In 1921 his Treatise on Probability was
published although it had been completed 10
years earlier. It was an attempt to put
probability on a firm mathematical basis.

Russell said:

The mathematical
powerful ... the
calculus
book is
is
one
impossible to praise too highly .
astonishingly
which it is
General Theory

Keynes became editor of the
Economic Journal, certainly one of
the most important of journals of
professional work and research in
economics then as now. After the
disaster of the Great Depression,
Keynes was the leading figure in a
group of (mostly) younger and very
creative economists who attempted
to understand and explain the
disaster. Borrowing freely from
their ideas, Keynes published The
General Theory of Employment,
Interest and Money,
GENERAL THEORY (CONT)

which (again quoting Schumpeter)
"was a similar feat of leadership.
It taught England, in the form of
an apparently general analysis,
his own personal view of her
social and economic situation and
also his own personal view of
'what should be done about it.'"
GENERAL THEORY (CONT)

The General Theory, as it is
known, also founded modern
macroeconomics, and virtually all
of the work in that field emerges
from Keynes' work, if not
positively as extensions and
adaptations then negatively as
criticism or the extension of
criticism of it.
GENERAL THEORY (CONT)

CONCEPTS
 Consumption Function
C  f (YD )
where f '  0
and in the case of a linar function
C  C 0  bYd
where 0  b  1
GENERAL THEORY (CONT)

CONCEPTS (continuation)
 Consumption Function (continuation)
 With the Use of The Hicks-Hansen
graphs
C
YD
GENERAL THEORY (CONT)

CONCEPTS

Marginal Propensity to Consume
Additional Consumption based on
additional Disposable Income
 Greater than zero but less than 1

GENERAL THEORY (CONT)

CONCEPTS (continuation)
 Consumption Function (continuation)
C
C
CO
YD
YD
GENERAL THEORY (CONT)

CONCEPTS

Marginal Propensity to Save
Additional Consumption based on
additional Disposable Income
 Greater than zero but less than 1
 Also, marginal propensity to consume
and marginal propensity to save should
add up to 1

GENERAL THEORY (CONT)

CONCEPTS (continuation)
 Savings Function (continuation)
S
S
SO
YD
YD
GENERAL THEORY (CONT)

CONCEPTS (continuation)
 Relation
between Interest and
Interest Rate is negative
 Marginal Efficiency of Capital
 Opportunity cost of placing money
into Investment
GENERAL THEORY (CONT)

CONCEPTS (continuation)
 Relation
between Interest and
Interest Rate (=return to investment)
Divides
those
projects
worth
from
those not
worth it
r
1
2
3
I
GENERAL THEORY (CONT)

CONCEPTS
Aggregate Demand
 AD = C + I + G
 C = consumption
 I = Investment
 G = Government Expenditures

GENERAL THEORY (CONT)

CONCEPTS
 Aggregate Supply
 Keynes has aggregate supply adjusting to
aggregate demand so Hicks-Hansen use
the 450 line
450
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Price of Bonds and Interest
 Keynes recognized the concept of
opportunity cost as consequently concluded
that interest rates and the price of bonds
were inversely related
 Based on the fact that as at high interest rates
bonds become a “good deal”
 At low interest rates, bonds become to
expensive and individuals would rather hold
cash then bonds
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Money Demand
 Individuals held money for:
• To purchase goods (function of income)
• For a rainy day (function of Income)
• Speculative purposes (function of interest
rates)
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Liquidity Trap
 In the case of holding money for
speculative purposes. Bonds may be so
high that speculators feel the price
must first go down
 Since Bonds an interest rates vary
inversely
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Liquidity Trap (Continuation)
 Speculators will not purchase bonds
and thus interest rates will now longer
decrease
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Monetary Policy
 Because of the “liquidity trap” it is
possible that increase in money supply
that is intended to decrease the interest
rates will not do so
Monetary Policy
Liquidity Trap
r
M0
P
0
M1
P
1
M2
P
2
M3
P
3
LS
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy
 Multiplier Effect
• Assume that Income Increases by some
amount YD
• From the Consumption function we know
Personal Consumption will increase by
C = b* YD where b is the marginal
propensity to consume
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
 Multiplier Effect (continuation)
• Assume that Income Increases by some
amount YD
• From the Consumption function we know
Personal Consumption will increase by
C = b* YD where b is the marginal
propensity to consume
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
 Multiplier Effect (continuation)
• Or C /YD = b
• So that for the first new dollar in income
the new Cnew is now equal to the old Cold
+ b. However, that additional b
expenditures become income to someone
else
• This other person now has the ability to
spend additional b2
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
 Multiplier Effect (continuation)
• But this additional consumption of b2
becomes additional income to someone
who now, with the same MPC will now
spend an additional b3
• So the next person spends now b4
• And so on and on
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
 Multiplier Effect (continuation)
• So the additional income generated
by an additional dollar of income
increases total consumption by
• b + b2 + b3 + b3 + b4 + b5 +………
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
2
3
3
4
5
 b + b + b + b + b + b +………
 However, because if the change comes from
an increase in an autonomous expenditure,
for instance government expenditures then
Aggregate income will increase by the dollar
plus the infinite series b + b2 + b3 + b3 + b4 +
b5 +………
 Or (1 + b + b2 + b3 + b3 + b4 + b5 +………)
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
 Solving for the infinite series
 (1 + 1*b + 1* b2 + 1*b3 + 1*b3 + 1*b4 +
1*b5 +………)
 Is equal to
1/ ( 1 – b )
 Consequently a one dollar increase in
Government expenditures will increase
Income by 1 * 1/( 1 – b )
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
 Solving for the infinite series
 ( 1*b + 1* b2 + 1*b3 + 1*b3 + 1*b4 +
1*b5 +………)
 Let sn = 1*b + 1* b2 + 1*b3 + 1*b3 +
1*b4 + 1*b5 +…..+ 1*bn-1
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
 Let sr = 1 + 1*b + 1* b2 + 1*b3 + 1*b4
+ 1*b5 + 1*b6 +…..+ 1*br-1
 Or bsr = b + 1* b1+ 1*b2 + 1*b3 +
1*b4 + 1*b5 +…..+ 1*br
 Or by subtracting the two we get
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
r
 ( 1 – b)sr = 1 * (1 – b )
 sr = (1 – br) / (1 – b)
 Since 0 < b < 1 then
 The limit of (1 – br) as r increases to infinity
is
1
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
 So that
 sr = 1 / (1 – b)
 Now Assume that the change comes from
a 100 million increases in Government
expenditures
GENERAL THEORY (CONT)

CONCEPTS (Continuation)
 Fiscal Policy (continuation)
 Thus Government expenditures increase by 100
million and
 Consumption increases by 100 million times
 sr = 1 / (1 – b)
 And if b=.75 then sr = 4
 So aggregate demand will increase by 400
million dollars (100 million from government
expenditures and 300 from additional
consumption)
Fiscal Policy
C+I+G
C+I+G
YD
YE
YF
Fiscal Policy



A significant contribution of Keynes is clearly that
an economy can be at equilibrium while not at full
employment
And that if the economy is 400 million from being
at full employment and MPC = .75 that all it
would take is an increase in autonomous
expenditure of 100 million
Since we can not legislate increase autonomous
Consumption or autonomous Investment then the
only alternative is Government expenditures
Fiscal Policy

He was not particular either of the type of
expenditure the government did
 For instance,
 He has the example of hiring individuals one
day to dig a hole and place bottles in that
hole.
 The next day hire same or other individuals
to dig and bottles out
 The next day bury them again, etc.
GENERAL THEORY (CONT)

He was the British
representative in 1944 at
Brenton Wood Conference that
set up the International
Monetary Fund and the World
Bank.