John Maynard Keynes: Capitalism's Savior

Keynesian fiscal theories altered forever government's role in the economy

As part of its anniversary celebration, BusinessWeek is presenting a series of weekly profiles for the greatest innovators of the past 75 years. Some made their mark in science or technology; others in management, finance, marketing, or government. In late September, 2004, BusinessWeek will publish a special commemorative issue on Innovation.

John Maynard Keynes is endlessly fascinating. A product of Eton, Cambridge, and the British Treasury, he was also a member of the Bloomsbury group, that influential collection of writers, artists, and intellectuals in London that included Virginia Woolf and E.M. Forster. A top academic and public policy polemicist, he also ran an insurance company and made a fortune in the markets. The philosopher Bertrand Russell considered Keynes's mind the "sharpest and clearest" he had ever encountered. "When I argued with him," Russell said, "I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool."

But it is as an economic innovator that Keynes is best remembered. Keynes changed how economists study business cycles, price levels, labor markets, and economic growth. His insights have largely kept downturns in the business cycle over the past half century from turning into depressions. "Keynes's lasting achievement is the invention of macroeconomics," says Deidre McCloskey, an economic historian at the University of Illinois at Chicago.

Indeed, Keynes can lay claim to playing a crucial role in saving capitalism and, perhaps, civilization during the Great Depression. Despite millions of unemployed workers in the industrial nations, economic orthodoxy demanded that government do nothing or, worse yet, tighten the purse strings. Little wonder that the totalitarian solutions of fascism and communism exerted such pull. U.S. Treasury Secretary Andrew W. Mellon expressed a widespread sentiment among elites when he said in 1930 that the Depression would "purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."

Keynes battled against such harsh counsel. With his landmark 1936 book, The General Theory of Employment, Interest, and Money, he persuaded a generation of thinkers and leaders to abandon a near-theological belief in balanced budgets. He showed how economies could get trapped in recession or depression -- and argued that government could break the spiral by borrowing to finance public spending that stimulated consumer activity and restored business confidence. His ideas helped create the golden era of postwar growth, and two institutions he championed in the 1940s still operate on a global scale, the International Monetary Fund and the World Bank.

Keynes is the philosopher-king of the modern mixed economy. It's a sign of his influence that there are no true believers in laissez-faire left. We are all Keynesians now. Governments routinely run deficits during downturns to increase the overall level of demand and, hence, employment. And many economists believe Japan's long stagnation in the 1990s largely reflected timid policymakers unwilling to boldly use the levers of fiscal and monetary policy.

Like Adam Smith and Karl Marx before him, Keynes believed economics wasn't merely about studying the efficient allocation of resources. For him, the good life meant beauty, art, love, morality -- the passions that define civilization -- and the value of economics lay in its pursuit of the stability and wealth that would allow our passions to flower.

By Christopher Farrell

    Before it's here, it's on the Bloomberg Terminal.