As an economic advisor to the British delegation at the Versailles conference in 1919, he became convinced that the Carthaginian peace that the Allies were imposing on Germany would undermine European economic recovery and guarantee new crises.
John Maynard Keynes was a product of the late Victorian and Edwardian eras, a period when stability, prosperity, and peace were assumed and when Britain ruled the world economy. Keynes never lost the self-confidence, self-assurance, and indeed the optimism of that time. But his intellectual career, and his profound impact, arose from his efforts to make sense of the disruptions and crises that began with the first world war and continued through the Great Depression.
During the crises of the 1920s he came increasingly to identify conservative economic policies as the cause of Britain’s economic problems. From this beginning, he developed a new theory of income determination, grounded in the concept of the ‘consumption function’, the ‘liquidity preference theory of interest’, and the inflexibility of money wages.
He lived life to the full, not only as an economist and statesman, but also as a journalist, art collector, bibliophile, and patron of the arts.
His criticism of the peace treaty of Versailles (1919) with Germany in The Economic Consequences of the Peace (1919) made him famous overnight and effectively undermined public support for the treaty.
Demand can increase through investment--through the creation of new capital goods. It is not necessary to depend either on price declines, or on wage-advances. Ultimately, of course, an increase in capital goods means an increase in consumers goods, and consumption per capita must go up if the balance between production and consumption is to be maintained. But the advantage, particularly in periods of recovery from depression, in raising demand through investment rather than mainly through direct increases in individual consumption is that the operation enlists the cooperation rather than the hostility of the investing groups.
The problem of foreign trade, while important, is not the primary economic problem. It is necessary first to increase the domestic demand. With that accomplished, foreign trade will increase in actual volume, while declining in relative importance. If the industrial nations all set to work to increase their domestic demand, they would soon have a revival in their foreign trade without having to worry about it.
Keynes took issue with Say's Law - one of the economic "givens" of his era. Say's Law states that supply creates demand. Keynes believed the opposite to be true - output is determined by demand.
Keynes argued that full employment could not always be reached by making wages sufficiently low. Economies are made up of aggregate quantities of output resulting from aggregate streams of expenditure - unemployment is caused if people don't spend enough money.
Keynes stated that if Investment exceeds Saving, there will be inflation. If Saving exceeds Investment there will be recession. One implication of this is that, in the midst of an economic depression, the correct course of action should be to encourage spending and discourage saving. This runs contrary to the prevailing wisdom, which says that thrift is required in hard times. In Keynes's words, "For the engine which drives Enterprise is not Thrift, but Profit."
Keynes enjoyed an elite early education at Eton, where he displayed talent in nearly every field of his unusually wide-ranging interests. His abilities were remarkable for their sheer diversity. He entered King’s College, Cambridge to study mathematics, but his interest in politics led him towards the field of economics, which he studied at Cambridge under A.C. Pigou and Alfred Marshall.
John Maynard Keynes was the son of John Neville Keynes, an economics lecturer at Cambridge University, and Florence Ada Brown, a successful author and a social reformist. His younger brother Geoffrey Keynes (1887-1982) was a surgeon and bibliophile and his younger sister Margaret (1890-1974), married the Nobel-prize winning physiologist Archibald Hill.