John Maynard Keynes, the Keynesian revolution

John Maynard Keynes (1883-1946) was born in Cambridge, educated at Eton and supervised by both A. C. Pigou and Alfred Marshall at Cambridge University. He began his career as a lecturer, before working in the British government during the Great War, and rose to be the British government's financial representative at the Versailles conference. His observations were laid out in his book The Economic Consequences of the Peace.^[64] In his Theory of Money, Keynes said that savings and investment were independently determined. The amount saved had little to do with variations in interest rates which in turn had little to do with how much was invested. Keynes thought that changes in saving depended on the changes in the predisposition to consume which resulted from marginal, incremental changes to income. Therefore, investment was determined by the relationship between expected rates of return on investment and the rate of interest.

During the Great Depression, Keynes had published his most important work, The General Theory of Employment, Interest, and Money (1936). He argued that there exists a continuum of equilibria, the full employment equilibrium position being just one of them. One innovation in his core argument is to stop taking prices and wages as perfectly flexible, arguing instead for a certain degree of stickiness. Thanks to stickiness, it is established that the interaction of "aggregate demand" and "aggregate supply" may lead to stable unemployment equilibria. To combat unemployment Keynes advocated low interest rates and easy credit. However, Keynes also argued that low interest rates were not the only necessary condition to restore economic activity. If investers' expectations are pessimistic (they forecast that effective demand will not grow) they will not invest. So lasting unemployment was entirely possible, and there would be no automatic self correction without external intervention by government. Keynes advocated that state spending be financed by a budgetary deficit.

The book was an enormous success, and though it was criticised for false predictions by a number of people.^[65] As a UK representative he helped formulate the plans for the International Monetary Fund, the World Bank and an International Trade Organisation^[66] at the Bretton Woods conference, a package designed to stabilise world economy fluctuations and create a level trading field across the globe.