8: John Maynard Keynes was a political economist

11: of extraordinary optimism and vision

14: who believed that governments have it in their power

16: to solve some of the greatest ills of capitalism.

20: Keynes refused either to believe in communism,

23: or in the utter wisdom of the unfettered free market.

26: Instead, he occupied a middle course,

28: believing that governments could,

30: with a judicious injection of money here

33: and a rise regulation there, smooth out the peaks

36: and troughs to which all economies seem fatefully prone.

40: Keynes believed that what chiefly holds back countries

43: is corruption, knee-jerk policies, and shortsightedness, but that if these three ills

48: are corrected, then humanity can look forward to an age of incredible and lasting wealth.

53: In a charming essay titled, "Economic Possibilities for Our Grandchildren," written in 1930,

60: at the height of the world economic crisis, Keynes outlined his belief that most severe economic problems

65: could be overcome, and give way to an age where the chief challenge for human beings would be how to occupy

71: their leisure time in conditions of mass prosperity. For Keynes, economics was not a dull science. It was the tool

79: with which to bring about economic security for all.

83: Keynes' background was well-to-do, and throughout his life, he remained firmly a part of the British establishment.

89: Educated at Eton and at Cambridge University,

92: Keynes was unusual for the breadth of his artistic and literary interests.

96: Throughout his life, he maintained friendships with some of the most brilliant artists and scholars

100: of the twentieth century, and was an integral part

103: of the Bloomsbury Group of writers and intellectuals.

106: Virginia Woolf, for example, was one of his best friends.

109: As the Bloomsbury Group recognized,

112: good economics is as fundamental to wellbeing

114: as good painting or literature, and at a deep sense,

117: not fundamentally different in its search

119: for the wellsprings of fulfilment, and its attention to human error and blindness.

125: Keynes' masterpiece was written in 1936.

128: The General Theory of Employment, Interest, and Money.

131: In this work, Keynes set out to rethink the

134: causes of unemployment, in the hope of reducing new solutions

137: to this intractable problem of the 1930s,

140: and of capitalism more generally.

143: Classical economics give us three reasons why unemployment exists.

147: Firstly, and most obviously, workers are temporarily unemployed when they move jobs.

152: Secondly, individuals might simply elect not to work, particularly if they can

156: support themselves through some form of welfare payment.

159: But thirdly, and most interestingly,

161: unemployment arises when wages are higher than what employers can afford.

166: In the classical model, it's assumed that a free market

169: will correct this last course automatically,

171: and that the supply of labor and the demand for labor

174: will spontaneously come into equilibrium.

177: ensuring something approaching full employment.

180: Only, if some outside force were to exert itself

183: on the market--for example, if governments set a minimum wage

185: that artificially inflates wages, or

188: if trade unions organized workers so that they refused to take

191: lower wages in a declining market,

193: only under these conditions would equilibrium not be found. But Keynes took issue

199: with this classical theory. In the 1930s,

201: there were huge numbers of people out of work, as many as

204: 3 million in Britain and 15 million in the United States

207: of America. These numbers were just too great

210: to shrug off as the result of people being between jobs

213: or simply idle. And to Keynes' way of thinking,

216: this level of unemployment was also too great to be explained

219: by the interference of trade unions,

221: given that, during the years of the Great Depression,

224: high unemployment had severely curbed union power.

227: For Keynes, the real problem of unemployment lay in a

230: lack of demand.

232: This was not something that economists had ever properly focused on,

235: but it became the linchpin of Keynes' theories.

238: Classical economic theory had simply assumed that

241: demand for goods would return by itself

244: once wages and labor requirements had equalized.

247: But Keynes now famously declared,

249: "In the long run, we are all dead."

252: In other words, this process might simply take too long.

256: Keynes argued that it was insufficient for economists and policymakers

260: simply to advise people to accept suffering in the short and medium term, secure in the knowledge

264: that at the end of the storm, the sea would return to calm.

267: What was needed was intervention

269: in the economy, by government, in order to break

272: the cycle of economic depression,

274: and thereby restore prosperity.

276: Traditionally, in an economic downturn, governments would turn to

279: matters of supply to provide an economic boost,

282: encourage growth, and create employment.

285: For example, if interest rates were reduced, that this should encourage

287: savers to invest their money, providing cash

290: either for existing businesses to expand, or else for

293: entrepreneurs to establish new ventures. However,

296: Keynes now declared there might exist a persistent belief that

299: demand was so low

300: that there was little point in supplying goods. In this case,

303: traditional tools of promoting economic recovery

306: would be useless, and something else would be required.

310: If market mechanisms were unable to stimulate economic recovery, then, Keynes now argued, it was the job of the state

317: to step in to create demand, by running, if necessary, a very large budget deficit in order to create jobs.

326: Practically, this could be done by raising loans and using the money to finance vast public works

331: that could be brought on line relatively quickly.

333: These might include building roads or railways,

336: or else investment in other infrastructure that would not only

339: create work for people, but which would leave a useful legacy

342: for private enterprise. Governments should, for Keynes, act as the primary shopper in the land,

348: creating demand until more widespread sources off-demand can return.

353: Keynes criticized governments for the way they typically respond to downturns.

357: Their immediate (and understandable) impulse is just to rein in spending. After all, this is what a household would do when money is no longer coming in.

365: But what is wise at the level of the household is often catastrophic when applied at the level of the nation.

371: Nations are not households in all kinds of ways,

375: and Keynes needed to persuade his audiences to act contrary to their simpler, more basic instincts.

381: Reining in spending when an economy is in decline always worsens the very problem it's meant to solve.

387: One obvious objection to Keynes' focus on government spending

390: was the question as to who should pay for the loans.

394: By creating the debt, would not the problem be simply postponed to another day, rather than solved?

399: Here, Keynes applied his theory of what became known as the "Multiplier Effect."

404: In the first instance, by creating jobs through public works,

407: governments would save some of the money they would've otherwise spent on unemployment benefits.

413: Secondly, the increase in the number of people in employment would create additional spending power, and therefore boost the economy and tax receipts.

422: There would be an indirect effect on businesses as opportunities to service public works programs became available.

428: The result would be increased tax revenue from businesses, as they began to once again prosper.

433: In turn, these receipts would then pay off the debt created by the initial expenditure.

438: That was the Multiplier Effect.

441: Keynes' ability to conceive of grand macroeconomic architecture

445: put him in a high demand during the Second World War.

447: When he went to the Treasury to work as an advisor,

450: raised the peerage in 1942 as Baron Keynes of Tilton in the County of Sussex, Lord Keynes

456: led the British delegation to the Bretton Woods Conference in the United States,

459: at which the Allied nations hammered out post-war economic policy.

464: Not only did Keynes believe that national governments could successfully manage economies,

468: but Keynes also believed that a global system of economic organization was possible.

474: He argued that, for the purpose of global trade, countries should subscribe to the creation of a new international standardized unit of account:

481: the Bancor.

482: Through a complex system of accounting,

485: the adoption of the pseudo-currency

487: would allow an internationally-recognized organization

489: to impose fines on countries in order to discourage them from running large trade deficits or surpluses.

495: Such a system would help to smooth out peaks and troughs

498: in international trade and, not coincidentally, it would also benefit countries like Britain

504: who had, because of the cost of the War, had low reserves of gold.

507: It was both a brilliant and self-interested idea in equal measure.

512: But, ultimately, the Bancor did not come about.

515: The United States, which was effectively bankrolling global post-war economic reconstruction, ran large trade surpluses

521: and had no intention of accepting limitations on these.

524: But several of Keynes' other proposals, such as the establishment of the World Bank, and the International Monetary Fund

530: to oversee and encourage world trade, were accepted,

534: and have dramatically changed the world.

536: Testimony to Keynes' belief that national and super-national economic planning is both necessary and possible.

544: The strain of the Bretton Woods negotiations were immense upon Keynes. In 1946, aged only 62,

550: Keynes died of complications from a series of heart attacks.

554: Yet his legacy lived on.

555: In the thirty years or so after the Second World War,

558: Keynesian policies were adopted across the capitalist world.

561: Economies saw record lows of unemployment, and record high levels of economic growth.

567: Keynes' ideas became the new orthodoxy, and were particularly attractive to the political left.

572: By the 1970s, however, critics of Keynes' ideas,

575: notably, Friedrich Hayek and Milton Friedman

578: were gaining ground with politicians in countries like the United States and Britain.

583: They argued for small estate, free markets, and a reduction in regulation of capitalist enterprise.

589: At the same time, Britain and the United States

591: began to experience high inflation alongside high unemployment, known as "stagflation."

596: This phenomenon could not be explained by Keynesian economics,

599: and Keynes' ideas came to be discredited,

602: giving way to those of the neoliberals.

605: Nevertheless, the financial crisis of 2008

608: jolted policymakers into considering alternatives to neoliberal thinking.

612: When the global economy spiralled into decline, rather than wait for the market to correct itself,

617: the G20 nations announced an economic stimulus package of around 2% of gross domestic product to stimulate growth.

625: As one critic of Keynes wryly conceded,

628: "I guess everyone is a Keynesian in a foxhole."

632: To be sure, Keynes' ideas need to be modified to suit the conditions of the contemporary world, but Keynes would approve. His was not a static

640: or dogmatic understanding of economics. After all,

643: when asked why, in the 1930s, he had altered some of the positions on economic policy he had previously held,

649: Keynes famously answered,

652: "When the facts change, I alter my conclusions. What do you do, sir?"