The End of Laissez-Faire: The Economic Consequences of the Peace

John Maynard Keynes (1883-1946) was the most influential economist of the first half of the twentieth century. During both world wars he was an adviser to the British treasury, and his theory of government stimulation of the economy through deficit spending influenced Franklin D. Roosevelt’s ＂New Deal＂ administration. The mass unemployment caused by the Great Depression inspired his most famous work, General Theory of Employment, Interest and Money (1935-36). Keynes first gained widespread prominence immediately following World War I, when he attended the Versailles peace conference as an economic adviser to British Prime Minister David Lloyd George. Disgusted with the harshly punitive and unrealistic provisions of the Versailles Treaty, as well as the political chicanery and general incompetence of the chief participants, he published The Economic Consequences of the Peace in 1919. This book gained a good deal of notoriety because of its withering portraits of both French premier Georges Clemenceau and U.S. President Woodrow Wilson. Keynes described Clemenceau as motivated only by shortsighted nationalistic goals and vindictiveness, which aimed at crippling Germany for generations no matter what the consequences to the rest of Europe. He found fault with Wilson for his ivory tower idealism, lack of diplomatic savvy, and unfamiliarity with the political realities of Europe. This ineffectual combination ultimately dashed his best hopes for a League of Nations and a just resolution to the war in Europe. In a point-by-point analysis Keynes makes clear the ruinous consequences of the treaty to all of Europe and proposes substantial modifications. Unfortunately, few appreciated Keynes’s prescience, and he saw his worst fears realized in the rise of Hitler and the devastation of World War II. In The End of Laissez-Faire (1926) he presents a brief historical review of laissez-faire economic policy. Though he agrees in principle that a marketplace of free individuals pursuing their own self-interest without government interference has a better chance of improving society’s economic situation than socialist alternatives, he suggests that government can play a constructive role in protecting individuals from the worst harms of capitalism’s cycles, especially as concerns unemployment. Other useful government functions are the dissemination of information relating to business conditions, encouraging savings and investment along ＂nationally productive channels,＂ and forming a national policy about the size of population. Keynes’s brilliant mind and lucid writing are evident on every page. Both of these works are still well worth reading for his many stimulating ideas and profound knowledge of economics.

John Maynard Keynes was born in Cambridge, England, on July 5, 1883. His father, John Neville Keynes, was a professor and administrator at Cambridge University and himself the author of The Scope and Methods of Political Economy. After attending Eton (1897-1902), Keynes entered King’s College, where he studied economics. Following graduation, he worked in the India Office (1906-1908); lectured on economics at Cambridge (1908); was made a fellow of King’s College (1909), editor of the Economic Journal, and secretary of the Royal Economic Society (1911); and accepted a position in the British treasury.

In 1919 Keynes was principal representative of the treasury at the Paris Peace Conference. Disturbed by developments at the conference, however, he soon resigned. His Economic Consequences of the Peace (1919) gave voice to his strong objection to the punitive measures being enacted against Germany. In this eloquently argued and strangely prescient work, Keynes detailed the problems that would result from the war reparations to be made by conquered Germany beyond her ability to pay, as well as the devastating economic, social, and political consequences of continuing European ultranationalism.

Keynes returned to England to resume teaching at Cambridge (1920-37), during which time he gave the Sidney Ball Lecture that was published as the pamphlet The End of Laissez-Faire (1926) and wrote his main work, The General Theory of Employment, Interest, and Money (1935-36). Critiquing the neoclassical theory of Alfred Marshall, namely, that a normally functioning market
economy leads to full employment, Keynes showed that a market economy can operate at less than full employment and that it may even work against reducing unemployment. Keynes advocated enlightened governmental intervention over unregulated laissez-faire policies. The Keynesian analysis of how monetary and financial arrangements affect the economy has formed the basis of subsequent activist governmental fiscal and monetary policy.

Heart trouble ended Keynes’s academic career in 1937. However, he remained active as an adviser to the chancellor of the exchequer (1940) and as principal British delegate and negotiator at the Bretton Woods Conference (1944), Stage II of Lend Lease (1944), arrangements for a United States loan to Britain (1945), and the inauguration of the International Monetary Fund and the International Bank (1946). In 1942, he was raised to the peerage, being named 1st Baron Keynes of Tilton. John Maynard Keynes died in Firle, Sussex, on April 21, 1946.

Keynes’s other published works include A Revision of the Treaty (1922), A Tract on Monetary Reform (1923), A Treatise on Money (1930), and How to Pay for the War (1940).