Part 3 of this series can be found here.
John Maynard Keynes
John Maynard Keynes is widely considered the most influential economist of the 20th century. He even made Time Magazine’s list of the 100 most influential people of the 20th century. Keynes was a towering intellect with wide-ranging interests and many achievements, but his greatest claim to fame no doubt, is the reputation accorded to him as the man who ended the “Great Depression” and birthing in the process, the field of macroeconomics.
The Great Depression as the name suggests was a time of great misery in the west. Starting with the great stock market crash of 1929, it lasted about 10 years. It was a global economic crisis marked by significant declines in industrial production, prices (deflation), mass unemployment, banking panics, and increased poverty and homelessness.
Perhaps some actual figures will give a better idea of how bad things really were. In a crazy two month selling spree, about $34 billion in market value was wiped off the stock market. That today would be worth about $607.58 billion. By the end of 1930, a quarter of factory workers had lost their jobs. Wages were down by 60%. Standard of living was set back about 20 years. To say that the times were hard is an understatement.
What made it all the more frustrating was that the standard economic theory about how money markets functioned suggested that prolonged depressions shouldn’t exist. To see why, we might have to back up a bit and try to understand fundamental concepts about the interplay between savings and investments (by saying investments, I am using the term the way an economist would use it and not the way, say a mutual fund manager would use it. So investments here do not refer to acquisition of stocks, bonds and other financial instruments but to the acquisition of production machinery, the building of offices and factories for the purpose of carrying out production).
Healthy economies typically have significant amount of savings. For those economies to stay healthy, savings must be put to productive use. Those productive uses are typically carried out by businesses who mop up savings and use them to make investments in a bid to expand production. Money markets exist to enable businesses access savings. Money markets facilitate the flow of short-term funds between borrowers and lenders, helping businesses, governments, and individuals manage their immediate cash needs. Businesses however, aren’t always in a position to make investments. If such a situation persisted, standard economic theory suggested that the interest rates that businesses ordinarily should pay to lenders for the privilege of gaining access to savings should fall, making savings cheaper to access and thus eventually inducing businesses to borrow savings for the purpose of making investments, but this was not happening during the Great Depression and nobody knew why.
It fell to Keynes to explain the puzzle. He explained that with each successive round of non-investment by businesses, the economy contracted, contracting the nation’s savings with it, thus making less and less savings available for each investment round, eventually grinding the economy to a halt. As a solution, he proposed that where businesses failed to invest that government should pick up the slack until businesses were in a position to resume investment activity. His ideas were put into practice and they eventually ended the Great Depression. Keynes would make other important contributions to economics, finance, mathematics and even theater. The man is still largely venerated to this day.
In the four posts in this series, we having been surveying the ideas of some history’s greatest economic thinkers, men who peered deep into the chaos of the market economy and divined its natural rhythms discovering that despite the appearance of chaos on the surface, the economy was driven by scientific laws, which had a firm hold on the economy much like how the law of gravity has a firm hold on the physical world.
Today, the successors to these great men have gone beyond explaining markets to actively shaping them. The economist has become an engineer. All over the world, the ideas of economists have gone on to shape government policy, leading to the creation of many new businesses and unlocking trillions of dollars in economic value. Some of these ideas have made their presence felt in Nigeria like the original auctions held for mobile licenses, after the resumption of democracy in 1999, leading to the GSM revolution. Others though occurring in other parts of the world, have had a global impact of which Nigeria is a beneficiary, like the deregulation of the telecom sector in the US, which played a crucial role in launching global ecommerce. Perhaps we would do well to lean more on our economists for desperately needed ideas on the way out of our current economic logjam.
Bibliography
- Heilbroner, Robert. 1965 The Worldly Philosophers: The Lives, Times and Ideas of the great Economic Thinkers. New York: Simon and Schuster
- Litan, Robert. 2014 Trillion Dollar Economists: How Economists and Their Ideas Have Transformed Business. New Jersey: John Wiley & Sons
