WEBVTT 00:00:00.000 --> 00:00:02.220 Welcome to the deep dive, the show where we take 00:00:02.220 --> 00:00:05.139 a massive stack of sources and turn it all into 00:00:05.139 --> 00:00:07.599 the essential knowledge you need to be brilliantly 00:00:07.599 --> 00:00:10.800 informed. Today, we are undertaking a deep dive 00:00:10.800 --> 00:00:13.939 into John Maynard Keynes. And I mean, this is 00:00:13.939 --> 00:00:16.399 a figure whose shadow just stretches across every 00:00:16.399 --> 00:00:19.280 single major economic debate of the last century. 00:00:19.339 --> 00:00:21.760 Absolutely. He's the single person most responsible 00:00:21.760 --> 00:00:24.239 for transforming economics from this, you know, 00:00:24.260 --> 00:00:28.239 niche academic field into a central tool of government 00:00:28.239 --> 00:00:31.000 policy. We're talking about the father of macroeconomics, 00:00:31.000 --> 00:00:34.780 right? The man who's... Radical ideas basically 00:00:34.780 --> 00:00:37.299 saved capitalism during its worst crisis, the 00:00:37.299 --> 00:00:40.159 Great Depression. Exactly. But he was also this 00:00:40.159 --> 00:00:43.280 massive contradiction, a hugely successful investor 00:00:43.280 --> 00:00:46.060 who literally wrote the book on why markets fail. 00:00:46.140 --> 00:00:48.679 And a free trade advocate who then did a complete 00:00:48.679 --> 00:00:52.299 180 and pivoted hard to protectionism. So our 00:00:52.299 --> 00:00:54.460 mission in this deep dive is really to unpack 00:00:54.460 --> 00:00:56.539 that paradox. We're going to examine how one 00:00:56.539 --> 00:00:59.359 man who is primarily trained in mathematics and 00:00:59.359 --> 00:01:02.399 philosophy of all things, completely revolutionized 00:01:02.399 --> 00:01:05.540 economic theory. And not just theory. He challenged 00:01:05.540 --> 00:01:08.140 core tenets like the invisible hand. And then 00:01:08.140 --> 00:01:10.379 he went on to design the entire global financial 00:01:10.379 --> 00:01:13.159 order after World War II. We really have to get 00:01:13.159 --> 00:01:15.439 into the mechanics of it all. Aggregate demand, 00:01:15.819 --> 00:01:19.799 price stickiness, the multiplier, and also explore 00:01:19.799 --> 00:01:23.260 the... surprising personal life that I think 00:01:23.260 --> 00:01:25.939 really fueled his extraordinary confidence. It's 00:01:25.939 --> 00:01:28.200 such an important mission because, well, as we 00:01:28.200 --> 00:01:31.079 saw after the 2008 crisis, his ideas just never 00:01:31.079 --> 00:01:33.840 truly go away. They're cyclical. They are. Time 00:01:33.840 --> 00:01:36.900 magazine said it decades ago that Keene's radical 00:01:36.900 --> 00:01:39.019 idea that government should spend money they 00:01:39.019 --> 00:01:41.439 don't have may have saved capitalism. He just 00:01:41.439 --> 00:01:43.900 he keeps coming back every time the free market 00:01:43.900 --> 00:01:46.060 system looks like it's about to collapse. So 00:01:46.060 --> 00:01:47.859 to understand the revolutionary, you really have 00:01:47.859 --> 00:01:49.719 to start with the man. John Maynard Keynes was 00:01:49.719 --> 00:01:52.780 born in Cambridge, England in 1883, and he was 00:01:52.780 --> 00:01:57.019 born into this intellectual but also very grounded 00:01:57.019 --> 00:01:59.159 upper middle class family. It really sounds like 00:01:59.159 --> 00:02:01.120 the perfect Petri dish for producing someone 00:02:01.120 --> 00:02:03.579 who was just utterly convinced they could solve 00:02:03.579 --> 00:02:05.780 the world's problems. Absolutely. I mean, think 00:02:05.780 --> 00:02:08.219 about it. His father, John Neville Keynes, was 00:02:08.219 --> 00:02:11.300 a prominent economist and logician. His mother, 00:02:11.479 --> 00:02:14.159 Florence Ada Keynes, became the first female 00:02:14.159 --> 00:02:16.919 mayor of Cambridge. Wow. So he was supported. 00:02:17.060 --> 00:02:20.300 He was loved. And that translated into this lifelong, 00:02:20.620 --> 00:02:23.979 almost unshakable confidence in his own intellectual 00:02:23.979 --> 00:02:27.419 ability to find solutions. And just as importantly, 00:02:27.659 --> 00:02:30.580 a real faith in the ability of educated government 00:02:30.580 --> 00:02:33.199 officials to do good. The fascinating part to 00:02:33.199 --> 00:02:35.319 me, though, is that his actual academic foundation 00:02:35.319 --> 00:02:38.259 wasn't in economics at all. Not really, no. It 00:02:38.259 --> 00:02:40.699 was math first. Right. He was a brilliant student, 00:02:40.800 --> 00:02:43.000 earned a first class B .A. in mathematics from 00:02:43.000 --> 00:02:46.199 King's College, Cambridge in 1904. But his real 00:02:46.199 --> 00:02:48.539 passion at the time, his deepest intellectual 00:02:48.539 --> 00:02:51.319 leaning, was toward philosophy. And his formal 00:02:51.319 --> 00:02:54.280 economic training was... What? Almost nothing. 00:02:54.460 --> 00:02:56.319 Almost nothing. He attended just one term of 00:02:56.319 --> 00:02:58.599 lectures, and that was informally as a graduate 00:02:58.599 --> 00:03:00.939 student. That is just astonishing. He becomes 00:03:00.939 --> 00:03:03.039 the single most influential economist of the 00:03:03.039 --> 00:03:05.740 20th century, basically invents an entire subfield, 00:03:05.860 --> 00:03:07.800 and he's almost entirely self -taught in the 00:03:07.800 --> 00:03:09.960 subject. Well, it speaks volumes, doesn't it? 00:03:10.280 --> 00:03:12.939 Biographers often point to his optimistic background, 00:03:13.120 --> 00:03:15.900 that stable, educated, socially unified class, 00:03:16.139 --> 00:03:19.530 as being crucial. He just lacked the ideological 00:03:19.530 --> 00:03:22.030 rigidity of people who spent decades learning 00:03:22.030 --> 00:03:24.830 and internalizing classical orthodoxy. So he 00:03:24.830 --> 00:03:27.229 wasn't tied down by tradition? Not at all. It 00:03:27.229 --> 00:03:29.389 allowed him to challenge the entire structure 00:03:29.389 --> 00:03:32.229 of economic thought when the real world, you 00:03:32.229 --> 00:03:34.449 know, the Great Depression, showed that the old 00:03:34.449 --> 00:03:36.889 structure was fundamentally broken. Okay, so 00:03:36.889 --> 00:03:38.689 let's unpack this journey. Let's jump into section 00:03:38.689 --> 00:03:41.770 one, the making of a revolutionary WWI and the 00:03:41.770 --> 00:03:45.349 trauma of Versailles. Before the war, he was... 00:03:46.090 --> 00:03:47.889 Laying the groundwork, right? He went back to 00:03:47.889 --> 00:03:49.889 Cambridge in 1908 after getting bored with the 00:03:49.889 --> 00:03:52.229 civil service. Yeah, he was just not cut out 00:03:52.229 --> 00:03:53.990 for that kind of bureaucracy. He was initially 00:03:53.990 --> 00:03:56.530 funded by people like Alfred Marshall to lecture 00:03:56.530 --> 00:03:59.270 in economics. And he worked extensively on probability 00:03:59.270 --> 00:04:01.729 theory, which later became his really important 00:04:01.729 --> 00:04:04.810 book, A Treatise on Probability, in 1921. But 00:04:04.810 --> 00:04:06.870 his first real dive into practical economics 00:04:06.870 --> 00:04:10.229 was Indian currency and finance in 1913. Yes, 00:04:10.270 --> 00:04:12.729 and this was a very detailed analysis of the 00:04:12.729 --> 00:04:15.250 Indian monetary system. And what was the situation 00:04:15.250 --> 00:04:17.910 there? Well, the Indian rupee was tied to silver, 00:04:18.069 --> 00:04:20.310 but it was becoming more and more convertible 00:04:20.310 --> 00:04:23.829 to gold or the pound sterling. Keynes, showing 00:04:23.829 --> 00:04:26.629 this early grasp of monetary policy, basically 00:04:26.629 --> 00:04:29.269 recommended formalizing that process, speeding 00:04:29.269 --> 00:04:32.110 it up. I was essentially arguing for a gold exchange 00:04:32.110 --> 00:04:34.550 standard. So right away you see him moving from 00:04:34.550 --> 00:04:37.860 abstract theory to, well. Practical policy design. 00:04:38.060 --> 00:04:40.740 Immediately. And that practical genius was, as 00:04:40.740 --> 00:04:42.819 you said, put to the ultimate test during World 00:04:42.819 --> 00:04:46.300 War I. He joined the Treasury in 1915. And this 00:04:46.300 --> 00:04:48.480 is where his reputation for, what was it, nerve 00:04:48.480 --> 00:04:51.240 and mastery was really forged. It was. His role 00:04:51.240 --> 00:04:53.620 was crucial. He was managing the terms of credit 00:04:53.620 --> 00:04:56.500 with his allies and, most importantly, acquiring 00:04:56.500 --> 00:04:59.040 the scarce foreign currencies they needed to 00:04:59.040 --> 00:05:01.199 fund the war. And the story about the Spanish 00:05:01.199 --> 00:05:03.720 pesetas really shows his strategic brilliance. 00:05:04.120 --> 00:05:06.139 It's more than just supply chain management. 00:05:06.189 --> 00:05:08.870 Oh, it truly is. So in 1917, the British government 00:05:08.870 --> 00:05:11.189 desperately needed Spanish pesetas to finance 00:05:11.189 --> 00:05:14.370 its huge purchases in neutral Spain. And Keynes 00:05:14.370 --> 00:05:16.709 managed to secretly buy up enough to cover the 00:05:16.709 --> 00:05:19.009 government's immediate needs. So the normal thing 00:05:19.009 --> 00:05:21.509 to do would be to just hand it over, solve the 00:05:21.509 --> 00:05:23.889 problem. Right. The traditional approach would 00:05:23.889 --> 00:05:26.170 be to solve the immediate shortage and move on. 00:05:26.230 --> 00:05:29.209 But he didn't do that. No. He refused. Instead, 00:05:29.509 --> 00:05:32.810 he chose to sell the entire massive block of 00:05:32.810 --> 00:05:36.069 Pasetas back onto the market. He intentionally 00:05:36.069 --> 00:05:39.240 flooded it. Wow. It was an incredibly aggressive, 00:05:39.519 --> 00:05:42.759 high -risk move. It wasn't designed just to meet 00:05:42.759 --> 00:05:46.079 the demand, but to fundamentally crash the price 00:05:46.079 --> 00:05:48.279 of the Posada. To make it cheaper for the government 00:05:48.279 --> 00:05:50.699 to buy more in the future. Exactly. Yeah. He 00:05:50.699 --> 00:05:53.139 was prioritizing long -term structural advantage 00:05:53.139 --> 00:05:56.800 and market control over just, you know, immediate 00:05:56.800 --> 00:05:59.579 tactical relief. That must have been a very contentious 00:05:59.579 --> 00:06:02.480 choice inside the conservative treasury. Highly 00:06:02.480 --> 00:06:04.420 contentious, but it worked. It was like economic 00:06:04.420 --> 00:06:07.439 judo. He received the Companion of the Order 00:06:07.439 --> 00:06:09.779 of the Bath for his service. But this triumph 00:06:09.779 --> 00:06:12.720 was, well, it was quickly overshadowed by the 00:06:12.720 --> 00:06:14.860 trauma of the Versailles Peace Conference in 00:06:14.860 --> 00:06:17.560 1919. This event really changed him, didn't it? 00:06:17.579 --> 00:06:19.339 It didn't just change his career. It changed 00:06:19.339 --> 00:06:22.019 his whole economic philosophy. It was a defining 00:06:22.019 --> 00:06:24.459 break. He served as the Treasury's financial 00:06:24.459 --> 00:06:27.100 representative, focusing on German reparations. 00:06:27.240 --> 00:06:30.279 And his objective was clear from the start. Keep 00:06:30.279 --> 00:06:32.480 the compensation payments low enough that the 00:06:32.480 --> 00:06:34.779 German economy wouldn't be irreparably damaged. 00:06:35.259 --> 00:06:37.660 He had this incredibly prescient vision, didn't 00:06:37.660 --> 00:06:40.560 he? He really did. Keynes understood that setting 00:06:40.560 --> 00:06:43.000 reparations too high wouldn't just hurt Germany. 00:06:43.040 --> 00:06:45.899 It would destabilize the entire European financial 00:06:45.899 --> 00:06:49.139 network, creating these massive crippling trade 00:06:49.139 --> 00:06:52.339 and debt imbalances that would inevitably lead 00:06:52.339 --> 00:06:54.560 to future conflict. He wanted reconstruction, 00:06:54.879 --> 00:06:57.990 not punishment. Exactly. But he was overruled 00:06:57.990 --> 00:07:00.829 by hardliners who were demanding just ruinous 00:07:00.829 --> 00:07:02.889 sums of money. Right. He was up against these 00:07:02.889 --> 00:07:04.990 conservative powers, the ones he famously called 00:07:04.990 --> 00:07:07.829 the Heavenly Twins, Lord Sumner and Lord Cunliffe. 00:07:07.949 --> 00:07:10.750 And they were demanding astronomically high reparations. 00:07:10.970 --> 00:07:13.410 Keynes just realized the mood was vengeful and 00:07:13.410 --> 00:07:15.870 punitive. It wasn't economically rational at 00:07:15.870 --> 00:07:18.370 all. And his own counterplan to resolve the war 00:07:18.370 --> 00:07:21.430 debt issue was just as radical. But it got shot 00:07:21.430 --> 00:07:24.769 down by the U .S. It did. He proposed this major 00:07:24.769 --> 00:07:27.050 international scheme to write down almost all 00:07:27.050 --> 00:07:29.110 the inter -allied war debts. You know, the UK 00:07:29.110 --> 00:07:31.670 owed the US, France owed the UK, and so on. And 00:07:31.670 --> 00:07:33.730 then he wanted to shift two -thirds of the cost 00:07:33.730 --> 00:07:36.350 of European reconstruction onto America's deep 00:07:36.350 --> 00:07:38.329 pockets. But America was the largest creditor. 00:07:38.430 --> 00:07:40.269 They weren't going to go for that. Not a chance. 00:07:40.689 --> 00:07:42.689 They saw it as, you know, they'd already sacrificed 00:07:42.689 --> 00:07:44.870 enough, so they flatly rejected it. And this 00:07:44.870 --> 00:07:47.389 rejection... Combined with a harsh treaty, it 00:07:47.389 --> 00:07:49.829 just disgusted him on both a moral and an economic 00:07:49.829 --> 00:07:52.529 level. And that led to his dramatic resignation. 00:07:52.829 --> 00:07:55.170 His resignation was immediately followed by his 00:07:55.170 --> 00:07:57.709 devastating polemic, The Economic Consequences 00:07:57.709 --> 00:08:00.810 of the Peace. And the book was a global sensation. 00:08:00.910 --> 00:08:04.490 It was this mix of... blistering character assassination, 00:08:04.870 --> 00:08:07.189 his descriptions of Woodrow Wilson are legendary, 00:08:07.370 --> 00:08:10.689 with sharp, accessible economic analysis, he 00:08:10.689 --> 00:08:13.089 argued the treaty was a recipe for catastrophe. 00:08:13.550 --> 00:08:15.569 The language in that book is still shocking today. 00:08:15.889 --> 00:08:18.750 He paints it not as a peace deal, but as an act 00:08:18.750 --> 00:08:21.470 of calculated cruelty. He wrote of the policy 00:08:21.470 --> 00:08:24.430 of reducing Germany to servitude for a generation. 00:08:24.990 --> 00:08:27.509 And his ultimate warning, which is just tragic 00:08:27.509 --> 00:08:30.490 in hindsight, was his prediction that impoverishing 00:08:30.490 --> 00:08:34.809 Central Europe would lead to that final war before 00:08:34.809 --> 00:08:37.370 which the horrors of the late german war will 00:08:37.370 --> 00:08:40.750 fade into nothing a devastating chilling prediction 00:08:40.750 --> 00:08:43.190 that well the rise of the nazis in the start 00:08:43.190 --> 00:08:46.139 of world war ii seemed to prove completely correct. 00:08:46.340 --> 00:08:49.500 It did. But here is where we have to introduce 00:08:49.500 --> 00:08:51.840 a necessary historical counterpoint, you know, 00:08:51.860 --> 00:08:53.519 something that really speaks to the complexity 00:08:53.519 --> 00:08:56.279 of this whole debate. Well, Keynes's book was 00:08:56.279 --> 00:08:58.700 profoundly influential and it shaped the popular 00:08:58.700 --> 00:09:01.399 view that the treaty was ruinous. Later, historians 00:09:01.399 --> 00:09:04.779 have presented a more nuanced picture. What's 00:09:04.779 --> 00:09:06.840 the counter argument then? Well, historians like 00:09:06.840 --> 00:09:08.779 Nell Ferguson and others have argued that the 00:09:08.779 --> 00:09:11.639 treaty wasn't necessarily unduly harsh in economic 00:09:11.639 --> 00:09:14.320 terms because of what happened next. point out 00:09:14.320 --> 00:09:16.600 that in the decade that followed, Germany received 00:09:16.600 --> 00:09:19.399 a massive net capital inflow from American loans. 00:09:19.700 --> 00:09:22.139 So American money was basically recycling through 00:09:22.139 --> 00:09:24.200 the system, funding the payments and preventing 00:09:24.200 --> 00:09:27.379 the collapse Keynes feared. Precisely. That capital 00:09:27.379 --> 00:09:29.840 inflow was estimated to be roughly four times 00:09:29.840 --> 00:09:32.120 the eventual size of the Marshall Plan after 00:09:32.120 --> 00:09:35.100 World War II. Wow, that's a huge number. It is. 00:09:35.139 --> 00:09:37.659 So while Kean's critique was a brilliant polemic, 00:09:37.679 --> 00:09:40.480 some modern scholars see it as ultimately flawed 00:09:40.480 --> 00:09:43.600 in its economic prognosis. They'd say the treaty's 00:09:43.600 --> 00:09:46.240 real failure was political, not purely financial. 00:09:46.740 --> 00:09:49.840 But regardless of the debate, The book made Keynes 00:09:49.840 --> 00:09:53.019 an international celebrity. It cemented his status 00:09:53.019 --> 00:09:55.820 as the anti -establishment intellectual. So if 00:09:55.820 --> 00:09:58.159 Versailles showed Keynes the political failure 00:09:58.159 --> 00:10:00.740 of the establishment, the economic turmoil that 00:10:00.740 --> 00:10:03.139 followed really provided the catastrophe he needed 00:10:03.139 --> 00:10:06.220 to unleash his intellectual revolution. Let's 00:10:06.220 --> 00:10:08.250 move into section two. The Keynesian Revolution 00:10:08.250 --> 00:10:11.149 challenging neoclassical orthodoxy. Yeah, the 00:10:11.149 --> 00:10:13.590 1920s in Britain were just characterized by high 00:10:13.590 --> 00:10:15.990 unemployment. And it was compounded by this disastrous 00:10:15.990 --> 00:10:19.350 decision by Winston Churchill in 1925 to put 00:10:19.350 --> 00:10:21.769 Britain back on the gold standard at a cripplingly 00:10:21.769 --> 00:10:24.370 high pre -war parity. And Keynes was completely 00:10:24.370 --> 00:10:27.730 against this. Relentlessly. He argued the gold 00:10:27.730 --> 00:10:29.730 standard was forcing Britain into unnecessary 00:10:29.730 --> 00:10:32.789 deflation and austerity, just strangling the 00:10:32.789 --> 00:10:35.450 domestic economy. He responded immediately with 00:10:35.450 --> 00:10:37.429 the economic consequences. as a Mr. Churchill, 00:10:37.649 --> 00:10:40.230 arguing austerity was actively making things 00:10:40.230 --> 00:10:42.549 worse. But the real trigger for the revolution 00:10:42.549 --> 00:10:46.250 was the Great Depression, starting in 1929. The 00:10:46.250 --> 00:10:48.809 collapse of global demand, mass unemployment. 00:10:49.590 --> 00:10:53.370 It just validated all his worst fears about market 00:10:53.370 --> 00:10:55.590 instability. And he was a trenchant critic of 00:10:55.590 --> 00:10:57.610 the orthodox response, which was, you know, balance 00:10:57.610 --> 00:11:00.210 the budget and let wages fall. Which to Keynes 00:11:00.210 --> 00:11:03.320 was just suicidal. Completely. He argued that 00:11:03.320 --> 00:11:05.799 in a severe slump, budget deficits weren't a 00:11:05.799 --> 00:11:08.019 symptom of failure. They were, in his words, 00:11:08.120 --> 00:11:10.779 nature's remedy that cushioned the economy from 00:11:10.779 --> 00:11:13.899 total collapse. He was arguing for counter -cyclical 00:11:13.899 --> 00:11:16.379 public spending right away. If the private sector 00:11:16.379 --> 00:11:18.820 won't spend, the government has to. But he needed 00:11:18.820 --> 00:11:21.000 more than just a policy prescription. He needed 00:11:21.000 --> 00:11:23.360 a proper theoretical argument to back it up. 00:11:23.600 --> 00:11:26.639 And that arrived in 1936 with his magnum opus, 00:11:26.659 --> 00:11:28.820 The General Theory of Employment, Interest and 00:11:28.820 --> 00:11:31.399 Money. This book is really the foundation of 00:11:31.399 --> 00:11:34.240 modern macroeconomics, isn't it? It just shattered 00:11:34.240 --> 00:11:37.629 the existing framework utterly. It provided the 00:11:37.629 --> 00:11:41.330 theoretical justification for activist interventionist 00:11:41.330 --> 00:11:44.389 government policy. It challenged that core classical 00:11:44.389 --> 00:11:46.470 belief that free markets would automatically 00:11:46.470 --> 00:11:49.409 just sort themselves out and return to full employment. 00:11:49.590 --> 00:11:52.409 So what exactly was the established orthodoxy 00:11:52.409 --> 00:11:54.570 he was fighting against? He was fighting against 00:11:54.570 --> 00:11:57.629 Say's Law, which is often summarized as supply 00:11:57.629 --> 00:12:01.139 creates its own demand. The classical economists 00:12:01.139 --> 00:12:03.799 believe that every act of production generates 00:12:03.799 --> 00:12:07.340 income that must eventually be spent. So unemployment, 00:12:07.580 --> 00:12:10.220 in their view, was just temporary or voluntary. 00:12:10.539 --> 00:12:13.120 And the catastrophe of the 1930s with idle factories 00:12:13.120 --> 00:12:15.700 and millions of people desperate for work showed 00:12:15.700 --> 00:12:19.139 that theory was just deeply flawed in practice. 00:12:19.340 --> 00:12:21.299 It showed it only applied in a special case, 00:12:21.500 --> 00:12:23.840 the case of an economy already at full employment. 00:12:24.350 --> 00:12:26.210 Keynes said his theory was the general theory 00:12:26.210 --> 00:12:28.610 because it applied to all situations. And he 00:12:28.610 --> 00:12:30.570 countered Say's law with a couple of interconnected 00:12:30.570 --> 00:12:33.350 concepts. The first one being price stickiness. 00:12:33.629 --> 00:12:36.870 Yes. Classical theory required perfect flexibility. 00:12:37.389 --> 00:12:40.529 If there is a slump, wages should fall, making 00:12:40.529 --> 00:12:43.289 labor cheaper so firms hire more and you get 00:12:43.289 --> 00:12:45.309 back to full employment. But that doesn't happen 00:12:45.309 --> 00:12:48.149 in the real world. Not really. Keynes pointed 00:12:48.149 --> 00:12:51.379 to what he called nominal wage rigidity. Workers 00:12:51.379 --> 00:12:53.960 just refuse to accept lower money wages. And 00:12:53.960 --> 00:12:56.820 why is that? Why are workers so resistant to 00:12:56.820 --> 00:12:59.419 wage cuts, even if economists say it's rational? 00:12:59.950 --> 00:13:01.950 It's a mix of things. You have institutional 00:13:01.950 --> 00:13:04.389 factors like union contracts and minimum wage 00:13:04.389 --> 00:13:06.570 laws, but there are also psychological factors. 00:13:06.769 --> 00:13:08.370 I mean, no one wants to be the first to take 00:13:08.370 --> 00:13:10.169 a pay cut, right? Of course not. It's terrible 00:13:10.169 --> 00:13:13.129 for morale. Exactly. It damages morale, often 00:13:13.129 --> 00:13:15.309 reducing productivity more than the money saved. 00:13:15.669 --> 00:13:18.350 So this stickiness meant the price mechanism 00:13:18.350 --> 00:13:21.090 was too slow and it allowed the economy to settle 00:13:21.090 --> 00:13:24.029 into a stable but very damaging low employment 00:13:24.029 --> 00:13:26.750 equilibrium. So the economy gets stuck in a trap. 00:13:27.240 --> 00:13:29.740 And the government's role is to be the external 00:13:29.740 --> 00:13:32.840 force that breaks that trap. Precisely. Which 00:13:32.840 --> 00:13:35.860 leads to his second critical concept. Aggregate 00:13:35.860 --> 00:13:39.460 demand, or AD canes, argued that AD, the total 00:13:39.460 --> 00:13:42.179 planned spending in the economy, is the variable 00:13:42.179 --> 00:13:45.419 that matters most. To get people back to work, 00:13:45.480 --> 00:13:48.080 you have to increase total expenditure first. 00:13:48.759 --> 00:13:50.980 So it wasn't a shortage of goods. It was a shortage 00:13:50.980 --> 00:13:54.279 of willing buyers, a failure of demand. A failure 00:13:54.279 --> 00:13:57.740 of effective demand. If confidence is low, businesses 00:13:57.740 --> 00:14:00.259 won't invest and consumers will hoard their money, 00:14:00.320 --> 00:14:02.679 even if interest rates are zero. This is what 00:14:02.679 --> 00:14:05.279 we now call a liquidity trap, and it means traditional 00:14:05.279 --> 00:14:07.720 monetary policy becomes useless. So the government 00:14:07.720 --> 00:14:10.100 has to step in and spend directly. It has to. 00:14:10.139 --> 00:14:12.440 It must directly increase expenditure, either 00:14:12.440 --> 00:14:15.100 through public works or transfers, just to jumpstart 00:14:15.100 --> 00:14:17.179 the cycle. And this is where we get to the most 00:14:17.179 --> 00:14:20.799 famous and, I guess, most contentious part of 00:14:20.799 --> 00:14:23.759 Keynesian policy, the multiplier effect. The 00:14:23.759 --> 00:14:25.940 multiplier is the engine of the stimulus. It 00:14:25.940 --> 00:14:28.580 basically says that an initial injection of government 00:14:28.580 --> 00:14:30.960 spending will lead to a total increase in national 00:14:30.960 --> 00:14:33.399 income that is way bigger than that initial amount. 00:14:33.620 --> 00:14:35.299 OK, so walk me through the mechanics of that. 00:14:35.320 --> 00:14:37.289 How does it actually work? Let's use an example. 00:14:37.429 --> 00:14:39.710 Say the government spends 100 million pounds 00:14:39.710 --> 00:14:42.690 building new road. That money immediately becomes 00:14:42.690 --> 00:14:45.610 income for construction workers, suppliers, engineers. 00:14:45.970 --> 00:14:48.850 OK. Now, Keynes focused on what he called the 00:14:48.850 --> 00:14:52.230 marginal propensity to consume or MPC. It's just 00:14:52.230 --> 00:14:54.889 the fraction of any new income that people choose 00:14:54.889 --> 00:14:57.330 to spend rather than save. Right. So the MPC 00:14:57.330 --> 00:15:00.590 is, say, 80 percent. That means people spend 00:15:00.590 --> 00:15:03.590 80 pence of every new pound they get. Correct. 00:15:03.710 --> 00:15:05.970 So the construction workers spent 80 percent 00:15:05.970 --> 00:15:08.470 of their new hundred million. That's 80 million 00:15:08.470 --> 00:15:12.710 pounds on groceries, cars, rent. And that 80 00:15:12.710 --> 00:15:15.029 million pounds becomes new income for grocers 00:15:15.029 --> 00:15:17.190 and car dealers and landlords. And then they 00:15:17.190 --> 00:15:19.179 spend 80 percent of that. And the cycle continues. 00:15:19.419 --> 00:15:21.639 It continues. The spending flows through the 00:15:21.639 --> 00:15:24.100 economy, getting smaller each time, but adding 00:15:24.100 --> 00:15:27.559 up very quickly. So an initial 100 million pound 00:15:27.559 --> 00:15:29.759 expenditure doesn't just generate 100 million 00:15:29.759 --> 00:15:32.460 pounds of activity, but potentially three, four 00:15:32.460 --> 00:15:35.059 or 500 million. It's like throwing a pebble in 00:15:35.059 --> 00:15:37.519 a pond. It's an engine starter for an economy 00:15:37.519 --> 00:15:40.840 stuck in neutral. He had that great line with 00:15:40.840 --> 00:15:44.259 men and plants unemployed. It is ridiculous to 00:15:44.259 --> 00:15:46.440 say that we cannot afford these new developments. 00:15:46.720 --> 00:15:49.879 Yes. It is precisely with these plants and these 00:15:49.879 --> 00:15:52.539 men that we shall afford them. The spending pays 00:15:52.539 --> 00:15:55.440 for itself many times over. But this sounds a 00:15:55.440 --> 00:15:58.480 little bit like a perpetual motion machine. What 00:15:58.480 --> 00:16:00.720 was the strongest argument against this idea 00:16:00.720 --> 00:16:03.639 back in 1936? The main argument was something 00:16:03.639 --> 00:16:05.779 called crowding out. The idea was that if the 00:16:05.779 --> 00:16:08.000 government borrows money, it drives up interest 00:16:08.000 --> 00:16:10.139 rates, which makes it more expensive for private 00:16:10.139 --> 00:16:12.740 businesses to borrow. So you just cancel out 00:16:12.740 --> 00:16:14.860 the stimulus effect. The famous crowding out 00:16:14.860 --> 00:16:17.899 argument. Still hear that today? We do. But Keynes 00:16:17.899 --> 00:16:20.600 countered that in a depression. When confidence 00:16:20.600 --> 00:16:23.559 is low and nobody wants to borrow anyway, crowding 00:16:23.559 --> 00:16:26.019 out is impossible. If the government is borrowing 00:16:26.019 --> 00:16:28.700 idle savings, it's just putting money to use 00:16:28.700 --> 00:16:30.559 that would otherwise be stuffed under a mattress. 00:16:31.129 --> 00:16:34.149 And while the orthodox economists were hostile 00:16:34.149 --> 00:16:36.970 at first, his ideas started to gain support, 00:16:37.210 --> 00:16:39.389 especially in the U .S., laying the groundwork 00:16:39.389 --> 00:16:42.629 for the New Deal and, crucially, for the massive 00:16:42.629 --> 00:16:45.350 government spending of World War II. Let's move 00:16:45.350 --> 00:16:49.330 to Section 3, the global architect trade, imbalances, 00:16:49.330 --> 00:16:52.750 and Bretton Woods. This is where Keynes shows 00:16:52.750 --> 00:16:55.789 a really surprising intellectual shift, pivoting 00:16:55.789 --> 00:16:57.909 away from a pillar of classical thought he once 00:16:57.909 --> 00:17:00.889 believed in. free trade. This turning point was 00:17:00.889 --> 00:17:04.509 definitive and it happened between 1929 and 1931. 00:17:04.910 --> 00:17:07.029 I mean, Keynes was a student of Alfred Marshall, 00:17:07.089 --> 00:17:10.450 who was an absolute free trader. But the inflexibility 00:17:10.450 --> 00:17:12.990 of the British economy convinced him that protectionist 00:17:12.990 --> 00:17:15.170 measures were necessary, especially during a 00:17:15.170 --> 00:17:17.730 severe downturn. So for him, domestic full employment 00:17:17.730 --> 00:17:19.690 was more important than the ideal of free trade. 00:17:19.829 --> 00:17:22.430 It trumped it. He stated flatly that economic 00:17:22.430 --> 00:17:24.789 recovery is only fully effective if a country 00:17:24.789 --> 00:17:27.289 eliminates its trade deficit. Otherwise, stimulus 00:17:27.289 --> 00:17:28.950 spending is just leaking out of the country, 00:17:29.130 --> 00:17:31.190 you're paying for foreign goods and creating 00:17:31.190 --> 00:17:33.529 foreign jobs. Which led him to actually advocate 00:17:33.529 --> 00:17:37.069 for tariffs. In detail. In late 1930, he proposed 00:17:37.069 --> 00:17:40.890 a uniform tariff of 10 % on all imports, later 00:17:40.890 --> 00:17:44.630 suggesting 15 % on manufactured goods. He was 00:17:44.630 --> 00:17:46.569 fundamentally criticizing the whole theoretical 00:17:46.569 --> 00:17:49.650 basis for global specialization, Ricardian comparative 00:17:49.650 --> 00:17:52.210 advantage. Okay, let's just clarify what he was 00:17:52.210 --> 00:17:54.319 rejecting there. What is recording comparative 00:17:54.319 --> 00:17:57.359 advantage in simple terms? In simple terms, it's 00:17:57.359 --> 00:17:59.339 the idea that every country should specialize 00:17:59.339 --> 00:18:01.880 in producing whatever it's relatively best at, 00:18:01.980 --> 00:18:04.259 even if it's not the absolute best at anything. 00:18:04.539 --> 00:18:07.519 The theory is that this maximizes global efficiency 00:18:07.519 --> 00:18:10.039 and wealth. But it relies on some pretty big 00:18:10.039 --> 00:18:11.900 assumptions, right? Like frictionless markets 00:18:11.900 --> 00:18:14.420 and mobile labor. Huge assumptions. And he argued 00:18:14.420 --> 00:18:16.720 those conditions just don't exist in reality, 00:18:17.000 --> 00:18:19.460 especially during a depression. If a domestic 00:18:19.460 --> 00:18:21.680 industry shuts down because of foreign competition, 00:18:22.039 --> 00:18:24.740 the unemployed workers don't just magically migrate 00:18:24.740 --> 00:18:27.720 to a new, more efficient job. No, they face real 00:18:27.720 --> 00:18:31.140 costs. Retraining, moving, searching. Unemployment 00:18:31.140 --> 00:18:34.259 becomes chronic. Exactly. So this supposed gain 00:18:34.259 --> 00:18:36.819 from specialization often disappears when you 00:18:36.819 --> 00:18:39.309 factor in the very real social costs of long 00:18:39.309 --> 00:18:41.579 -term unemployment. He actually started defending 00:18:41.579 --> 00:18:44.640 the idea of having a national diversity of production. 00:18:44.880 --> 00:18:47.900 He did. It's captured perfectly in his 1933 article, 00:18:48.140 --> 00:18:51.259 National Self -Sufficiency. And this essay reads 00:18:51.259 --> 00:18:53.859 almost like an anti -globalization manifesto, 00:18:53.859 --> 00:18:56.839 especially coming from him. He said, I sympathize 00:18:56.839 --> 00:19:00.700 with those who would minimize economic entanglement 00:19:00.700 --> 00:19:04.339 among nations, but let goods be homespun whenever 00:19:04.339 --> 00:19:07.160 it is reasonably and conveniently possible. And 00:19:07.160 --> 00:19:10.180 above all, let finance be primarily. national. 00:19:10.420 --> 00:19:12.359 He also believed that trade wasn't necessarily 00:19:12.359 --> 00:19:14.380 a force for peace, that it could lead to conflict. 00:19:14.599 --> 00:19:17.240 He fundamentally disagreed with that idea. He 00:19:17.240 --> 00:19:19.900 concluded that with modern technology, most mass 00:19:19.900 --> 00:19:21.859 production could be done efficiently in most 00:19:21.859 --> 00:19:24.359 countries. So the economic loss from favoring 00:19:24.359 --> 00:19:26.859 domestic production was minimal, and it was easily 00:19:26.859 --> 00:19:29.019 outweighed by the political and social advantages 00:19:29.019 --> 00:19:31.579 of self -sufficiency and full employment. And 00:19:31.579 --> 00:19:34.759 this whole mindset, this protectionist anti -imbalance 00:19:34.759 --> 00:19:37.680 mindset, was the foundation for his vision for 00:19:37.680 --> 00:19:39.819 the post -war world. which he took to Bretton 00:19:39.819 --> 00:19:42.640 Woods in 1944. He led the British delegation 00:19:42.640 --> 00:19:45.900 and he was advocating for his comprehensive Keynes 00:19:45.900 --> 00:19:48.660 plan for an international clearing union or ICU. 00:19:49.240 --> 00:19:52.420 His goal wasn't just reconstruction. It was to 00:19:52.420 --> 00:19:55.019 create a system that would prevent the massive 00:19:55.019 --> 00:19:57.880 destabilizing trade imbalances that had caused 00:19:57.880 --> 00:20:00.880 so many problems before the war. And the famous 00:20:00.880 --> 00:20:03.640 banker currency was central to this plan. The 00:20:03.640 --> 00:20:06.359 banker was the unit of account for this ICU, 00:20:06.559 --> 00:20:09.180 a common world currency to manage trade. The 00:20:09.180 --> 00:20:11.670 ICU would essentially be. a global central bank 00:20:11.670 --> 00:20:14.309 and all international transactions would be cleared 00:20:14.309 --> 00:20:16.950 through this system. But the truly radical part 00:20:16.950 --> 00:20:20.390 was the idea of equitable adjustment, forcing 00:20:20.390 --> 00:20:22.849 the creditor nations to share the burden of fixing 00:20:22.849 --> 00:20:25.369 imbalances. This is so critical. In the existing 00:20:25.369 --> 00:20:27.970 system, only debtor nations, the ones running 00:20:27.970 --> 00:20:30.410 deficits like Britain, were forced to adjust 00:20:30.410 --> 00:20:33.299 through painful austerity. Keynes argued that 00:20:33.299 --> 00:20:35.460 the creditor nations, the ones with huge surpluses 00:20:35.460 --> 00:20:38.000 like the U .S., were just as responsible for 00:20:38.000 --> 00:20:40.200 global instability because their surpluses were 00:20:40.200 --> 00:20:42.480 destroying aggregate demand worldwide. So he 00:20:42.480 --> 00:20:44.559 wanted to penalize saving on a global scale. 00:20:44.740 --> 00:20:47.059 How would that have worked? Well, the ICU would 00:20:47.059 --> 00:20:50.059 apply an interest charge, a penalty on persistently 00:20:50.059 --> 00:20:53.799 large surplus accounts. If a country ran a massive 00:20:53.799 --> 00:20:55.940 surplus and just sat on its banker reserves, 00:20:56.299 --> 00:20:58.980 they would start losing capital. This would force 00:20:58.980 --> 00:21:02.180 them to either buy more imports or invest their 00:21:02.180 --> 00:21:04.559 capital internationally. It's a brilliant, elegant 00:21:04.559 --> 00:21:07.400 solution. It automatically generates demand and 00:21:07.400 --> 00:21:09.380 keeps the global economy in balance. It was. 00:21:09.539 --> 00:21:12.420 But the political reality was that the U .S., 00:21:12.420 --> 00:21:14.740 as the world's dominant creditor nation, was 00:21:14.740 --> 00:21:17.359 never going to agree to being penalized for its 00:21:17.359 --> 00:21:20.160 success. And that's the tragedy. The American 00:21:20.160 --> 00:21:23.079 delegation, led by Harry Dexter White, pretty 00:21:23.079 --> 00:21:26.039 much overruled the Keynes plan. Keynes was forced 00:21:26.039 --> 00:21:28.319 into a compromise that established the IMF and 00:21:28.319 --> 00:21:30.500 the World Bank. But critically, the adjustment 00:21:30.500 --> 00:21:33.119 burden fell almost entirely on the deficit countries. 00:21:33.319 --> 00:21:35.759 The U .S. dollar became dominant. And yet economists 00:21:35.759 --> 00:21:37.940 still revisit that negotiation all the time. 00:21:38.000 --> 00:21:40.859 All the time. Jay Bradford DeLong is just one 00:21:40.859 --> 00:21:43.700 of many who've argued that on almost every major 00:21:43.700 --> 00:21:46.299 point where Keynes was overruled by the Americans, 00:21:46.559 --> 00:21:49.380 especially on penalizing creditors and the need 00:21:49.380 --> 00:21:51.980 for capital controls, he was later proven correct. 00:21:52.680 --> 00:21:55.700 The instability caused by massive, unregulated 00:21:55.700 --> 00:21:58.299 global capital flows, which Keynes wanted to 00:21:58.299 --> 00:22:00.700 restrict, contributed directly to the breakdown 00:22:00.700 --> 00:22:02.920 of the system in the 70s and the later crises. 00:22:03.380 --> 00:22:05.940 Despite the compromises, though, Keynes still 00:22:05.940 --> 00:22:08.240 felt that getting the IMF and World Bank established 00:22:08.240 --> 00:22:11.160 was a massive step forward. He said that if the 00:22:11.160 --> 00:22:13.339 institutions remain true to their founding principles, 00:22:13.680 --> 00:22:15.740 the brotherhood of man will have become more 00:22:15.740 --> 00:22:18.420 than a phrase. And now we can chart the impact 00:22:18.420 --> 00:22:21.059 of his life's work in Section 4. The cycles of 00:22:21.059 --> 00:22:23.579 influence, ascendancy, stagflation, and resurgence. 00:22:23.920 --> 00:22:26.619 Because the moment World War II began, Keynesian 00:22:26.619 --> 00:22:28.839 ideas moved from being this controversial theory 00:22:28.839 --> 00:22:31.519 to just established practice. World War II was, 00:22:31.799 --> 00:22:34.279 in the words of John Kenneth Galbraith, the perfect 00:22:34.279 --> 00:22:37.900 demonstration of Keynesian ideas. The massive 00:22:37.900 --> 00:22:40.140 government borrowing and spending needed for 00:22:40.140 --> 00:22:42.180 the war effort instantly wiped out unemployment. 00:22:42.660 --> 00:22:44.900 You couldn't have had a better real -world lab 00:22:44.900 --> 00:22:48.180 to prove his point. And after the war? Keynesianism 00:22:48.180 --> 00:22:51.000 became the consensus across the developed world. 00:22:51.140 --> 00:22:55.099 For about two decades, from 1950 to 1970, Keynesian 00:22:55.099 --> 00:22:57.720 policies were standard. Governments actively 00:22:57.720 --> 00:23:00.440 managed the business cycle. This period is often 00:23:00.440 --> 00:23:03.460 called the golden age of capitalism. High growth, 00:23:03.700 --> 00:23:06.859 low unemployment, or rising middle class. The 00:23:06.859 --> 00:23:09.539 consensus was so strong that Time magazine declared 00:23:09.539 --> 00:23:14.200 in 1965, we're all Keynesians now. Exactly. And 00:23:14.200 --> 00:23:16.640 this consensus was built in part on a simplified 00:23:16.640 --> 00:23:18.880 understanding of the tradeoff between inflation 00:23:18.880 --> 00:23:21.440 and unemployment, often visualized through the 00:23:21.440 --> 00:23:23.920 Phillips curve. The idea that there's a reliable 00:23:23.920 --> 00:23:26.140 inverse relationship. To get lower unemployment, 00:23:26.420 --> 00:23:28.019 you have to accept a little more inflation and 00:23:28.019 --> 00:23:30.059 vice versa. Right. Governments thought they could 00:23:30.059 --> 00:23:31.640 just pick their spot on the curve. They could 00:23:31.640 --> 00:23:34.140 fine tune the economy. But that simplification 00:23:34.140 --> 00:23:36.359 was the very thing that made the whole consensus 00:23:36.359 --> 00:23:39.849 vulnerable when the 1970s hit. The arrival of 00:23:39.849 --> 00:23:42.710 stagflation, the simultaneous presence of high 00:23:42.710 --> 00:23:45.829 inflation and high unemployment, just shattered 00:23:45.829 --> 00:23:49.069 that confidence. The simple Phillips curve suggested 00:23:49.069 --> 00:23:52.009 this shouldn't happen. But it did, especially 00:23:52.009 --> 00:23:55.569 after the oil price shocks of 1973. And stagflation 00:23:55.569 --> 00:23:58.230 provided the opening for the intellectual counterrevolution 00:23:58.230 --> 00:24:01.089 led by the monetarists. Milton Friedman was their 00:24:01.089 --> 00:24:03.869 most formidable voice, and he had predicted stagflation 00:24:03.869 --> 00:24:07.549 as early as 1968. He argued that sustained Keynesian 00:24:07.549 --> 00:24:09.549 expansionary policies could only temporarily 00:24:09.549 --> 00:24:12.809 boost employment. In the long run, he said, they 00:24:12.809 --> 00:24:15.009 only lead to higher inflation without affecting 00:24:15.009 --> 00:24:16.990 real output. So the government could influence 00:24:16.990 --> 00:24:19.049 the dollar price of things, but not the actual 00:24:19.049 --> 00:24:21.559 number of jobs or cars. has produced. Precisely. 00:24:21.700 --> 00:24:23.640 Friedman argued that workers would eventually 00:24:23.640 --> 00:24:26.339 catch on to the inflation, demand higher wages, 00:24:26.519 --> 00:24:28.900 and push the economy back to its natural rate 00:24:28.900 --> 00:24:31.680 of unemployment, but now at a much higher inflation 00:24:31.680 --> 00:24:34.359 rate. This critique, combined with the chaos 00:24:34.359 --> 00:24:37.259 of the 70s, successfully undermined a Keynesian 00:24:37.259 --> 00:24:39.740 consensus. And the international structure he'd 00:24:39.740 --> 00:24:42.740 helped build also began to fray. favoring the 00:24:42.740 --> 00:24:45.640 deregulated, globalized model he had warned against. 00:24:45.859 --> 00:24:48.420 That's a key point. The Bretton Woods system 00:24:48.420 --> 00:24:50.759 of fixed exchange rates began breaking down. 00:24:50.920 --> 00:24:54.299 In 1971, the US suspended the convertibility 00:24:54.299 --> 00:24:56.960 of the dollar to gold, allowing capital to flow 00:24:56.960 --> 00:25:00.650 freely across borders. By the late 70s and 80s, 00:25:00.650 --> 00:25:03.130 the UK and US had officially moved away from 00:25:03.130 --> 00:25:05.670 Keynesianism. So his principles entered this 00:25:05.670 --> 00:25:08.930 period of relative dormancy in the mainstream 00:25:08.930 --> 00:25:12.009 until the next major systemic crisis. Which was 00:25:12.009 --> 00:25:15.630 the 2008 global financial crisis. The sheer magnitude 00:25:15.630 --> 00:25:18.369 of that demand shock sparked an immediate and 00:25:18.369 --> 00:25:21.450 massive Keynesian resurgence. The policy change 00:25:21.450 --> 00:25:24.029 was stunningly fast. It was. Governments worldwide, 00:25:24.329 --> 00:25:27.190 led by the US and UK, embraced fiscal stimulus 00:25:27.190 --> 00:25:29.750 and massive bailout. to prevent demand from collapsing 00:25:29.750 --> 00:25:32.349 entirely. The Financial Times called it a stunning 00:25:32.349 --> 00:25:34.289 reversal of the orthodoxy of the past several 00:25:34.289 --> 00:25:36.670 decades. And even his radical Bretton Woods ideas 00:25:36.670 --> 00:25:39.490 were given a second look. They were. In 2009, 00:25:39.730 --> 00:25:41.990 the governor of the People's Bank of China, Zhu 00:25:41.990 --> 00:25:45.049 Xiaochuan, publicly argued for adopting Kean's 00:25:45.049 --> 00:25:48.349 original vision, a centrally managed global reserve 00:25:48.349 --> 00:25:52.150 currency, the Bancor idea, implemented via IMF 00:25:52.150 --> 00:25:55.230 special drawing rights. So his ideas were back 00:25:55.230 --> 00:25:57.200 on the table. but they had evolved into something 00:25:57.200 --> 00:26:00.240 more intellectually robust than the simple models 00:26:00.240 --> 00:26:03.480 of the 1960s. They had evolved into New Keynesian 00:26:03.480 --> 00:26:06.500 economics. This school of thought retained the 00:26:06.500 --> 00:26:09.259 core policy implication that government stabilization 00:26:09.259 --> 00:26:12.299 is necessary, but it rebuilt the foundation to 00:26:12.299 --> 00:26:14.880 address the monetarist critiques. What was the 00:26:14.880 --> 00:26:17.039 key difference between the New Keynesians and 00:26:17.039 --> 00:26:19.289 the old model? Well, New Keynesianism accepted 00:26:19.289 --> 00:26:21.710 some tenets of the New Classical School, especially 00:26:21.710 --> 00:26:24.269 the idea that people operate with rational expectations. 00:26:24.750 --> 00:26:27.569 But they combine this rationality with an acknowledgement 00:26:27.569 --> 00:26:30.269 of market failures, specifically the existence 00:26:30.269 --> 00:26:33.809 of sticky prices and sticky wages. So people 00:26:33.809 --> 00:26:35.789 are rational, but the real world of contracts 00:26:35.789 --> 00:26:38.230 and morale prevents prices and wages from adjusting 00:26:38.230 --> 00:26:41.039 instantly. Exactly. And because markets adjust 00:26:41.039 --> 00:26:44.000 slowly due to these frictions, a rational government 00:26:44.000 --> 00:26:46.220 stabilization policy can lead to a much more 00:26:46.220 --> 00:26:48.619 efficient outcome than a pure hands -off approach. 00:26:48.880 --> 00:26:51.660 It can prevent those catastrophic low employment 00:26:51.660 --> 00:26:54.160 equilibriums that Keynes identified 80 years 00:26:54.160 --> 00:26:56.980 before. This deep dive would just be incomplete 00:26:56.980 --> 00:26:59.819 without getting into Section 5, the philosopher, 00:27:00.160 --> 00:27:03.740 investor, and contradictory man. For a man who 00:27:03.740 --> 00:27:06.240 focused on the cold logic of macroeconomics, 00:27:06.339 --> 00:27:09.019 his personal life was just marked by this passionate 00:27:09.019 --> 00:27:12.059 philosophy, cultural enthusiasm, and profound 00:27:12.059 --> 00:27:14.279 contradictions. He was a genuine Renaissance 00:27:14.279 --> 00:27:17.099 man, a central figure in the famed Bloomsbury 00:27:17.099 --> 00:27:19.519 group of intellectuals and artists, a group that 00:27:19.519 --> 00:27:22.099 explicitly rejected rigid Victorian morality. 00:27:22.539 --> 00:27:24.259 And how did his time in the Bloomsbury group 00:27:24.259 --> 00:27:26.859 influence his worldview? It provided the philosophical 00:27:26.859 --> 00:27:30.119 ballast for his iconoclasm. He was deeply influenced 00:27:30.119 --> 00:27:33.140 by G .E. Moore's ethical philosophy, which prized 00:27:33.140 --> 00:27:35.319 the pleasures of human intercourse and the enjoyment 00:27:35.319 --> 00:27:37.700 of beautiful objects. This wasn't just a hobby. 00:27:37.779 --> 00:27:40.059 It was his moral framework. So that commitment 00:27:40.059 --> 00:27:43.119 to aesthetic and intellectual honesty gave him 00:27:43.119 --> 00:27:46.140 the confidence to reject economic dogma, just 00:27:46.140 --> 00:27:49.099 like he rejected social dogma. I think so. And 00:27:49.099 --> 00:27:51.599 he translated this commitment into massive public 00:27:51.599 --> 00:27:53.920 service for the arts. He personally supported 00:27:53.920 --> 00:27:56.140 the Cambridge Arts Theater. During World War 00:27:56.140 --> 00:27:58.359 II, he helped secure vital government funding. 00:27:58.410 --> 00:28:00.670 for institutions like the Royal Opera House. 00:28:01.009 --> 00:28:03.670 And most critically, he became the founding chairman 00:28:03.670 --> 00:28:06.230 of the Arts Council of Great Britain in 1946. 00:28:07.009 --> 00:28:09.569 He also collected fine art Cezanne, Picasso, 00:28:09.890 --> 00:28:12.569 and historic documents. Yes. His passion for 00:28:12.569 --> 00:28:14.970 history was obvious in his acquisition of Isaac 00:28:14.970 --> 00:28:17.930 Newton's papers. Based on those documents, Keynes 00:28:17.930 --> 00:28:20.390 wrote a famous essay describing Newton not as 00:28:20.390 --> 00:28:22.089 the first of the Enlightenment thinkers, but 00:28:22.089 --> 00:28:25.509 as the last of the magicians. It shows Keynes' 00:28:25.609 --> 00:28:28.069 own fascination with that transition from mystical 00:28:28.069 --> 00:28:30.109 to rational thought. Now let's talk about his 00:28:30.109 --> 00:28:32.029 personal life, which was marked by a great deal 00:28:32.029 --> 00:28:34.910 of openness about his sexuality, which was later 00:28:34.910 --> 00:28:38.630 weaponized by his political opponents. In his 00:28:38.630 --> 00:28:41.009 early life, within the Bloomsbury circle, he 00:28:41.009 --> 00:28:44.470 was openly homosexual. He kept meticulous diaries 00:28:44.470 --> 00:28:47.410 about his encounters. His supreme male love was 00:28:47.410 --> 00:28:50.369 the artist Duncan Grant. And how did his opponents 00:28:50.369 --> 00:28:52.809 use this against him? In a deeply unpleasant 00:28:52.809 --> 00:28:56.089 way. Critics of his lenient stance towards Germany 00:28:56.089 --> 00:28:58.690 after the war would suggest his views were suspect, 00:28:58.990 --> 00:29:01.269 distorted by his personal feelings for a German 00:29:01.269 --> 00:29:04.430 negotiator. And later, his childlessness and 00:29:04.430 --> 00:29:06.750 early life were used to attack his economic theories, 00:29:07.009 --> 00:29:09.309 suggesting they lacked the long -term vision 00:29:09.309 --> 00:29:11.549 that only a family could provide. But despite 00:29:11.549 --> 00:29:13.950 identifying as bisexual, he did later marry. 00:29:14.589 --> 00:29:18.809 Yes. In 1925, he married Lidia Lopakova, the 00:29:18.809 --> 00:29:21.440 celebrated Russian ballerina. It was a union 00:29:21.440 --> 00:29:23.240 that was initially surprising to his friends, 00:29:23.339 --> 00:29:25.799 but they were exceptionally happy. It was described 00:29:25.799 --> 00:29:28.619 as a marriage of beauty and brains, and it provided 00:29:28.619 --> 00:29:31.599 him immense stability and joy. OK, let's pivot 00:29:31.599 --> 00:29:33.680 to his other great contradiction. His phenomenal 00:29:33.680 --> 00:29:36.160 success as a private investor, the inventor of 00:29:36.160 --> 00:29:38.930 macroeconomics, was a master of the market. It's 00:29:38.930 --> 00:29:41.809 truly fascinating. Many great economic theorists 00:29:41.809 --> 00:29:44.690 are terrible investors. Keynes was not. He made 00:29:44.690 --> 00:29:47.529 one huge mistake, nearly getting wiped out in 00:29:47.529 --> 00:29:50.549 the 1929 crash. An error he admitted was because 00:29:50.549 --> 00:29:52.930 he was focused too much on the big picture and 00:29:52.930 --> 00:29:56.210 not enough on market psychology. But he recovered 00:29:56.210 --> 00:29:59.190 quickly. Very quickly. By the time of his death 00:29:59.190 --> 00:30:01.829 in 1946, his net worth was equivalent to about 00:30:01.829 --> 00:30:05.049 23 million pounds today. And he did this while 00:30:05.049 --> 00:30:07.630 refusing to sell into a falling market, which 00:30:07.630 --> 00:30:10.170 he considered antisocial. And he managed the 00:30:10.170 --> 00:30:12.950 King's College Endowment, right? For decades. 00:30:13.190 --> 00:30:16.369 He radically shifted its strategy away from conservative 00:30:16.369 --> 00:30:19.869 assets like land and bonds and into stocks, particularly 00:30:19.869 --> 00:30:21.930 small and medium -sized companies with strong 00:30:21.930 --> 00:30:24.130 growth. So he wasn't a trader. He was a long 00:30:24.130 --> 00:30:25.970 -term strategist. Absolutely. He's seen today 00:30:25.970 --> 00:30:28.309 as an early pioneer of value investing, buying 00:30:28.309 --> 00:30:30.890 solid businesses for the long haul, and ignoring 00:30:30.890 --> 00:30:33.910 the daily noise. It shows that while he questioned 00:30:33.910 --> 00:30:36.309 the stability of the market, he certainly believed 00:30:36.309 --> 00:30:38.910 in its underlying dynamism. But we have to address 00:30:38.910 --> 00:30:41.990 the most jarring contradiction of all, his social 00:30:41.990 --> 00:30:44.809 views on eugenics. Yes. And this is a fact that 00:30:44.809 --> 00:30:47.390 requires careful contextualization. Keynes was 00:30:47.390 --> 00:30:49.869 a lifelong proponent of eugenics, which today 00:30:49.869 --> 00:30:52.670 we rightly view with horror. But in the early 00:30:52.670 --> 00:30:55.930 20th century, this was a mainstream, though highly 00:30:55.930 --> 00:30:58.930 misguided view held by many progressive intellectuals 00:30:58.930 --> 00:31:01.069 and scientists across the political spectrum. 00:31:01.230 --> 00:31:03.069 And he wasn't just a passive believer. He was 00:31:03.069 --> 00:31:05.650 actively involved. He was. He served as a director 00:31:05.650 --> 00:31:08.690 of the British Eugenics Society from 1937 to 00:31:08.690 --> 00:31:12.849 1944. And as late as 1946, he called eugenics 00:31:12.880 --> 00:31:16.160 the most important branch of sociology which 00:31:16.160 --> 00:31:19.240 exists. It's a disturbing intellectual blind 00:31:19.240 --> 00:31:21.420 spot for someone so brilliant. It is. It shows 00:31:21.420 --> 00:31:23.680 a highly confident intellectual applying that 00:31:23.680 --> 00:31:26.039 same rationalist planning impulse, the one that 00:31:26.039 --> 00:31:28.279 sought to manage the economy, to the realm of 00:31:28.279 --> 00:31:30.700 human biology, a movement with deeply troubling 00:31:30.700 --> 00:31:33.460 ethical consequences. And despite all these internal 00:31:33.460 --> 00:31:36.420 conflicts, his political stance was consistently 00:31:36.420 --> 00:31:39.269 anti -communist and liberal. Resolutely liberal. 00:31:39.549 --> 00:31:42.170 He refused to hold political office, believing 00:31:42.170 --> 00:31:44.190 he had more influence as an independent intellectual. 00:31:44.529 --> 00:31:48.029 He was vehemently anti -communist, dismissing 00:31:48.029 --> 00:31:51.170 Marxism as a misunderstanding of Ricardo. He 00:31:51.170 --> 00:31:53.930 really preferred the educated bourgeoisie, whom 00:31:53.930 --> 00:31:56.329 he believed carried the seeds of all human advancement 00:31:56.329 --> 00:31:59.529 over the boorish proletariat. What an extraordinary 00:31:59.529 --> 00:32:02.609 tapestry of intellects, contradiction, and impact. 00:32:03.210 --> 00:32:05.289 Let's bring this deep dive to a close with our 00:32:05.289 --> 00:32:08.180 outro. We've covered Keynes' immense legacy, 00:32:08.380 --> 00:32:11.160 haven't we? The rejection of the automatic full 00:32:11.160 --> 00:32:13.460 -implorement model. the invention of counter 00:32:13.460 --> 00:32:15.799 -cyclical government spending, and his effort 00:32:15.799 --> 00:32:18.099 to build a system of managed, regulated international 00:32:18.099 --> 00:32:21.119 trade. His core achievement really was providing 00:32:21.119 --> 00:32:23.519 a legitimate intellectual framework for government 00:32:23.519 --> 00:32:26.279 intervention in a crisis. He showed that laissez 00:32:26.279 --> 00:32:28.680 -faire capitalism, though powerful, was just 00:32:28.680 --> 00:32:30.920 prone to these catastrophic failures that only 00:32:30.920 --> 00:32:33.380 proactive public spending could solve. He died 00:32:33.380 --> 00:32:36.059 in 1946. He'd suffered a series of heart attacks, 00:32:36.319 --> 00:32:38.640 likely made worse by the exhausting post -war 00:32:38.640 --> 00:32:40.980 loan negotiations he undertook with the U .S., 00:32:40.980 --> 00:32:44.200 which he described as as absolute hell. He won 00:32:44.200 --> 00:32:46.579 the favorable loan terms for Britain, but at 00:32:46.579 --> 00:32:49.599 a severe personal cost. He did. And it's in this 00:32:49.599 --> 00:32:52.279 context of exhaustion, right near the end of 00:32:52.279 --> 00:32:55.700 his life, that we find what is maybe the final, 00:32:55.720 --> 00:32:58.680 most profound irony, the provocative thought 00:32:58.680 --> 00:33:01.700 we want to leave you with. Just before his death, 00:33:01.940 --> 00:33:04.019 Keynes was speaking to a colleague, Henry Clay, 00:33:04.299 --> 00:33:06.920 about the capitalist engine he'd spent two decades 00:33:06.920 --> 00:33:09.519 trying to fix. And he told Clay that he found 00:33:09.519 --> 00:33:12.519 himself More and more relying for a solution 00:33:12.519 --> 00:33:14.940 of our problems on the invisible hand, which 00:33:14.940 --> 00:33:17.500 I tried to eject from economic thinking 20 years 00:33:17.500 --> 00:33:21.220 ago. The invisible hand. That cornerstone of 00:33:21.220 --> 00:33:24.700 Adam Smith's classical theory. The ultimate symbol 00:33:24.700 --> 00:33:27.339 of the free market he had rejected. It's a stunning 00:33:27.339 --> 00:33:29.380 thing to say. It just raises the essential question. 00:33:29.799 --> 00:33:32.720 Did Keynes at the end confess some doubt about 00:33:32.720 --> 00:33:34.619 the ultimate efficacy of his own revolution? 00:33:35.000 --> 00:33:37.339 Or, or does this comment suggest something else? 00:33:37.740 --> 00:33:40.519 Maybe the ultimate utility of Keynesianism isn't 00:33:40.519 --> 00:33:43.000 in permanently replacing the market, but in serving 00:33:43.000 --> 00:33:46.339 as this sophisticated, necessary emergency brake. 00:33:46.480 --> 00:33:48.759 That he wasn't the enemy of capitalism. He was 00:33:48.759 --> 00:33:52.099 its most acute diagnostician. He knew the engine 00:33:52.099 --> 00:33:54.279 was fundamentally sound, but just inherently 00:33:54.279 --> 00:33:57.000 prone to these catastrophic failures of confidence. 00:33:57.640 --> 00:33:59.700 His final acknowledgement might have been the 00:33:59.700 --> 00:34:03.039 recognition that his entire life's work was dedicated 00:34:03.039 --> 00:34:05.880 to creating the tools to moderate that powerful, 00:34:06.059 --> 00:34:08.659 creative, but also destructive force of the capitalist 00:34:08.659 --> 00:34:11.579 engine to ensure it could survive its own worst 00:34:11.579 --> 00:34:14.519 tendencies. It wasn't about destruction. It was 00:34:14.519 --> 00:34:17.000 about stabilization. And that idea that the market 00:34:17.000 --> 00:34:19.300 needs an intelligent, rational mind acting as 00:34:19.300 --> 00:34:22.059 its engineer during a crisis is still the defining 00:34:22.059 --> 00:34:24.619 question of political economy today. And it's 00:34:24.619 --> 00:34:26.239 one that Keynes forces us all to answer.