Bad writing, confused thinking, pernicious policies.
I first encountered the name Keynes when reading a Time magazine article in around 1975 about West Germany’s chancellor Helmut Schmidt. As I recall, the article was a complimentary one, in which Schmidt was portrayed as an intellectual technocrat who favored the intellectual and technocratic economics of John Maynard Keynes. I got the impression that Keynesian economics was something advanced and new, a sophisticated modern theory to be used by sophisticated modern leaders who have the necessary intellectual power and humanitarian vision.
Over the years I would see his name crop up from time to time, usually as representing one pole in an economic debate that I didn’t really understand. I did not encounter a meaningful discussion of his ideas until I read Jane Jacobs’s excellent Cities and the Wealth of Nations in 1986, in which she examines, in chapter 1, how different economists throughout history have tried to account for the phenomenon of “stagflation,” or, in other words, economic decline. On page 16 she describes Keynes as “the most influential economist of this century,” but by page 27 she sends him off into history:
Keynes gloomily commented, as he observed the economic decline of Britain, that possibly an economy could develop structural flaws lying beyond help from his remedies: another way of saying that things can go wrong which his theory couldn’t account for.
Jacobs’s own book, which is no longer than Keynes’s, goes on to answer the question that stumped the earlier economists, including Keynes. It makes an excellent work to compare with his, because it is a paragon of clarity of both thought and expression. By contrast, Keynes’s book is a paragon of obscurity and vagueness.
I had long thought that I should probably read Keynes as part of my general education, but I found myself reluctant to try him, both because of intimations of the difficulty of his writing, and because my own economic beliefs were leading me in the opposite direction to what his ideas seemed to be. When I came across a review on Amazon in which the reviewer recommended reading this book along with a critical analysis by Henry Hazlitt called The Failure of the New Economics: An Analysis of the Keynesian Fallacies, I immediately wanted to try it, and I bought both books at that moment.
I’d already read Hazlitt and liked him. His Economics In One Lesson is an excellent primer on the fundamentals of classical economics. Like Jane Jacobs, Henry Hazlitt thinks and writes with great clarity. Hazlitt, as a classical economist, is hostile to Keynes’s ideas, and his book is a debunking of the General Theory, but his analysis is logical, and he has performed a great service to the reader of Keynes in grappling with Keynes’s obscurities of expression to reveal their meaning and state them in plain terms.
Do you think I’m being hard on Keynes? Let’s try an example. Early in the book he sets out to define some terms. One of the terms he wants to define is “involuntary” unemployment (and the quotation marks are his). Here it is:
Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labor willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.
Got that? No? Go ahead: read it again. Take your time. It’s a definition, so in order to understand what follows in the book, you’ll have to grasp this.
Friends, I didn’t waste my time. As a sentence, it reminded me of another one penned by James Joyce in Finnegans Wake:
Utterly impossible as are all these events they are probably as like those which may have taken place as any others which never took person at all are ever likely to be.
The difference being that Joyce’s sentence is an impish joke, while presumably Keynes’s is not.
All right, obscurity aside, what is Keynes actually trying to say in his book? He’s saying that the cause of unemployment in an economy is a deficiency of consumption. Consumption is deficient because of people’s “liquidity-preference”that is, their desire to save some of their earnings. They are enticed to save partly because interest rates are so high, which in turn is due to the greed of moneylenders. The path to full employment is therefore to push down the interest rate to deter saving, and to boost consumption by all possible means: by preventing any drop in wage-rates on the one hand, and on the other by government’s stepping into the breach by doing plenty of spending of its own. If a government needs to run deficits and print money in order to spend, then well and good: these actions are not only harmless, they are positively beneficial and it is immoral to shrink from them. If these actions are undertaken vigorously enough, full employment will result and maximum prosperity will be achieved.
Keynes’s great economic discovery was that Aesop got things exactly backwards in his fable of The Ant and the Grasshopper. It was the ant who was doing things wrong, saving up for the winter. For while he was seeing to his own future, he was beggaring the rest of society by creating unemployment. The grasshopper’s poverty was due not to his own lack of industry, but to the ant’s “liquidity-preference”!
Keynes doesn’t actually mention Aesop’s fable in his bookI wish he had. But he does make repeated arch jabs at the “vice” of thrift. Not that he really blames people for trying to see to their own futures, but he laments the social damage that, according to him, results from their behavior. That damage has to be undone, or better, prevented, by a sagacious government. People are too foolish and too self-centered to do what is best for the common good.
But wealth is not created by consumption; it’s created by production. You don’t make anyone richer by consuming; you make everyone richer by producing. And while it’s true that producers produce for the sake of consumers, it’s at best a circuitous and backwards way of going about things to try to stimulate the process by pushing ever-larger amounts of printed money into consumers’ hands. Keynes puts the cart before the horse in this and in many other ways in the course of his book.
Oh yes, along the way there are some equations too. It’s not clear whether Keynes himself sees these as anything more than a metaphor or an illustrative device, and he even disparages the use of equations. Equations can only have scientific validity if the variables involved can be isolated and controlled for in an experiment. This is possible in physics, but not in economics. The mathematics in the book is halfhearted and it’s safe to skip; Keynes himself even suggests doing so.
In his last chapter Keynes briefly outlines the implications of his theory for policy-making. By and large, the investment of capital is to be taken over by the state. It will not be full-blown socialism, he says, because the state need not own the actual means of production. The state merely needs to decide where to allocate capital to the best overall social advantage. Yes, this will “mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.” Both the sentiment here and its manner of expression are worthy of Karl Marx. Keynesianism overall is Marxism Lite.
Keynes repeatedly talks about how to control human behavior, how to formulate public policies to neutralize people’s purblind selfishness and misguided actions. The citizens are the livestock on the great farm of the state. Their behavior needs to be channeled in ways that are productive and beneficiala task that falls to the wise farmer and his farmhands, who in effect form the ruling class. Keynes, by presumably being free of the vices he ascribes to others, is by implication a member of this ruling class. He is its theoretician.
But could Keynes be right after all? We’re finding out. Keynes’s ideas triumphed in the 20th century, and are being implemented with even more force today in the 21st. Governments all over the world and at all levels are running unprecedented deficits; paper currencies are being printed at record rates to try to “stimulate” sluggish, faltering economies; interest rates are at zero or, in real terms, below zero; great mountains of debt have been accumulated in an effort to “capitalize” ventures of all kinds, often failed ones. And yet unemployment is high and growing: it’s higher than our governments dare tell us. Maybe if we open the floodgates of money-printing still further, that will finally create “full employment.”
The experiment has failed. We are now just racing to the catastrophic endgame of Keynes’s program. I’m afraid that Keynes’s popularity arose not from any brilliance in his thought, which was disorderly and confused, or in his writing, which ditto, but from the fact that he told everyone what they wanted to hear. He told workers that the path to prosperity was in spending and consuming, and that their wages should never go down; and he told governments that their greatest virtue lay in spending, borrowing, and printing money. Let’s party!
We’ve been partying now pretty much since this book was published in 1936. We’ve been keeping the hangover at bay by taking more and more hair of the dog. But the terrible consequences are becoming manifest. Winter is coming, and we’re now a world of grasshoppers; soon we’ll be in search of those few ants who might have some provisions put by.