John Maynard Keynes: The destroyer of monies

IN HER COLUMN IN THIS morning's Herald Deborah Hill Cone confesses to "swotting up on John Maynard Keynes."

For Galt's sake woman, why!?

The pity of it is, I've heard plenty of other good folk who're taking their copy of Keynes' General Theory down from the shelf and dusting them off. 

Poor things.  They'd be better off using them to light this year's bonfire. 

He's not easy reading, and since his "theory" is responsible for so much of the economic destruction of the last seven decades, there's no pot of gold at the end of it either.

As he said himself,

"...the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."

When it comes to the appalling notion that it's a good idea to let government spending run wild and have government banks control and manipulate the money supply, Keynes is that very scribbler -- he still rules us from the grave -- and madmen in authority are still following him.

And haven't they done a good job!

From extending the depression of the 1930s (massive intervention by the state to prop up wage rates and inflate credit took unemployment from 17.4% in September 1931 to 17.4% in January 1938, and the Dow Jones from 140 to 121 over the same period) -- to stagflation in the 70s -- to Japan's "lost decade" of the 90s -- to the "contra-cyclical" claptrap being talked up today -- for too bloody long the "practical men" have been the slaves of this defunct economist, to the general deficit of us all.

Keynes isn't popular because his ideas ever worked.  He's popular because his prescription for every economic ill was inflation of the money supply, increased government spending and massive government intervention -- unsurprisingly this snake oil proved enormously popular with inflationists, interventionists and proponents of big government snake oil.

Who would have thunk it?

"To such people," as economist Ludwig von Mises pointed out,

"the Keynesian slogans appealed strongly. Here they found what they were looking for.
    If demand lags, then create "effective" demand by expanding credit!
    If there is unemployment, print more money!
    If you want to increase "the real national dividend of useful goods and service," then "dig holes in the ground paid for out of savings!"
    And, first of all, do not save, spend!"

Hardly the sort of thinking one would want to dust off.  Mises institute president Lew Rockwell puts Keynes "general theory" in plain words:

    "The underlying idea in the Keynesian tradition is to attribute the length of the recession to insufficient effective demand, so it is up to government to give the economy a kick-start, change public psychology, spend money on anything and everything, stop the money hoarding and start the buying, inflate a bit here and there, drive down interest rates, run deficits for a while, and fool the workers into thinking they’re getting raises though their real wages are falling.
    That's the traditional mix of policies that has been employed during every recession between the early thirties and the current day."

And just look at the results!  If deepening recessions and making them longer is your aim, then John Maynard Keynes is your man. If the most first lesson we learn that makes us adults is that there's no such thing as a free lunch, then Keynes is the man who made "free lunch" economics sound smart -- who said you could eat your consumption and and have your production too.  But you can't.

Economist  Henry Hazlitt points out that the very first lesson of economics is, or should be, that

"the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

Keynes advice instead --  lapped up by politicians for whom "the long term" is merely the next headline -- was not to worry about the long term at all.  "In the long run," he said, "we're all dead anyway."  In fact, in the long run, we're all paying for the follies of fools like him and his followers.

He claimed that credit expansion "performed the miracle...of turning a stone into bread."

He said that "To dig holes in the ground, paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services."

And in the in the preface to the German edition of his General Theory, published in Nazi Germany in 1936, Keynes boasted that his theory was "particularly well suited for totalitarian regimes" and lamented that it was "less fit for the conditions prevailing in freer societies":

"The theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire."

Milton Friedman is rightly castigated for helping out Augusto Pinochet, but compared to Keynes -- the ultimate totalitarian's shill -- Friedman was clearly a piker.  This is not the sort of chap you'd like to have around your cabinet table.

AS A CONTEMPORARY OF KEYNES, Hazlitt produced a thorough book-length destruction of Keynes' tax-and-spend-spend-spend system that any serious student of Keynes really has to address.  Hazlitt concluded, in a sentence, that "all Keynes's recommendations for practical policy are unsound." In his introduction Hazlitt summarised:

    "I have analyzed Keynes's General Theory ... theorem by theorem, chapter by chapter, and sometimes even sentence by sentence... In spite of the incredible reputation of the General Theory, I could not find in it a single important doctrine that was both true and original. What is original in the book is not true; and what is true is not original.
    "In fact, even most of the major errors in the book are not original, but can be found in a score of previous writers."

If you don't wish to take advantage of Hazlitt's brilliant book-length critique -- and with a PDF version so easily available you really should if you're serious -- if  you're short of time and still insist on dusting off some Keynes, then several much shorter introductions to the destructive aristocrat and his frenzied notions can be found at the Mises Institute site and elsewhere:

• Stones into Bread: The Keynesian Miracle - Ludwig von Mises
• The Church of Keynes - Garet Garrett
• Standing Keynesian GDP on Its Head: Saving Not Consumption as the Main Source of Spending - George Reisman
• Spotlight on Keynesian Economics - Murray Rothbard.
• Keynes the Man [pdf]- Murray Rothbard
• The Misesian Case against Keynes [pdf] - Hans Herman Hoppe
• Garrison versus Keynes - David Gordon

If you genuinely want to understand how governments destroy our money, and the nostrums that back up the pillage, then this is a great place to start.

PS: Since this has gone long enough anyway, I can't resist concluding by posting Ayn Rand's observation of the whole field of "macroeconomics" which Keynes came to dominate is, but which is in effect,

"a science starting in midstream: it observed that men were producing and trading, it took for granted that they had always done so and always would—it accepted this fact as the given, requiring no further consideration—and it addressed itself to the problem of how to devise the best way for the "community" to dispose of human effort."

No wonder some of the more intelligent macroeconomists are questioning their calling.

And finally, here's one of Ayn Rand's many observations of Keynes (this from a brilliant article analysing modern-day mainstream economics called 'Egalitarianism & Inflation'):

     [P]roject the mentality of a savage, who can grasp nothing but the concretes of the immediate moment, and who finds himself transported into the midst of a modern, industrial civilization. If he is an intelligent savage, he will acquire a smattering of knowledge, but there are two concepts he will not be able to grasp: "credit" and "market."
    He observes that people get food, clothes, and all sorts of objects simply by presenting pieces of paper called checks—and he observes that skyscrapers and gigantic factories spring out of the ground at the command of very rich men, whose bookkeepers keep switching magic figures from the ledgers of one to those of another and another and another. This seems to be done faster than he can follow, so he concludes that speed is the secret of the magic power of paper—and that everyone will work and produce and prosper, so long as those checks are passed from hand to hand fast enough. If that savage breaks into print with his discovery, he will find that he has been anticipated by John Maynard Keynes...
    Perhaps it is harder for us to understand that the mentality of that savage has been ruling Western civilization for almost a century.
    Trained in college to believe that to look beyond the immediate moment—to look for causes or to foresee consequences—is impossible, modern men have developed context-dropping as their normal method of cognition. Observing a bad, small-town shopkeeper, the kind who is doomed to fail, they believe—as he does—that lack of customers is his only problem; and that the question of the goods he sells, or where these goods come from, has nothing to do with it. The goods, they believe, are here and will always be here. Therefore, they conclude, the consumer—not the producer—is the motor of an economy. Let us extend credit, i.e., our savings, to the consumers—they advise—in order to expand the market for our goods.
    But, in fact, consumers qua consumers are not part of anyone's market; qua consumers, they are irrelevant to economics. Nature does not grant anyone an innate title of "consumer"; it is a title that has to be earned—by production. Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market's "supply"; in the role of consumers, they represent a market's "demand." The law of supply and demand has an implicit subclause: that it involves the same people in both capacities.  
   When this subclause is forgotten, ignored or evaded—you get the economic situation of today...