Friday, 24 October 2008

John Maynard Keynes: The destroyer of monies

SpotlightOnKeynes 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!

KeynesGhostFrom 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:

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...


  1. I wouldn't quite say that Kling is questioning his calling - he just doesn't think the methodological foundations of modern macro-economics are appropriate.

    It is a fair issue of debate - there has not been a consensus on how to be a macro-economist since 1973, when neo-Keynesianism fell apart.

    One thing to note about Keynes is that he did understand issues about money supply - however, only took his description of the economy over the very short term.

    Keynes didn't believe in fiscal tinkering and consistent and explicit counter-cyclical policies - they were policies that were attributed to his name by other people.

  2. Yes, Matt, but I figured the following: if I wrote "questioning his calling" people might follow the link and see what you just said.

    But if I wrote "he just doesn't think the methodological foundations of modern macro-economics are appropriate" they wouldn't even bother to read on. ;^)

  3. "Milton Friedman is rightly castigated for helping to prop up Augusto Pinochet"

    Say what???? The following is from The Economist and the Dictator: Just what is the connection between Milton Friedman and Augusto Pinochet? by Brian Doherty

    Yes, it’s true—Friedman gave advice to Pinochet. But it wasn’t about how to find the best place at sea to dump the bodies of murdered political enemies. Despite the angry mobs of students who hounded Friedman everywhere from Stockholm (his Nobel acceptance ceremony in 1976 was marred by their presence) to Chicago because they held him to be some sort of puppet master for sinister Chilean policies, the reality of Friedman’s “links” with Pinochet is far less dramatic.

    For years, the University of Chicago had a program in partnership with the Catholic University of Chile providing scholarships to Chileans to study at Chicago. Pinochet’s economic advisers were thus University of Chicago-trained, and known as the “Chicago Boys.” But Friedman’s only direct connection was when he was invited by fellow Chicago professor Arnold Harberger--who was most closely involved with the Chilean program--to give a week of lectures and public talks in Chile in 1975.

    While there, Friedman did have one meeting with Pinochet, for less than an hour. Pinochet asked Friedman to write him a letter about his judgments on what Chilean economic policy should be, which Friedman did . He advocated quick and severe cuts in government spending and inflation, as well as instituting more open international trade policies—and to “provide for the relief of any cases of real hardship and severe distress among the poorest classes.” He did not choose this as an opportunity to upbraid Pinochet for any of his repressive policies, and many of Friedman’s admirers, including me, would have felt better if he had.

    But that was the extent of his involvement with the Chilean regime—and it fit with a recurring pattern in Friedman’s career of advising with an even hand all who would listen to him. It was not a sign of approval of military authoritarianism. Friedman, in defending himself against accusations of complicity with or approval of Pinochet, noted in a 1975 letter to the University of Chicago school newspaper that he “has never heard complaints” about giving aid and comfort to the communist governments to which he had spoken, and that “I approve of none of these authoritarian regimes—neither the Communist regimes of Russia and Yugoslavia nor the military juntas of Chile and Brazil. But I believe I can learn from observing them and that, insofar as my personal analysis of their economic situation enables them to improve their economic performance, that is likely to promote not retard a movement toward greater liberalism and freedom.”

  4. "But if I wrote "he just doesn't think the methodological foundations of modern macro-economics are appropriate" they wouldn't even bother to read on. ;^)"

    Ahhh, I see. That must be why tvhe is struggling for hits :)

    Personally if I saw the words "methodological foundations" I would be more likely to click on something - but that has more to do with me being a freak methinks :P

  5. Yes, Paul, on reflection that was a little harsh on Uncle Milt, and invites people to ignore the major point I was trying to make there.

    That is, that Friedman was hounded everywhere from Stockholm to Chicago because he was held to be some sort of puppet master for sinister Chilean policies, whereas Lord bloody Keynes, who was basically holding out his business card to totalitarian murderers, escapes utterly without censure from the same whack jobs.

    Anyway, I've amended the sentence, which now reads:

    "Milton Friedman is rightly castigated for helping out Augusto Pinochet, but compared to Keynes -- the ultimate totalitarian's shill -- Friedman was clearly a piker."

    How's that?

  6. "Personally if I saw the words "methodological foundations" I would be more likely to click on something..."

    I'm sure it's possible to seek help for that. :-)

  7. The first lecyure Freidman gave in Chile was on the theme that where the markets are free, the people will be free.

    When you contrast the corruption and ongoing political travseties in South America with the ongoing prosperity and political stability of Chile you find he may very well have been right.

    Anyway, Keynes biggest problem is he advocated Governments deficit spending in economic recession to prevent unemployment, and then pulling back Governmeny spending in times of economic growth to repay the debt incurred in the bad times. He failed to account for the need to keep on deficit spending to avoid slowdowns, and the lack of political will to reduce spending as this was politicially unpopular.

    Too bad that Ruth Richardson disproved Keynes completely in 1991.

  8. Keynes almost certainly helped to save the capitalist system in the 1930s, and it could be that sensible policies in the spirit of Keynes are needed to do it again. It makes sense to swot up on Keynes, as Deborah Hill Cone says she has been doing, and the best books for doing this include:
    Robert Skidelsky's biography of Keynes
    Donald Moggridge's biography of Keynes
    Donald Markwell's "John Maynard Keynes and International Relations: Economic Paths to War and Peace"
    Even if you don't agree with Keynes on all points, this is important for understanding some of the most important ideas and events in modern economic thought and history. In fact, it emerges that Keynes was much more sympathetic to free markets and free trade than he is often said (by people who haven't swotted up on him) to be.

  9. "Too bad that Ruth Richardson disproved Keynes completely in 1991..."

    Actually, Keynes has been disproved many times, perhaps most convincingly in the world stagflation of the 70s, and Japan's "lost decade" of the 90s.

  10. Easy to see why the commenter is anonymous. Who wouldn't be too embarrassed to put their name to such bald-faced bullshit.

    Our anonymous friend says, "Keynes almost certainly helped to save the capitalist system in the 1930s..."

    Answer: Bullshit.

    Keynes batty book wasn't even published until 1936, although both Hoover and Roosevelt had already dipped enthusiastically into deficit spending -- diluting the purchasing power of money in the process by trying to inflating the money supply to do it.

    But once the Roosevelt regime learned through its mis-named "brains trust" that it had the imprimatur of this "new economics" for what it had been previously only doing out of ignorance -- and since it promised to bring riches by means of rapidly consumimg one's capital, nothing more deserves the appelation "voodoo economics" -- the Roosevelt Administration swiftly moved from moderately reluctant deficit spenders (unbelievably, Roosevelt had run in 1932 on a platform that included balancing the budget), to enthusiastic wastrels -- a policy followed all too enthusiastically by subsequent administrations.

    The long-term result was twenty-three years of deficits and a bill in 1955 for $280 billion (that's 280 billion 1955 dollars. Multiply by about 60 to get the bill in today's terms -- about $17 trillion)!

    The long-term bill didn't even offer short-term gain.

    In Britain, where they were still insisting on the old-fashioned "classical" notion of balanced budgets, the economy was starting to pull out of depression by 1936, and even in the US there were some signs of recovery.

    But back in the US, where they were mainlining Keynesian poison, there was another crash in 1937 -- a crash as bad if not worse than the original crash -- a crash almost wholly due to the "regime uncertainty" created by Roosevelt's meddling; sky-rocketing taxes to discourage savings and to try and pay for Roosevelt's enormous public works taking investment capital out of producers' mouths; and the huge deficits run the Roosevelt regime to make up for the shortfall.

    Thus, rather than "rescuing" America from depression," or "saving capitalism" as our anonymous correspondent to fatuously claims, Keynes's nostrums were largely responsible for the ignominy of bringing about the historically unprecedented outcome of a depression within a depression.

    Some achievement, huh?!

    Meanwhile, wisely ignoring the Keynesian promise to turn stones into bread, the Brits continued their slow and sober economic recovery -- as did NZ incidentally, which also followed the balanced budget route, delivering to Michael Joseph Savage an economy already recovering from the pain of correction.

    Keynes didn't save capitalism in the thirties -- to the extent his ideas were followed, he all but destroyed it.

    But don't take my word. Here's economic historian Robert Higgs, who points out the the real economic miracle of the depression era was not Keynesian deficit spending, which only led further into the mire, but the means by which the gigantic American unemployment disaster was finally extinguished in 1946: real savings, and real investment, which paid for real industrial production that easily absorbed the nine million returning servicemen -- who had conveniently been taken off the unemployment register from 1941 on:

    "The war had taught the American people many lessons, some true, some false. Of the latter sort, a leading example was the Keynesian illusion, the belief that the Federal government's management of the economy, primarily by its fiscal policies, can prevent business declines...

    "But the notion that wartime "full employment" had resulted from the huge federal deficits was false. Quite simply, unemployment fell mainly because of the buildup of the armed forces. Between 1940 and 1945 the number of persons classified as unemployed fell by about seven million, while the number of persons in the armed forces rose by more than eleven million (see table at this link)

    "Any government that can conscript prime workers by the millions can eliminate unemployment...

    "The real economic miracle occurred in 1946, when nine million military personnel returned to civilian life but the much-feared postwar depression did not occur.

    "The immediate postwar period was prosperous not because of shrewd fiscal management by the federal government but because consumers, starved by years of depression and wartime restrictions on the production of civilian durable goods, and bloated with bank accounts and bonds accumulated during the war [but that couldn't be spent since no civilian durable goods were being produced during the war years] produced an expansive market and encouraged a private investment boom.

    Note that last comment: a private investment boom.

    Contra Keynes, There's no way to produce a real boom out of the printing press. There's no way to increase purchasing power out of the printing press.

    Purchasing power is paid for out of production. And to increase production, you need to increase investment -- which means taking investment funding from the pool of real savings.

    Which means, again contra Keynes, getting the hell out of the way of investment and savings, and having a government that lives within its means.

    If only there were such a government on the horizon.



1. Commenters are welcome and invited.
2. All comments are moderated. Off-topic grandstanding, spam, and gibberish will be ignored. Tu quoque will be moderated.
3. Read the post before you comment. Challenge facts, but don't simply ignore them.
4. Use a name. If it's important enough to say, it's important enough to put a name to.
5. Above all: Act with honour. Say what you mean, and mean what you say.