Wednesday, 3 December 2008

Tyler’s reading Keynes!

Austrian Economist Peter Boettke laments Tyler Cowen’s decision to host a book club reading on his blog for Keynes's General Theory.  Why on earth would you want to?  Keynes is now that defunct and long-dead economist to whose ideas we are now all in thrall.  Sincerely, says Boettke,

    you want to know what is going on in 2008 --- it is the consequence of the bad economic ideas of Lord Keynes that have led to the victory of Keynesian policy (of either the liberal or conservative variety) since 1940.  
We are living through the consequences of Keynes's ideas. The Soviet Union had to confront the legacy of Marxist-Keynesianism in the 1980s, and we are dealing with the consequences of Social Democratic-Keynesianism in the 2000s.
Hayek warned us about the "tiger by the tail" problem of inflation and Buchanan warned us about the destruction of the "old-time fiscal religion" due to Keynesianism… Keynesianism represented the pushing open of an already opened door to fiscal and monetary irresponsibility and opportunistic politicians left and right walked right through… I would rather we have a serious discussion of the consequences of Lord Keynes with respect to world-wide fiscal imbalance associated with intergenerational accounting and world-wide inflation as governments attempt to meet those obligations through monetization of debt.  Somehow I doubt that will take place in our current intellectual and policy context.

He’s right, you know.

    I also think that the emphasis on Keynes demonstrates a collective delusion among economists.  Even Milton Friedman can be quoted as emphasizing Keynes's brilliance.
But what of Knight's judgment that "what is new isn't true, and what is true isn't new", or of Hayek's judgment that Keynes's idle resources argument assumes a post-scarcity world, or of Mises's judgment that Keynesian economic policy assumes the miracle that stones can be turned into bread?
The problem with economics since 1940 has been the thorough victory of Keynes throughout the democratic western nations.  We have Keynesian theory, the development of Keynesian inspired data collection, the "testing" of Keynesian theory via Keynesian data with the purpose of providing tools for Keynesian policy.  This exercise survived the Monetarist and New Classical intellectual challenge, and it survived the Supply Side revolution in policy.  All that remained was an oscillation between liberal and conservative Keynesianism, never a serious challenge to the paradigm of Keynesian policy manipulation of the economy.

The “theory” has failed – and so has the tinkering the theory inspired – failed spectacularly in the black hole of failed macroeconomic theory down which Ben Bernanke and Henry Paulson have now poured $7 trillion. 

Fact is, says Boettke, there’ s better things to have in your suitcase for summer reading if you want to get to the bottom of “the destroyer of monies”:

2d76228348a06d00f3066110._AA240_.L Instead of reading Keynes one more time with feeling, I would suggest an alternative reading experience. (Or at least an additional one)  Start with Henry Hazlitt, ed., The Critics of Keynesian Economics, move on to Hazlitt's The Failure of the "New Economics", graduate to W. H. Hutt's The Keynesian Episode, and then read closely Buchanan and Wagner's Democracy in Deficit and then Higgs's Crisis and Leviathan and War, Depression, and Cold War.

To round this off which I would add Ayn Rand’s brilliant presentation ‘Egalitarianism and Inflation,’ which fully nails home the epistemological destruction behind Keynesian macroeconomics, and the real metaphysical destruction this unleashes. (You can read the edited presentation in 'her book Philosophy: Who Needs It?).  It concludes in part:

    Did you think a spending orgy of [the Keynesian] kind could be paid for out of current production? No, the situation is much worse than that. The government is consuming this country’s stock seed—the stock seed of industrial production: investment capital, i.e., the savings needed to keep production going. These savings were not paper, but actual goods. Under all the complexities of private credit, the economy was kept going by the fact that, in one form or another, in one place or another, somewhere within it, actual material goods existed to back its financial transactions. It kept going long after that protection was breached. Today, the goods are almost gone.
   A piece of paper will not feed you when there is no bread to eat. It will not build a factory when there are no steel girders to buy. It will not make shoes when there is no leather, no machines, no fuel. You have heard it said that today’s economy is afflicted by sudden, unpredictable shortages of various commodities. These are the advance symptoms of what is to come…
    If government spending continues, that incredible wealth will not save you. You may be left with all the magnificent skyscrapers, the giant factories, the rich farmlands—but without fuel, without electricity, without transportation, without steel, without paper, without seeds to plant the next harvest.
    If that time comes, the government will declare explicitly the premise on which it has been acting implicitly: that its only “capital asset” is you.


  1. "Even Milton Friedman can be quoted as emphasizing Keynes's brilliance."

    Where! WHERE!

  2. The Ayn Rand quote is great, as was the link. I've book marked that site for later.

  3. Keynes, "The General Theory", chapter 24, pages 381-83:

    "I have mentioned in passing that the new system might be more favourable to peace than the old has been. It is worth while to repeat and emphasise that aspect.

    "War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.

    "I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account.

    "Thus, whilst economists were accustomed to applaud the prevailing international system as furnishing the fruits of the international division of labour and harmonising at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true course of events, who believed that if a rich, old country were to neglect the struggle for markets its prosperity would droop and fail. But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage."

    The only discussions I know of this and related passages in the GT (including in chapter 23) on Keynes's belief in economic causes of war and that his economics might help promote peace are:

    - Hyman P Minsky, "John Maynard Keynes", Columbia University Press, 1975, page 159
    - Donald Markwell, "John Maynard Keynes and International Relations: Economic Paths to War and Peace", Oxford University Press, 2006, pages 178-190

    You might also be interested in discussion at

  4. Keynes, "The General Theory", chapter 24, pages 381-83:

    I didn't know that Keynes's work preceded that of Einstein's work, in which the great scientist simply extended Keynes's work with relativity, which lead to the The General Theory of Relativity.

    Had these great intellectuals have something in parallel?

  5. Arthur

    Regarding Keynes

    Never in the entire course of human affairs* has a single man provided such an extravagantly over-worded collection of bovine defaction as that statist shill Keynes with his circumlocutionary dissembling and deceptive ramblings of utter dishonest stupidity. The man was a carpetbagging liar and knew it.

    What does that hugely over-worded muck you quoted mean precisely?

    Keynes is claiming that big government central planning complete with nationalised non-specie fiat money leads to peace and hence is good.




    *well OK there might be two others. Call it a tie!

  6. Thanks to Arthur James for the reference to Hyman Minsky on Keynes on war and peace. It’s only a couple of pars - remmber Minsky was writing in 1975 -

    “Conflict among nations
    Keynes also believed that ‘if nations can learn to provide themselves with full employment by their domestic policy … there need be no important economic forces calculated to set the interest of one country against that of its neighbours’ (GT, p. 382). Keynes viewed the tensions among the affluent nations of Europe and America as stemming from the felt needs to export in order to protect domestic employment, if not to raise domestic employment by ‘beggar my neighbour’ policies.

    For the first twenty-five years after the Second World War, this view of Keynes was borne out by relations among the affluent capitalist countries. Aside from vestiges of past colonialism, such as the Vietnam involvement by first France and then the United States, there was an absence of war and even of serious tensions among the countries that were both capitalist and affluent. The ideological Cold War is not a question of economic conflict. The ability to sustain domestic markets by monetary and fiscal policies eliminated pressures for countries to ‘compete’ for controlled markets or advantageous positions in world trade.”

    How relevant is this again today!

    The reference to Markwell is also interesting. He gives a detailed account of how Keynes came to write in the General Theory about the effect of his economics on the chances of war and peace. Fascinating that Keynes was responding to a debate in New Statesman on “does capitalism cause war?”

    As Arthur James says, it is worth looking at


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