Published for F.A. Hayek Institute of Canada
July 4, 2010
By: Shawn Fraser
The economic model put forth by John Maynard Keynes has been a failure of the first grade. The lofty outcomes that the framework suggests have never come to fruition; the ideology itself has only been an engine for failure in every instance of its implementation. It is a failure because its creator and his followers choose to be ignorant on the first, most basic principle of economics: the creation of wealth. Keynes, far from being a well meaning, though misguided, social reformer, was a lifelong Fabian Socialist and self-described Bolshevik.
For a full understanding of this theory, it is necessary to discuss the creator in great detail before addressing the theory itself. John Maynard Keynes was born 5 June 1883, the son of John Neville Keynes, a lecturer of economics at Pembroke College, Cambridge, lifelong member of the Fabian Socialists of Cambridge, and author of the work "The Scope and Method of Political Economy". John Maynard followed in his father's footsteps studying economics, as well as a lifelong membership as a Fabian Socialist. From this background, Keynes chose a career favoured by most textbook-smart economic lightweights from upper-middle class upbringings -- the civil service. It is important to understand this for the following reason: civil servants, while certainly performing a necessary and useful service within their respective sphere, do not have to live with the consequences of bad decision-making the way the private industry does, and Keynes's economic mistakes would have been ruinous should they have been performed in private enterprise. As a cloistered lecturer, he and his Fabian Socialist society were highly supportive of the Bolshevik Revolution in Russia, and in a private letter to his mother, he claimed: "Well, the only course open to me is to be buoyantly Bolshevik"(Dobbs, Chapter X).
Keynes was highly supportive of the German Weimar Republic's policy of currency inflation, even as the currency inflated by one trillion percent over a three-year period from 1920 to 1923. The hyperinflation from that period of German history would only be surpassed by post-World War II Hungary in the 20th Century and more recently Mugabe's Zimbabwe.
Keynes lost much of his fortune during the 1929 stock market crash, an event he failed to predict. This event was forecast well in advance by Austrian economists Friedrich Hayek and Ludwig von Mises, both of who accredited the source of the crash to the Federal Reserve keeping interest rates artificially low, spurring on a boom that would eventually bust. Keynes's 1930 publication "Treatise on Money" was extensively reviewed and dissected by Hayek, forcing Keynes to admit that he no longer believed his own work. Keynes's latter and more famous work, "On the General Theory of Employment, Interest and Money", Hayek did not even bother to write a review, believing no rational individual could ever take such ideas seriously.
On the "General Theory", it is important to understand, not only the work itself, but also the very premise on which its argument relies and why it is a false premise and the context of the time it was produced. Published in 1936, seven years into the Great Depression, it denounces laissez faire economics as the root cause of economic woes and calls for greater spending and government regulation over private industry. By 1936, however, the Hoover and Roosevelt Administrations had imposed the most spending, taxing and regulations up to that point in American history. Henry Morganthau, Franklin Roosevelt's Secretary of the Treasury, in a rare move of candour, recorded a statement made to the House Ways and Means Committee in his private journal dated May 9, 1939: "We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot."(Folsom 144)
Economist Henry Hazlett, who introduced his review by stating "I have been unable to find in it a single important doctrine that is both true and original, extensively reviewed "General Theory". What is original in the book is not true; and what is true is not original. In fact, as we shall find, even much that is fallacious in the book is not original, but can be found in a score of previous writers."(6) He was quite correct in stating it was not original. His work, "The Failure of New Economics", is a chapter-by-chapter, and in some cases, line-by-line rebuttal to "General Theory". The general conclusion he reaches is Keynes is recycling old Mercantilist economic ideas.
The central component of Keynesian economics is wealth redistribution. He believes the role of the government is to inject money into the economy during periods of economic stagnation, a belief that has found new popularity in the last three years. This can be done a number of ways: One is to run deficits, which Keynes was very favourable to, putting governments at the mercy of central bankers; another is to print money and put that into circulation, which Keynes was also favourable to with complete disregard of the consequences of over inflation it brings, as he proved with his clamorous support of the Weimar Republic. Another is the manipulation of interest rates by the central bank, certainly not invented by Keynes, but still favoured by him. These approaches all have one thing in common; they expand the role of the central government in the lives of citizens. Keynes was not favourable to the private savings of individuals, believing that money saved was money that was not circulating in the economy. This is an entirely false premise, since money in a bank account is used for investment purposes by that bank, and is in circulation. What he does not state is when citizens save money, it diminishes the need for the central bank to supply money to the local banks. Keynes also disliked the gold standard, which he viewed as a stumbling block to the power of the state over financial matters. In reality, a gold standard, or any imperially measurable standard, is what prevents governments from simply printing paper money at their own whim and over inflating a currency.
Keynes's belief in government intervention was not a new economic phenomenon. As Hazlitt concluded, it was the very same premise that the Mercantile System of the 18th Century was based on, which was thoroughly denounced by Adam Smith in the Wealth of Nations. Smith had this to say on government intervention in economic matters, which is certainly as applicable to Keynesian theory: "It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, which of their subjects never will."(329)
Keynes's belief in government intervention in economic matters still continues to garner support in the ranks of government and among academic elites, both of whom generally have minimal, if any, practical experience in business matters or wealth creation. They assume all wealth is cyclical, changing hands from one individual to another, for this is the means by which they obtain their wealth. They are quite ignorant of the origin of wealth itself and the labour that goes into creating it. Because Keynesian theory is a system that puts more power in the hands of government, government officials have been very favourable to it. They are quite fond of choosing winners and losers in the marketplace, in spite of the will of consumers to choose their own winners and losers.
There are many things not to like about Keynesian theory: It is an economic wrecking ball, it places power in the hands of government at the expense of the liberty of its citizens, the premises behind the theory are wrong, its creator had no practical hands-on work experience in any fields but the academia and the civil service, and was hopeless at predicting economic forecasts in a time where other economists did. Most notably, the work and its author are ascribed with a sense of originality that neither deserves. In spite of all this, he continues to be revered within academic and government circles.
Dobbs, Zygmund, Keynes at Harvard: Economic Deception as a Political Credo, 1969. N. Page
Folsom, Burt Jr., New Deal or Raw Deal: How FDR's Economic Legacy Has Damaged America, Threshold Editions, 2008.
Harrod, Roy Forbes, The Life of John Maynard Keynes, London. Macmillan 1951.
Hazlitt, Henry, The Failure of the "New Economics": An Analysis of the Keynesian Fallacies, D. Van Nostrand Company, Inc., Princeton, New Jersey, 1959. http://mises.org/books/failureofneweconomics.pdf
Keynes, John Maynard, The General Theory of Employment, Interest, and Money, Harcourt Brace and Company, London, 1964.
Keynes, John Neville, The Scope and Method of Political Economy, Batoche Books, Kitchener, 1999. http://site.ebrary.com/lib/byuidaho/docDetail.action?docID=2001975
Smith, Adam, The Wealth of Nations, Random House, New York, 1937.
Sowell, Thomas, On Classical Economics, Yale University Press, New Haven, 2006.