Where Keynes Went Wrong Demolishes Keynesianism

• Hunter Lewis, Where Keynes Went Wrong, Mt. Jackson, Va.: Axios Press, 2009, 384 pages, $18.

In the wake of the bursting of the housing bubble and the resulting financial collapse, many politicians and high-profile economists (such as Nobel winner and New York Times columnist Paul Krugman) have missed no opportunity to push the idea that the economic tonic we need to get over our troubles is “stimulus.” What that means is increased spending by the federal government, thereby pumping up demand for goods and services and in turn putting people back to work.

Of course, there is considerable disagreement over that notion, but its popularity is widespread, especially among intellectuals. Intellectuals are prone to distrust the supposed “messiness” and even “chaos” of freedom and easily fall for theories that extol socio-economic planning by experts like themselves.

That haughty disdain for individualism perfectly mirrors the economic philosophy of the man most closely associated with the theory that an advanced economy needs constant government intervention — John Maynard Keynes.

Keynes, who lived from 1883 to 1946, was the progenitor of the economic theories that mostly have ruled the roost since the 1930s. The Obama administration is full of advisers, trained in the Keynsian approach, and its efforts at reviving the economy through massive deficit spending is right out of the Keynesian playbook.

In his latest book, Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts, author Hunter Lewis utterly deflates Keynes’ reputation. Keynes was not a brilliant, original, far-seeing economist, Lewis argues. And his system of thought was nothing more than a hodgepodge of false ideas.

Keynes became a giant, however, because his ideas appealed to statist politicians and academics. They gave intellectual respectability to a vast increase in government power.

Keynes’ reputation rests largely on one book, his The General Theory of Employment, Interest, and Money, published in 1936. At that time, he already was a well known public intellectual (more so in Europe than in the United States), but the General Theory got people talking about him everywhere.

Lewis examines the major themes of the book and concludes that the adulation for Keynes is much ado about nothing. Far from advancing human understanding, The General Theory is a confusing, poorly written jumble of antiquated ideas. It was as if someone wrote a book on medicine saying, in obscure and intellectually intimidating language, that we should forget about bacteria and once again think about how diseases are caused by an imbalance of bodily humors.

Lewis readily admits that he is not the first writer to undertake a demolition job on Keynes. He praises Henry Hazlitt’s 1959 book The Failure of the New Economics for its line-by-line debunking of The General Theory. Instead of reprising Hazlitt’s work, Lewis gives us an easily read book that concentrates its fire on Keynes’ major ideas.

Under that fire, the Temple of Keynes is reduced to less than rubble.
At the outset, Lewis observes that Keynes wasn’t really an economist at all, but was “the first of a breed that we have come to know well: the government policy entrepreneur. He lived and breathed policy, loved being consulted, pursued and even lionized by the political and business elite.” The policy that Keynes pushed was the antithesis of laissez-faire. Rather than leaving the economy to the “invisible hand” — which is to say, to millions of individual decisions and transactions — Keynes wanted experts like himself to control “the commanding heights” and make the choices that would shape the general contours of the economy.

That is how Keynes explained the Great Depression of the 1930s: “Animal spirits” had driven investors wild, but after the bubble burst, they had gone into a terrible funk. Getting the economy moving again would call for government to step in and “prime the pump.” It needed to “invest” money in projects chosen by government planners.

It is important to note that Keynes was not a totalitarian. Unlike many other British intellectuals at the time, he wasn’t enamored of Stalin’s regime. Keynes wanted to preserve a fairly large measure of personal liberty alongside his politicization of investment. What he could not or would not see was that when the state controls “the commanding heights,” the details of the landscape below increasingly will be subject to political control by interest groups manipulating the government to suit their own ends.

Lewis points out that at the time Keynes was penning his ideas about “animal spirits,” the Austrian theory of the business cycle was known in London. F. A. Hayek was teaching there and the two had exchanged letters in newspapers. The Austrians had explained that the business cycle was a result of previous government interventions, mainly efforts at “stimulating” the economy with artificially low interest rates.

The Austrian theory stood in direct opposition to his own explanation, but Keynes never engaged it. As Lewis shows, Keynes was good at using satire and misrepresentation to make himself seem far smarter than “old fashioned” economists, but he never bothered trying to refute the Mises/Hayek explanation for the business cycle.

Perhaps the most astounding feature of Keynes’ economic beliefs was that capital was not really scarce. All government needed to do was to create so much money that interest rates would be driven down to almost zero and goods would become abundant for all. He maintained that greedy capitalists kept the price of money artificially high for their own gain, thus limiting investment that would greatly expand the nation’s production.

That belief is on a par with thinking that through politics we can turn stones into bread, but during the desperate times of the Depression, people were eager for any quick fix. Keynes’ message was just what most wanted to hear — especially politicians.

“Where did Keynes go wrong?” The short answer is that he popularized the habit of thinking about the economy as if it were a machine. People are always talking about the government needing to “fix” the economy, to keep it from “overheating,” or to “rev it up.”

That’s how Keynes looked at it: the economy was a simple, poorly built machine that needed constant government attention. The economy, however, is nothing like a machine and government attention (spending, borrowing, mandating, prohibiting, inflating) only interferes with the network of human relationships — the spontaneous order — that we call “the economy.”

Keynes was a pseudo-intellectual showman whose addled notions gave (and still give) advocates of the mega-state cover for their assaults on liberty and property. Bravo to Hunter Lewis for making the case against him so effectively.