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John Maynard Keynes, Defunct Economist


John Maynard Keynes, who rose to prominence in the 1930s, wrote, “The ideas of economists and political philosophers … are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men … are usually the slaves of some defunct economist. Madmen in authority … are usually distilling their frenzy from some academic scribbler of a few years back.”

When Keynes burst on the scene, most economists were against government economic interventionism. Still, there was a growing influence of Marxist ideas, evidenced by the inroads of welfarism in Europe, especially in Great Britain and Germany. And favorable reports of “success” in Mussolini’s Italy and Stalin’s Russia influenced the political direction of the United States. According to historian Benjamin Alpers, “The press [in the United States] praised Mussolini for single-handedly bringing order to Italy’s political life. Many saw a similar quality in Stalin’s first Five-Year Plan.” In 1933 Franklin Roosevelt and his fellow New Dealers much admired Mussolini’s success in avoiding the Great Depression. The American journalist Lincoln Steffens, after a visit to the Soviet Union, reported, “I have been over into the future, and it works.” In the 1920s and 1930s there was very little information coming out of Russia about the true state of affairs there.

Keynes was a revolutionary who provided a rationale for intellectual and political leaders who were increasingly enamored with Marxist political objectives but somewhat constrained by conventional economic wisdom. During World War I, Keynes had worked in an advisory capacity to the British government on financial and economic matters. Later he wrote several books, among them A Tract on Monetary Reform (1923), Treatise on Money (1930), and The General Theory of Employment, Interest and Money (1936).

Keynes’s theories provided intellectual support for the economic policies of Franklin Roosevelt, which were welcomed by a public desperate for change in the dire circumstances following the crash in 1929. They provided cover for massive government spending, abandoning the gold standard, and political control of market functions — all contrary to the economic wisdom that had taken two centuries to develop and had led to unparalleled prosperity in the United States.

The great economists of the 20th century, Ludwig von Mises, Friedrich Hayek, Milton Friedman, Henry Hazlitt, and Murray Rothbard, all clearly and thoroughly discredited Keynes. Hayek and Friedman both won Nobel Prizes in economics. In 1931 Hayek challenged Keynes in a famous series of debates, which focused on Keynes’s Treatise on Money. In the decades since, history has proven the correctness of Hayek’s views. Roosevelt’s New Deal was a failure and prolonged the Depression by about six years, as various research studies have shown. And though popular for several decades, Keynes eventually fell out of favor. Until now, when he is the “defunct economist” who provides the intellectual cover for Obama, just as he did for Roosevelt.

Hazlitt’s critique

Of the great economists just mentioned, the one who, in my opinion, wrote with the greatest clarity and is easiest for the general reader to understand is Henry Hazlitt. H.L. Mencken, a prominent literary figure, said he “is one of the few economists in human history who could really write.” He thought so highly of Hazlitt’s literary ability that in 1933 he asked Hazlitt to succeed him as editor of the American Mercury, which featured some of the most important writers of the 1920s and 1930s. Hazlitt’s Economics in One Lesson is one of the most popular economics books of all time. Even today, more than half a century after its publication, Amazon.com still lists it in the top 10 in current sales of economics books.

Forty-nine years ago, Hazlitt wrote The Critics of Keynesian Economics. This book included selections from Jean-Baptiste Say (1767–1832) and John Stuart Mill (1806–1873) that long antedated Keynes but anticipated his arguments and “constituted a refutation of them in advance,” as Hazlitt put it.

In that book, Hazlitt wrote,

I do not think we can point to any one “central” fallacy in Keynes upon which all the others depend, or of which they are all corollaries. The book is not that logical or consistent. It is a succession, rather, of a whole series of major fallacies that are intended to support each other….

… Keynes had no adequate theory of either capital or interest. He seemed in this field to get everything upside down. He thought that interest was a purely monetary phenomenon, the “reward” that had to be offered to the holders of money to induce them to “part” with their “liquidity.” Years before Keynes announced this doctrine, it was already old, and Ludwig von Mises had rightly dismissed it (as early as 1912) as a view of “insurpassable naivete.”…

… It is hardly necessary to add that, as a result of all these theoretical misconceptions, all Keynes’s recommendations for practical policy are unsound. He wanted government control and direction of investment — a proposal which, if taken seriously, would lead to full socialism and a totalitarian state. His ideas of creating employment by budget deficits and continuous cheap money policies — i.e., by continuous inflation — got a thorough tryout in both Great Britain and the United States. In Britain they were dramatically and successfully repudiated in 1957…. In the United States they failed miserably, in the entire period from 1930 to 1940, to achieve the goal of eliminating mass unemployment.

But here [in the United States] the Keynesian philosophy remains dominant. Keynesian policies are still the policies of most of our politicians and bureaucrats. At the first sign of recession, they begin to demand increased “public works,” increased government spending — whatever will create deficits that in turn will lead to the creation of more paper money.

Forty-nine years after Hazlitt wrote those words, history is repeating itself. We now have an undeniably Marxist president using Keynesian ideas as the base for unprecedented steps of “government control and direction of investment” leading to “full socialism and a totalitarian state.” He has usurped the power to fire heads of private corporations, disfranchise shareholders and boards of directors, dictate appointees to boards of directors, compel corporate mergers, force banks to accept government money — even healthy banks that attempted to refuse the money — and then refused to let them pay it back promptly, in order to retain federal control of the banks’ operations. He has made the federal government the largest shareholder in some of the nation’s largest companies. He has used his rhetoric and the position of his office to destroy legally binding contracts for employee bonuses, forcing many of them — whose contracts were for a salary of $1 plus the bonus — to give back their bonuses, leaving them a mere $1 for their labor. And he has even arrogated to himself the power to federally guarantee the brakes, transmissions, and other features of automobiles made by U.S. companies.

Where in the Constitution is there authority for such totalitarian power?

Socialism and fascism

The common definition of socialism is government ownership of the means of production. Some say Obama isn’t a socialist because he doesn’t favor that. He merely favors government control, not ownership. That fits the classic definition of fascism. Under the fascist government of Mussolini, for example, there was nominal private ownership, while the government exercised control. Mussolini developed the idea of the “corporate state” (estato corporativo), a partnership of government and private business. (It was disheartening to hear Fed Chairman Ben Bernanke recently say he favors a partnership of government and business.)

What does ownership mean? It means the right to control. If you cannot control property and determine its use, then you do not really own it. In practice, then, there is no difference between socialism and fascism. The latter merely maintains the fiction of private property while removing its essence and substituting government control, just as under socialism. Socialism and fascism are not opposites, as is sometimes claimed, but twin forms of collectivism, with its political control of property and people. The opposite is individualism, with its corollary of property rights and free people. Fascism’s underlying principles were founded in socialism, which, in fact, is where Mussolini began.

Hitler’s Germany was another example of fascism, with nominal private property under government control. Its common ground with socialism is evident from the full title of the Nazi Party: the National Socialist German Workers’ Party.

Many years ago Maurice Cranston, a philosopher and professor of political science at the London School of Economics, drew a distinction between structural socialism and functional socialism. He defined the former as government ownership of production. For the latter, he used a definition from Paul Janet’s Le Socialisme: “Any doctrine claiming that the state has the right to alter the inequality of wealth existing among men, and to introduce an equilibrium by taking away from those who have and giving to those who have not.”

Even earlier, there was a view that socialism did not require government ownership, that other government economic interventions produced the same result, viz., the redistribution of wealth, and constituted socialism. Back in 1850, the French economist Frédéric Bastiat wrote,

The prevailing illusion of our age is that it is possible to enrich all classes at the expense of one another — to make plunder universal…. Now, legal plunder can be committed in an infinite number of ways; hence, there are an infinite number of plans for organizing it: tariffs, protection, bonuses, subsidies, incentives, the progressive income tax, free education, the right to employment, the right to profit, the right to wages, the right to relief, the right to the tools of production, interest-free credit, etc., etc. And it is the aggregate of all these plans, in respect to what they have in common, legal plunder, that goes under the name of socialism.

After the historical failures of nationalized industries everywhere, no one in the developed world, even Obama, openly advocates government ownership of the means of production. Instead we hear demands for more government controls. How many times have we heard that the present economic difficulties have been caused by inadequate regulation, even deregulation, and that what is needed are stricter, more comprehensive regulations to prevent similar problems in the future? No one has bothered — or is able — to explain how, if governments are unable to successfully manage government-owned industries, they can know how private ones should be managed through regulation. It is significant that the disaster in the mortgage and housing market, which unraveled the whole economy, was precipitated by the two government-sponsored enterprises Fannie Mae and Freddie Mac, the largest factors in the mortgage industry and those over which government had the most control. They were established by acts of Congress as partnerships of government and business. (See my article “Housing Bubble and Bust” in Liberty July 2008, available at http://libertyunbound.com/archive/2008_07/contoski-housing.html.) Also, it is the plethora of government interventions regarding the Big Three auto manufacturers that brought about the downfall of the U.S. automobile industry. But that is a subject for another article.

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    Edmund Contoski is the author of the award-winning book Makers and Takers: How Wealth and Progress Are Made and How They Are Taken Away or Prevented, and of The Trojan Project, a novel about restoring America. His website is www.amlibpub.com. He is also a columnist at Forces International Liberty News Network.