Where Keynes went wrong (Hunter Lewis)

John Maynard Keynes was one of the leading economists of the 20th Century. Although his most famous book (The General Theory) came out in 1936 and he died ten years later, his approach to macroeconomics (aka Keynesian economics) remains very influential to this day.

Relatively few people have read the writings of Keynes, but it’s well known that he thought governments should engage in deficit spending during economic slumps in order to stimulate the economy and put unemployed people back to work. This idea happens to be congenial to many politicians, who relish the idea of being able to expanding popular spending programs without necessarily raising taxes to pay for them. Keynes also said governments might run surpluses during economic booms, thereby balancing the budget over the economic cycle, but this suggestion has not been widely followed.

This book quotes extensively from Keynes’ writings to flesh out some of the famed economist’s other thinking. Economic crises and recessions serve no useful purpose – misdirected investment is better than no investment at all – prompt and decisive government intervention is indicated at the first signs of trouble – the central bank should not only act as the “lender of last resort” (Walter Bagehot, 1873), but ensure low interest rates for all borrowers – government deficits during a slump will have a greater effect on overall output due to a multiplier effect as high as “three or four times” – markets won’t self-correct if the government fails to act – wage levels should not be driven down to promote full employment as that wouldn’t be fair – falling prices (deflation) should be assiduously avoided – inflation only becomes a problem if essentially all workers in the economy are employed – don’t pay too much attention to whether the aforesaid policies are sustainable because “in the long run we are all dead.”

The evidence supporting most of these principles is scanty, suggests Mr. Lewis, and much of Keynes written work (including his magnum opus, The General Theory) suffers from vague or inappropriate terminology, sloppy formulae, and logical contradictions. It’s one thing to fire off brilliant intuitive insights, as Keynes excelled in doing (contemporaries rarely bested him in an argument), and quite another to prove them.

Ultimately, the basic fallacy in Keynesian economics is the insistence on viewing the world as the utopia one might prefer (government spending doesn’t have to be paid for, printing money is OK, economic cycles aren’t necessary, full employment should be the norm, government planners have better judgment than free markets, etc.) instead of the rather less idyllic place that it actually is. As Hunter puts it at one point, Keynes was the same kind of thinker as Karl Marx except that he set up a different scapegoat (conservative bankers who wanted to charge high interest rates versus greedy owners of industrial enterprises).

This book isn’t an easy read, but it should be informative for those who are interested in kicking the tires on contemporaneous economic policies of governments and central banks. Many of the fallacies attributed to Keynes sound familiar because they have been picked up by economists and policy makers who are currently active.

8/29/16 - http://amzn.to/2c5D8Lk


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