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Posts Tagged ‘The General Theory’

Keynes Thought Scarcity Would Disappear in the Near Future. Boy, Was He Wrong. | Mises Wire

Posted by M. C. on May 11, 2021

Keynes fails to see this because of his invincible conviction of his own superiority to the common lot. Plebian businessmen may be baffled by the future; not so him and his ilk. If they control money and guide investment, all will be well.

https://mises.org/wire/keynes-thought-scarcity-would-disappear-near-future-boy-was-he-wrong

David Gordon

The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes
by Zachary D. Carter
Random House, 2021 [2020]
xxii + 628 pages

For many people, though not, to be sure, readers of The Austrian, John Maynard Keynes ranks as the greatest economist of the twentieth century; but for Zachary D. Carter, this is a restrained understatement. Carter, a writer on economics at the HuffPost, says this about Keynes:

No European mind since Newton had impressed himself so profoundly on both the political and intellectual development of the world. When the [London] Times wrote Keynes’ obituary, it declared him ”the greatest economist since Adam Smith.” But even praise so high as this sold Keynes short, for Keynes was to Smith as Copernicus was to Ptolemy—a thinker who replaced one paradigm with another. In his economic work he fused psychology, history, political theory, and observed financial experience like no economist before or since. (p. 368)

Those who make their way through this long book will likely come away puzzled with Carter’s enthusiasm. Keynes held bizarre beliefs, far stranger than the familiar underconsumptionist fallacy that the government needs to bolster insufficient aggregate demand. Though he wrote his most famous book about economic theory in the midst of the Great Depression, he thought that scarcity was no longer a problem. The potential for abundance was at hand, or soon would be; the real economic problem was to distribute this abundance so that selfish speculators would not take it all for themselves, leaving the masses in poverty.

This sounds unbelievable, but Keynes really did claim this. Summarizing Keynes’s position, Carter says,

Prior to The General Theory, economics was almost exclusively concerned with scarcity and efficiency. The very word for the productive output of society—economy—was a metaphor for making do with less. The root cause of human suffering was understood to be a shortage of resources to meet human needs…. This was the worldview of what Keynes called the “classical economists.”… But the sheer productive power of modern capitalism and the “miracle of compound interest” had rendered the portrait obsolete. Technological advances now allowed people to produce so much more with so much less effort than they had in the past that scarcity was no longer the overriding problem of humanity. (pp. 258–59)

What stands in the way of abundance for all? In essence, the problem is money. People hoard money because they fear an uncertain future, and if they hoard money, businessmen will be reluctant to invest. Attempts to cut costs by reducing wages exacerbate the problem, since this lessens consumers’ spending. The classical economists wrongly assumed that adjustments in relative prices suffice to take care of shortages and surpluses. “Say’s law” ensured that there could not be a “general glut” or depression. Keynes rejects Say’s law, arguing that it ignores the cumulative power of pessimistic expectations. It does not help matters that Keynes misstates the law: “For Keynes, the soft underbelly of the classical theory was Say’s Law, which he summarized as the maxim that ‘supply creates its own demand.’” (p. 261) The law in fact says that the supply of a commodity is demand for other commodities.

The technical difficulties of Keynesian theory have been covered amply and in depth by, among others, Henry Hazlitt, W.H. Hutt, and Murray Rothbard, and I do not propose to deal with them at further length here. What is important for our purposes is the mindset with which Keynes addresses the problems he alleges exist for the free market. For him the underlying problem is that an elite of official experts is not in control of money and investment. If only our betters, quintessentially Keynes himself, were in charge, then money creation and governmentally controlled investment would generate prosperity for all.

Money does not arise, as the classical economists, here followed by the Austrian school, thought, as a way to overcome the difficulties of barter. It is a creation of the state, and Keynes developed a peculiar theory of history according to which the continued expansion of the money supply drives historical progress.

In The Wealth of Nations, Smith had presented markets for trade as a primordial force that came into being long before the development of the political state…. The market was natural, while the state was a relatively recent artifice that intervened in or distorted the independent rhythms of trade … Keynes concluded that this history was all wrong. Capitalism itself was an ancient creation of government, dating back at least as far as the Babylonian Empire of the third millennium B.C.…. Inflation—viewed by orthodox economists of the 1920s as an underhanded sovereign’s subversion of the natural order—had instead been a near-constant condition ”throughout all periods of recorded history.” (pp. 167–69)

In his Treatise on Money, Keynes argued that government expansion of the money supply would by itself lead to abundance, but he changed his mind. Government control of investment is needed as well. In The General Theory, he calls for a “somewhat comprehensive socialization of investment,” and in an article for the Quarterly Journal of Economics in February 1937, Keynes speculated on what would happen after a European war. He hoped that a program of government control of investment would enable most fluctuations in employment to be eliminated. “Keynes thought that the government would need to control about two-thirds of all investment in the economy for his idea to work” (p. 402).

Readers of Ludwig von Mises will recognize a familiar pattern. Government control of the economy, while preserving the outward forms of private ownership of the means of production, exactly describes the economic system of Nazi Germany. Carter calls to our attention many critical remarks by Keynes about Hitler, but he nowhere mentions Keynes’s notorious foreword to the German translation of The General Theory. In it he says,

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David Gordon is Senior Fellow at the Mises Institute and editor of the Mises Review.

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The Great Criticism of Keynes That Every Economist Should Read

Posted by M. C. on December 21, 2019

Almost no one has ever read the book. There is good reason for this. Keynes’ book is unreadable. Its arguments are incoherent. This is why we rarely see direct quotes from the book.

https://www.economicpolicyjournal.com/

By Gary North

In 1959, Henry Hazlitt’s book, The Failure of the “New Economics,“ was published by D. Van Nostrand Company, a reputable but midsized publishing company. The book was subtitled An Analysis of the Keynesian Fallacies.
This was Hazlitt’s magnum opus. That is to say, it was his great work. Yet it was narrowly focused. It was a monograph. In clear prose, he took apart John Maynard Keynes’s magnum opus, The General Theory of Employment, Interest, and Money (1936), the book that indirectly reshaped economic theory in the second half of the twentieth century.

The Book Almost Nobody Has Read

Almost no one has ever read the book. There is good reason for this. Keynes’ book is unreadable. Its arguments are incoherent. This is why we rarely see direct quotes from the book. Keynesianism did not become a major factor in the thinking of most economists until 1945. The Keynesian movement accelerated in 1948 because of the first edition of Paul Samuelson’s textbook Economics. I own a reprint of that original edition. Keynes is not quoted in the book. Samuelson mentioned him on pages 253 and 303. The book and its later editions have sold something in the range of four million copies. It was the most successful economics textbook of the twentieth century. It shaped the thinking, or rather the non-thinking, of millions of students for seventy years. Yet almost none of these students has ever read The General Theory cover to cover.
Samuelson in 1946 wrote a laudatory assessment of the impact of The General Theory. It was published in Econometrica, an academic journal not noted for its clarity.
In any case, it bears repeating that the General Theory is an obscure book, so that would be anti-Keynesians must assume their position largely on credit unless they are willing to put in a great deal of work and run the risk of seduction in the process. The General Theory seems the random notes over a period of years of a gifted man who in his youth gained the whip hand over his publishers by virtue of the acclaim and fortune resulting from the success of his Economic Consequences of the Peace.
A reprint of his article is here.
The General Theory was not well received at the time of this publication. Richard Ebeling, a Misesian economist, wrote in 2004,
Except for some of Keynes’s young protégés at Cambridge University, most of the reviewers of the book were highly critical of many of its theoretical “innovations,” as well as its inflationary prescriptions for unemployment. Even some economists who later became proponents of Keynes’s “new economics” were initially highly critical of his work. For example, Alvin Hansen, who was one of the leading advocates of Keynesian economics in the United States in the 1950’s and 1960’s, wrote in late 1936 that The General Theory “is not a landmark in the sense that it lays the foundation for a ‘new economics.’ … The book is more a symptom of economic trends than a foundation stone upon which a science can be built.”
Yet within a few years, and most certainly by the end of World War II, Keynes’s ideas had virtually pushed aside every other explanation of the causes and cures of economic depressions. Keynes’s book became the foundation stone for the new “macroeconomics.”
In contrast to Keynes’s book, Hazlitt’s book is readable, although not so readable as all of his other books. That is because he had to spend his time trying to make sense out of Keynes’s convoluted prose and shifting definitions. But the book is coherent, and his explanations are lucid, as long as he was not directly citing Keynes.
I read the book in the summer of 1963. I know this because I used to write the date on which I had bought a book on the front inside cover page. I did not read Economics in One Lesson until 1971, when I became a senior staff member at the Foundation for Economic Education (FEE). The first book spoiled me. It really is a tour de force. I realize that the second book was his bestseller and is a fine introductory book for people who know nothing about economic theory, but his book on Keynes outshines it. Unfortunately, almost nobody has read it. It remains an unread book that demolishes an equally unread book.
In 1960, Van Nostrand published a follow-up volume edited by Hazlitt, The Critics of Keynesian Economics. It is a compilation of scholarly articles written by critics of Keynes.
The Mises Institute has done yeoman service in making certain that both of these books remain in print, and both of them remain available in PDF format free of charge.

The Memory Hole

Hazlitt’s book was not the first full-length book to criticize Keynes or the longest. That honor belongs to Arthur Marget, who was the first economist to devote a book to critiquing a narrow aspect of Keynes’s General Theory. It is a two-volume behemoth of over fourteen hundred pages, The Theory of Prices. It also covered Keynes’s earlier book, Treatise on Money (1930). The first volume was published in 1938; the second volume was published in 1942. It was unknown when it was published, and it remained unknown after it was republished in 1966. It is not as incoherent as Keynes’s book, but it is turgid, prolic, and unread. Almost no economist has ever heard of Marget. That was true in his day, too. There is no Wikipedia entry on him. His book did not go down the memory hole. It was published at the bottom of the memory hole, and it remained there. John Egger wrote a detailed review of it in 1995, which gives you some indication of just how obscure it is. It took over half a century to get a detailed review. Egger concluded, “Labels aside, Marget’s work offers scholarship in the history of monetary doctrine that is unmatched, and an analysis of processes that is in some respects unmatched, in explicitly Austrian works. ‘Prolixity’ or not, it deserves to be recognized as an exciting and significant contribution to the tradition of the methodologically individualistic analysis of monetary processes.” The use of the adjective “exciting” to describe this book I regard as exaggerated. The Mises Institute has made a PDF available of each volume.
Hazlitt in 1959 was a well-known economist. He had a regular column in Newsweek from 1946 to 1966. The Mises Institute has reprinted those articles in a massive 800-page book, Business Tides. Yet despite his name identification, the economic guild successfully blacked out references to Hazlitt’s book on Keynes. I never recall seeing a footnote to the book in any academic economic article other than those published in Austrian school journals.
The economists’ academic guild never took Hazlitt seriously. After all, Hazlitt did not go to college. Keynes did go to college, but he did not major in economics. He majored in mathematics. That certainly did not in any way hamper his capture of the academic guild after 1945.

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