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Mini-Review: Where Keynes Went Wrong

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09/12/2009

I’ve just finished Hunter Lewis’ new book Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles and Busts link here (scroll down to bottom).

The biggest surprise of the book is that it is thoroughly Austrian. The author draws upon Mises, Hayek, Rothbard, Resiman, Hutt, Rueff, and other thinkers in this tradition who have been most critical of Keynes. Lewis says that he set out to write the book that Hazlitt had planned to write, which resulted in The Failure of the New Economics. While Hazlitt had intended to produce a popular book, as he delved more deeply into his task he produced something closer to an academic treatise. Lewis’ book is accessible to anyone who has had a macro course or even to the general reader of business media.

The first section, What Keynes Really Said, consists of short excerpts from Keynes’ own writing, mostly The General Theory. Lewis tries to provide the reader with a fair and unbiased understanding of Keynes’ views. Going back to the source is a worthwhile endeavor because most people know what they know through a macro textbook using a second or third-generation graphical synthesis of Keynes’ idea, or through media buzzwords such as “stimulus” and “consumer confidence”.

The second section, Why Keynes Was Wrong, mirrors the structure of the first section. In the table of contents, the two sections are lined up side-by-side in columns. For example, a section in the first part called Spend More, Save Less, and Grow Wealthy is lined up against a section in the second part called Spend More, Save Less, and Grow Poorer.

There are several main themes in book. One is that most of Keynes key doctrines are paradoxical. The most well-known example is the paradox of thrift: saving is good for the individual but if everyone tries to save, then it drives the economy downwards into a bust. Another example of paradox is “unemployment equilibrium”. In each case, Lewis provides simple, logical arguments against Keynes’s paradoxes. The book could be characterized as a defense of common sense against obscurantism and muddle-headedness.

Keynes’ reliance on paradox brings to mind what philosopher Michael Levin calls “the skim milk fallacy”:

According to this paradigm, science always shows that things are the reverse of how they seem. Deep scrutiny of virtually any phenomenon will reveal that everyday convictions about it are wrong. In fact, taking things at face value betrays naiveté, while readiness to debunk is the mark of the sophisticate, what David Riesman called an “inside dopester.”

Another theme is Keynes’ reliance on his own opinion without any supporting facts. Lewis gives many examples of how Keynes moves through a point in his reasoning that cannot be decided on purely theoretical grounds by recourse to pure opinion without any empirical support. Lewis has located empirical studies from the subsequent years suggesting the opposite of Keynes’ opinions (and in other cases, Lewis provides a common sense argument against Keynes’ opinion). Where some empirical work existed at the time, Keynes would dismiss with no supporting evidence if he needed things to go in the opposite direction in order to arrive at the result he wanted.

This book fills a missing niche in the literature: a debunking of Keynes for the general reader. I believe that this book would also be useful as a supplement in a macro course. But its most important contribution in my view is that it demystifies Keynes. The ideas in The General Theory form the foundation of modern macro-economics, which is the basis for the modern practice of central banking and pretty much all monetary policy around the world. What I mean by the mystification of Keynes is that, because his theories are so long-established and deeply embedded in academic economics, government, and the public consciousness, it is difficult not to think that there must be something really deep and profound there. Upon reading Lewis’ book, it is somewhat shocking to see how weak his arguments are and how poorly they stand up to any kind of logical examination.

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