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How Keynes Took Over the World

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06/09/2018Murray N. Rothbard

Keynes’s General Theory was, at least in the short run, one of the most dazzlingly successful books of all time. In a few short years, his “revolutionary” theory had conquered the economics profession and soon had transformed public policy, while old-fashioned economics was swept, unhonored and unsung, into the dustbin of history.

How was this deed accomplished? Keynes and his followers would answer, of course, that the profession simply accepted a starkly self-evident truth. And yet The General Theory was not truly revolutionary at all but merely old and oft -refuted mercantilist and inflationist fallacies dressed up in shiny new garb, replete with newly constructed and largely incomprehensible jargon. How, then, the swift success?

Part of the reason, as Schumpeter has pointed out, is that governments as well as the intellectual climate of the l930s were ripe for such conversion. Governments are always seeking new sources of revenue and new ways to spend money, often with no little desperation; yet economic science, for over a century, had sourly warned against inflation and deficit spending, even in times of recession.

Economists— whom Keynes was to lump into one category and sneeringly disparage as “classical’ in The General Theory — were the grouches at the picnic, throwing a damper of gloom over attempts by governments to increase their spending. Now along came Keynes, with his modern “scientific” economics, saying that the old “classical” economists had it all wrong: that, on the contrary , it was the government’s moral and scientific duty to spend, spend, and spend; to incur deficit upon deficit, in order to save the economy from such vices as thrift and balanced budgets and unfettered capitalism; and to generate recovery from the depression. How welcome Keynesian economics was to the governments of the world!

In addition, intellectuals throughout the world were becoming convinced that laissez-faire capitalism could not work and that it was responsible for the Great Depression. Communism, fascism, and various forms of socialism and controlled economy became popular for that reason during the 1930s. Keynesianism was perfectly suited to this intellectual climate.

But there were also strong internal reasons for the success of The General Theory. By dressing up his new theory in impenetrable jargon, Keynes created an atmosphere in which only brave young economists could possibly understand the new science; no economist over the age of thirty could grasp the New Economics. Older economists, who, understandably, had no patience for the new complexities, tended to dismiss The General Theory as nonsense and refused to tackle the formidably incomprehensible work. On the other hand, young economists and graduate students, socialistically inclined, seized on the new opportunities and bent themselves to the rewarding task of figuring out what The General Theory was all about.1 

Paul Samuelson has written of the joy of being under 30 when The General Theory was published in 1936, exulting, with Wordsworth, “Bliss was it in that dawn to be alive, but to be young was very heaven.” Yet this same Samuelson who enthusiastically accepted the new revelation also admitted that The General Theory

is a badly written book; poorly organized. … It abounds in mares’ nests of confusions. … I think I am giving away no secrets when I solemnly aver—upon the basis of vivid personal recollection—that no one else in Cambridge, Massachusetts, really knew what it was all about for some twelve to eighteen months aft er publication. 23

It must be remembered that the now-familiar Keynesian cross, IS-LM diagrams, and the system of equations were not available to those trying desperately to understand The General Theory when the book was published; indeed, it took 10 to 15 years of countless hours of manpower to figure out the Keynesian system. Oft en, as in the case of both Ricardo and Keynes, the more obscure the content, the more successful the book, as younger scholars flock to it, becoming acolytes.

Also important to the success of The General Theory was the fact that, just as a major war creates a large number of generals, so did the Keynesian revolution and its rude thrusting aside of the older generation of economists create a greater number of openings for younger Keynesians in both the profession and the government.

Another crucial factor in the sudden and overwhelming success of The General Theory was its origin in the most insular university of the most dominant economic national center in the world. For a century and a half, Great Britain had arrogated to itself the role of dominance in economics, with Smith, Ricardo, and Mill all aggrandizing this tradition. We have seen how Marshall established his dominance at Cambridge and that the economics he developed was essentially a return to the classical Ricardo/Mill tradition.

As a prominent Cambridge economist and student of Marshall, Keynes had an important advantage in furthering the success of the ideas in The General Theory. It is safe to say that if Keynes had been an obscure economics teacher at a small, Midwestern American college, his work, in the unlikely event that it even found a publisher, would have been totally ignored.

In those days before World War II, Britain, not the United States, was the most prestigious world center for economic thought. While Austrian economics had flourished in the United States before World War I (in the works of David Green, Frank A. Fetter, and Herbert J. Davenport), the 1920s to early 1930s was largely a barren period for economic theory. Anti-theoretical institutionalists dominated American economics during this period, leaving a vacuum that was easy for Keynes to fill.

Also important to his success was Keynes’s tremendous stature as an intellectual and politicoeconomic leader in Britain, including his prominent role as a participant in, and then severe critic of, the Versailles treaty. As a Bloomsbury member, he was also important in British cultural and artistic circles.

Moreover, we must realize that in pre-World War II days only a small minority in each country went to college and that the number of universities was both small and geographically concentrated in Great Britain. As a result, there were very few British economists or economics teachers, and they all knew each other. This created considerable room for personality and charisma to help convert the profession to Keynesian doctrine.

The importance of such external factors as personal charisma, politics, and career opportunism was particularly strong among the disciples of F.A. Hayek at the London School of Economics. During the early 1930s, Hayek at the LSE and Keynes at Cambridge were the polar antipodes in British economics, with Hayek converting many of Britain’s leading young economists to Austrian (that is, Misesian) monetary, capital, and business-cycle theory.

Additionally, Hayek, in a series of articles, had brilliantly demolished Keynes’s earlier work, his two-volume Treatise on Money, and many of the fallacies Hayek exposed applied equally well to The General Theory4,5,6. For Hayek’s students and followers, then, it must be said that they knew better. In the realm of theory, they had already been inoculated against The General Theory. And yet, by the end of the 1930s, every one of Hayek’s followers had jumped on the Keynesian bandwagon, including Lionel Robbins, John R. Hicks, Abba P. Lerner, Nicholas Kaldor, G.L.S. Shackle, and Kenneth E. Boulding.

Perhaps the most astonishing conversion was that of Lionel Robbins. Not only had Robbins been a convert to Misesian methodology as well as to monetary and business-cycle theory, but he had also been a diehard pro-Austrian activist. A convert since his attendance at the Mises privatseminar in Vienna in the 1920s, Robbins, highly infl uential in the economics department at LSE, had succeeded in bringing Hayek to LSE in 1931 and in translating and publishing Hayek’s and Mises’s works.

Despite being a longtime critic of Keynesian doctrine before The General Theory, Robbins’s conversion to Keynesianism was apparently solidifi ed when he served as Keynes’s colleague in wartime economic planning. There is in Robbins’s diary a decided note of ecstatic rapture that perhaps accounts for his astonishing abasement in repudiating his Misesian work, The Great Depression (1934).

Robbins’s repudiation was published in his 1971 Autobiography: “I shall always regard this aspect of my dispute with Keynes as the greatest mistake of my professional career, and the book, The Great Depression, which I subsequently wrote, partly in justification of this attitude, as something which I would willingly see forgotten”7. Robbins’s diary entries on Keynes during World War II can only be considered an absurdly rapturous personal view. Here is Robbins at a June 1944 pre–Bretton Woods draft conference in Atlantic City:

Keynes was in his most lucid and persuasive mood: and the effect was irresistible… . Keynes must be one of the most remarkable men that have ever lived—the quick logic, the wide vision, above all the incomparable sense of the fitness of words, all combine to make something several degrees beyond the limit of ordinary human achievement. Only Churchill, Robbins goes on to say, is of comparable stature. But Keynes is greater, for he uses the classical style of our life and language, it is true, but it is shot through with something which is not traditional, a unique unearthly quality of which one can only say that it’s pure genius. The Americans sat entranced as the godlike visitor sang and the golden light played all around.8

This sort of fawning can only mean that Keynes possessed some sort of strong personal magnetism to which Robbins was susceptible.9

Central to Keynes’s strategy in putting The General Theory over were two claims: first, that he was revolutionizing economic theory, and second, that he was the first economist—aside from a few “underworld” characters, such as Silvio Gesell—to concentrate on the problem of unemployment. All previous economists, whom he lumped together as “classical,” he said, assumed full employment and insisted that money was but a “veil” for real processes and was therefore not a truly disturbing presence in the economy.

One of Keynes’s most unfortunate effects was his misconceiving of the history of economic thought, since his devoted legion of followers accepted Keynes’s faulty views in The General Theory as the last word on the subject. Some of Keynes’s highly influential errors may be attributed to ignorance, since he was little trained in the subject and mostly read work by his fellow Cantabrigians. For example, in his grossly distorted summary of Say’s law (“supply creates its own demand”), he sets up a straw man and proceeds to demolish it with ease.

This erroneous and misleading restatement of Say’s law was subsequently repeated (without quoting Say or any of the other champions of the law) by Joseph Schumpeter, Mark Blaug, Axel Leijonhufvud, Thomas Sowell, and others. A better formulation o fthe law is that the supply of one good constitutes demand for one or more other goods.10

But ignorance cannot account for Keynes’s claim that he was the first economist to try to explain unemployment or to transcend the assumption that money is a mere veil exerting no important influence on the business cycle or the economy. Here we must ascribe to Keynes a deliberate campaign of mendacity and deception—what would now be called euphemistically “disinformation.”

Keynes knew all too well of the existence of the Austrian and LSE Schools, which had flourished in London as early as the 1920s and more obviously since 1931. He himself had personally debated Hayek, the chief Austrian at LSE, in the pages of Economica, the LSE journal. The Austrians in London attributed continuing large scale unemployment to wage rates kept above the free-market wage by combining union and government action (e.g., in extraordinarily generous unemployment-insurance payments).

Recessions and business cycles were ascribed to bank credit and monetary expansion, as fueled by the central bank, which pushed interest rates below genuine time-preference levels and created overinvestment in higher-order capital goods. These then had to be liquidated by a recession, which in turn would emerge as soon as the credit expansion stopped. Even if he had not agreed with this analysis, it was unconscionable for Keynes to ignore the very existence of this school of thought then prominent in Great Britain, a school which could never be construed as ignoring the impact of monetary expansion on the real state of the economy.

In order to conquer the world of economics with his new theory, it was critical for Keynes to destroy his rivals within Cambridge itself. In his mind, he who controlled Cambridge controlled the world. His most dangerous rival was Marshall’s handpicked successor and Keynes’s former teacher, Arthur C. Pigou. Keynes began his systematic campaign of destruction against Pigou when Pigou rejected his previous approach in the Treatise on Money, at which point Keynes also broke with his former student and close friend, Dennis H. Robertson, for refusing to join the lineup against Pigou.

The most glaring misstatement in The General Theory, and one which his disciples accepted without question, is the outrageous presentation of Pigou’s views on money and unemployment in Keynes’s identification of Pigou as the major contemporary “classical” economist who allegedly believed that there is always full employment and that money is merely a veil causing no disruptions in the economy—this about a man who wrote Industrial Fluctuations in 1927 and Theory of Unemployment in 1933, which discuss at length the problem of unemployment! Moreover, in the latter book, Pigou explicitly repudiates the money veil theory and stresses the crucial centrality of money in economic activity.

Thus, Keynes lambasted Pigou for allegedly holding the “conviction…that money makes no real difference except frictionally and that the theory of unemployment can be worked out…as being based on ‘real’ exchanges.” An entire appendix to chapter 19 of The General Theory is devoted to an assault on Pigou, including the claim that he wrote only in terms of real exchanges and real wages, not money wages, and that he assumed only flexible wage rates.

But, as Andrew Rutten notes, Pigou conducted a “real” analysis only in the first part of his book; in the second part, he not only brought money in, but pointed out that any abstraction from money distorts the analysis and that money is crucial to any analysis of the exchange system. Money, he says, cannot be abstracted away and cannot act in a neutral manner, so “the task of the present part must be to determine in what way the monetary factor causes the average amount of, and the fluctuation in, employment to be different from what they otherwise would have been.”

Therefore, added Pigou, “it is illegitimate to abstract money away [and] leave everything else the same. The abstraction proposed is of the same type that would be involved in thinking away oxygen from the earth and supposing that human life continues to exist”11. Pigou extensively analyzed the interaction of monetary expansion and interest rates along with changes in expectations, and he explicitly discussed the problem of money wages and “sticky” prices and wages.

Thus, it is clear that Keynes seriously misrepresented Pigou’s position and that this misrepresentation was deliberate, since, if Keynes read any economists carefully, he certainly read such prominent Cantabrigians as Pigou. Yet, as Rutten writes, “These conclusions should not come as a surprise, since there is plenty of evidence that Keynes and his followers misrepresented their predecessors”12. The fact that Keynes engaged in this systematic deception and that his followers continue to repeat the fairy tale about Pigou’s blind “classicism” shows that there is a deeper reason for the popularity of this legend in Keynesian circles. As Rutten writes,

There is one plausible explanation for the repetition of the story of Keynes and the classics.…This is that the standard account is popular because it offers simultaneously an explanation of, and a justification for, Keynes’s success: without the General Theory, we would still be in the economic dark ages. In other words, the story of Keynes and the Classics is evidence for the General Theory. Indeed, its use suggests that it may be the most compelling evidence available. In this case, proof that Pigou did not hold the position attributed to him is … evidence against Keynes. … [This conclusion] raises the … serious question of the methodological status of a theory that relies so heavily on falsified evidence.

In his review of The General Theory, Pigou was properly scornful of Keynes’s “macédoine of misrepresentations,” and yet such was the power of the tide of opinion (or of the charisma of Keynes) that, by 1950, aft er Keynes’s death, Pigou had engaged in the sort of abject recantation indulged in by Lionel Robbins, which Keynes had long tried to wrest from him13,14,15

But Keynes used tactics in the selling of The Genera Theory other than reliance on his charisma and on systematic deception. He curried favor with his students by praising them extravagantly, and he set them deliberately against non-Keynesians on the Cambridge faculty by ridiculing his colleagues in front of these students and by encouraging them to harass his faculty colleagues. For example, Keynes incited his students with particular viciousness against Dennis Robertson, his former close friend.

As Keynes knew all too well, Robertson was painfully and extraordinarily shy, even to the point of communicating with his faithful, longtime secretary, whose office was next to his own, only by written memoranda. Robertson’s lectures were completely written out in advance, and because of his shyness he refused to answer any questions or engage in any discussion with either his students or his colleagues. And so it was a particularly diabolic torture for Keynes’s radical disciples, led by Joan Robinson and Richard Kahn, to have baited and taunted Robertson, harassing him with spiteful questions and challenging him to debate.16

[Chapter "Selling the General Theory" in Keynes, the Man.]
  • 1. Harry Johnson put the strategy perceptively: “In this process, it helps greatly to give old concepts new and confusing names. … [T]he new theory had to have the appropriate degree of diffi culty to understand. Th is is a complex problem in the design of new theories. Th e new theory had to be so diffi cult to understand that senior academic colleagues would fi nd it neither easy nor worthwhile to study, so that they would waste their eff orts on peripheral theoretical issues, and so off er themselves as easy market for criticism and dismissal by their younger and hungrier colleagues. At the same time, the new theory had to appear both diffi cult enough to challenge the intellectual interest of young colleagues and students, but actually easy enough for them to master adequately with a suffi cient investment of intellectual endeavor. Th ese objectives Keynes’s General Th eory managed to achieve: it neatly shelves the old and established scholars, like Pigou and Robertson, enabled the most enterprising middle-and lower-middle-aged like Hansen, Hicks, and Joan Robinson to jump on and drive the bandwagon, and permitted a whole generation of students … to escape from the slow and soul-destroying process  of acquiring wisdom by osmosis from their elders and the literature into an intellectual realm in which youthful iconoclasm could quickly earn its just reward (in its own eyes at least) by the demolition of the intellectual pretensions of its academic seniors and predecessors. Economics, delightfully, could be reconstructed from scratch on the basis of a little Keynesian understanding and a loft y contempt for the existing literature—and so it was” (1978, pp. 188–89).
  • 2. Samuelson, Paul A. 1948 [1946]. “Lord Keynes and the General Theory,” in Harris 1948. Orig inally appeared in Econometrica (July 1946).
  • 3. Hodge, Ian. 1986. Baptized Infl ation. Tyler, Tex.: Institute for Christian Economics.
  • 4. Hayek, Friedrich A. 1931a. “Reflections on the Pure Theory of Money of Mr. J. M. Keynes.” Economica 11. 
  • 5. Hayek, Friedrich A. 1931b. “A Rejoinder to Mr. Keynes.” Economica 11. 
  • 6. Hayek, Friedrich A. 1932. “Reflections on the Pure Theory of Money of Mr. J.M. Keynes (continued).” Economica 12
  • 7. Robbins, Lionel, Autobiography of an Economist. London: Macmillan. 
  • 8. Hession, Charles H. 1984. John Maynard Keynes. New York: Macmillan. 
  • 9. Robbin’s biographer, D.P. O’Brien, labors hard to maintain that, despite what he admits is Robbins’s “elaborate” and “exaggerated contrition,” Robbins never really, deep down, converted to Keynesianism. But O’Brien is unconvincing, even aft er he tries to show how Robbins waffl ed on some issues. Moreover, O’Brien admits that Robbins dropped his Misesian macro approach, and he fails to mention Robbins’s astonishing treatment of Keynes as “godlike” (O’Brien 1988, pp. 14–16, 117–20).
  • 10. Hutt, William H. 1974. A Rehabilitation of Say’s Law. Columbus: Ohio State University Press. 
  • 11. Pigou, A.C. 1933. The Theory of Unemployment. London: Macmillan. 
  • 12. Rutten, Andrew. 1989. “Mr. Keynes on the Classics: A Suggestive Misinterpretation?” Unpublished manuscript. 
  • 13. Pigou, A.C. 1950. Keynes’s General Theory: A Retrospective View. London: Macmillan.
  • 14. Johnson, Elizabeth, and Harry G. Johnson. 1978. Th e Shadow of Keynes. Oxford: Basil Blackwell. 
  • 15. Corry, Bernard. 1986. “Keynes’s Economics: A Revolution in Economic Th eory or Economic Policy?” in R.D. Collison Black, ed., Ideas in Economics. Totowa, N.J.: Barnes and Noble.
  • 16. Johnson, Elizabeth, and Harry G. Johnson. 1978. Th e Shadow of Keynes. Oxford: Basil Blackwell. 
Note: The views expressed on are not necessarily those of the Mises Institute.

Murray N. Rothbard

Murray N. Rothbard made major contributions to economics, history, political philosophy, and legal theory. He combined Austrian economics with a fervent commitment to individual liberty.

Cite This Article

Murray N. Rothbard, "Selling the General Theory" in Keynes, the Man (Auburn, Ala.: Mises Institute, 2010). Online edition published March 6, 2010.