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What Keynes Said, and Meant

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09/29/2009Robert Blumen

[Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts • by Hunter Lewis • Axios Press • 390 pages]

Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts
"Lewis's book is accessible to anyone who has had a macroeconomics course, and to the general reader of the business media."

This important book fills a gap in the literature. It is an Austrian critique of Keynes that is concise and accessible to the general reader.

Hunter Lewis says that he set out to write the book that Hazlitt had planned when he began composing The Failure of the New Economics (p. 10). Hazlitt started out planning to produce a popular book, but as he delved more deeply into his task, the result was something closer to an academic treatise. Lewis's book is accessible to anyone who has had a macroeconomics course, and to the general reader of the business media.

Keynes is a famously difficult writer to understand. While his ideas have achieved tremendous influence, most people have been exposed to them only by reading macroeconomics textbooks (which provide a second- or third-generation graphical synthesis of The General Theory), or through media buzzwords such as "stimulus" and "monetary policy."

Lewis writes, "Because few people have read Keynes, it is easy to be confused about what he said" (p. 7). Another source of confusion is that

Keynes himself is often obscure, even at first glance self-contradictory. In some cases, very close examination reveals that Keynes was not actually contradicting himself. Often he was simply being sloppy, although sometimes he seems to be intentionally opaque, rather like former US Federal Reserve Chairman Alan Greenspan.… Opacity has its uses in politics, especially when there is a logical difficulty to obscure or evade.

Where is the logical place to start in order to gain a clear understanding of this difficult original material? Lewis's strategy is to go directly to the source. In part 2 of the book, he presents Keynes's views in a series of short quotes and excerpts from his works (mainly The General Theory). Lewis presents the original words with a minimum of analysis and interpretation.

Reaching chapter 5, in part 2, Lewis summarizes Keynes's macroeconomics as a series of main points (p. 47): (1) people are too future oriented; (2) society tends to underconsume and oversave; (3) interest rates tend to be too high; (4) monetary policy can lower interest rates by money printing; and (5), the core of the theory, "unused savings … interrupt the flow of money through the economy and lead to unemployment. Unemployment reduces society's income."

Keynes believed markets to be fundamentally broken. Markets do not clear, the price system does not allocate resources, and generally, the entire system is unstable and possesses no self-correcting features.

In part 3, "Why Keynes Was Wrong," Lewis presents common-sense arguments and counterfactual evidence that refute the doctrines presented in part 2. He attacks Keynes from several directions: in some cases, showing that what Keynes said makes no sense or contradicts itself; in other cases, citing empirical studies that have produced results contrary to Keynes; and finally, developing alternative theories that make more sense.

"Keynes believed markets to be fundamentally broken."

The alternative theories are thoroughly Austrian: the author draws upon Mises, Hayek, Rothbard, Reisman, Hutt, Rueff, and Hazlitt for most of his analytical tools. Lewis clearly has a deep understanding of the Austrian teachings on production, money, banking, and the business cycle.

Part 3 parallels the structure of part 2. In fact, in the table of contents, the two parts of the book are lined up in vertical columns, with the heading for each fallacy on the left aligned with the one for the refutation of that fallacy on the right. For example, "Spend More, Save Less, and Grow Wealthy" is lined up across from "Spend More, Save Less, and Grow Poorer."

I will provide a couple of examples of Lewis's analysis. In response to Keynes's view that "interest rates are [too] high because people refuse to lend … on reasonable terms" (p. 91), Lewis writes,

The idea that lenders are obstinately holding out for exorbitant rates is particularly odd. It suggests a one-sided market in which the lenders have all the power and borrowers have little or none.…

Neither lender nor borrower can dictate terms in the market for money any more than in the market for other products or property. (pp. 91–92)

Lewis comes down especially hard on one of the most damaging fallacies of the Keynesian system: the proposition that "new money that has been injected into the banking system is 'just as genuine as any other savings'" (p. 98). Lewis writes,

It is Orwellian to refer to newly printed government money as "savings." Whatever the merits or demerits of "printing press" money, it is not the same as savings. The word savings describes money that has been earned, and having been earned, is not spent but rather set aside for emergency or investment use.…

The government's new money will eventually destroy traditional savings. This is true because the resulting inflation … will ultimately erode the purchasing power of traditional savings and thus ruin the saver, especially the small saver.

Several main themes emerge from Lewis's detailed analysis. One is that most of Keynes's 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 is "unemployment equilibrium" — the proposition that a market with unemployed resources has no tendency toward their employment.

Keynes's method of contrasting paradoxical truth against naïve common sense brings to mind philosopher Michael Levin's discussion of 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. (p. 129)Download PDF

Lewis tackles Keynes's obscurantism head-on with clear, logical arguments that reveal the nonsense within the paradoxes. He shows how Keynes relied on rhetorical tricks such as shifting definitions, statements that appear plausible but on closer examination make no sense, and hidden self-contradictions.

Contra the "paradox of thrift," Lewis writes,

There is no paradox here; Keynes is wrong. It is prudent for families facing job loss to put something away. It is also prudent for a society that has overspent and overborrowed to start saving. This is true with or without an economic slump.

As we have discussed, the slump came because the government … artificially stimulated the economy by printing new money and injecting it into the economy through the financial system. This lowered interest rates and encouraged a wave of wasteful borrowing and spending by both businesses and consumers. In particular, vast sums were borrowed which would never be paid back.…

The bad investments of the recent past need to be liquidated, or at least marked down in price. Until this happens, savers should build their cash positions and refuse to use them. To invest at the old, unrealistic asset prices would just continue the old pattern of throwing money away. (pp. 129–130)

Another recurring theme in Where Keynes Went Wrong is Keynes's reliance on hunches not supported by facts. For example,

Keynes offers not a shred of evidence that savings have exceeded investment throughout human history. This is another of his hunches.

He is correct that rich societies, like rich individuals, save more. But it does not follow that they produce more "excess" or "unused" savings.

Lewis demonstrates that Keynes frequently uses a hunch to decide a point in his reasoning that cannot be decided on theoretical grounds. The direction of his hunches was always in the direction that he needed the argument to go in order to get to the result he wanted. As Lewis later argues, Keynes in fact had the answer in advance; he knew what type of policy recommendations he wanted to make and he built his intellectual system to arrive at that destination. In those cases where empirical data existed at the time of his writing, Keynes often dismissed it with no counterevidence.

A running theme of Lewis's critique is Keynes's masterful use of satire and condescension: "satirical burlesques are a Keynesian specialty" (p. 121). Keynes loved to heap scorn and ridicule on the opposing view. Lewis inserts "pauses" in the book where the reader can give "Applause (for the satire)."

Keynes aimed to show, through this satire, that individual behaviors that economists have always thought to be rational and self-interested were in reality irrational and dogmatic. He characterizes saving, for example, as a religion with no practical end (p. 120). Likewise, he claims that policies usually considered sound and prudent, such as balanced budgets, in reality restrain economic growth. Governments, for example, should welcome disasters as an opportunity for deficit spending (p. 131).

Most of part 4, and some digressions in parts 2 and 3, cover what might be called the sociology of Keynes: the way that certain features of his personality and particular talents contributed to the widespread adoption of his views. His success requires explanation because it is entirely undeserved on the merits of the ideas themselves. Lewis identifies several factors, especially Keynes's writing style, his debating skill, his political maneuvering, and his gift for inflicting ridicule and embarrassment on his opponents, as keys in winning the day.

Finally, Lewis arrives at an important juncture:

One could go on, almost indefinitely, citing Keynes's obscurities, convolutions, inconsistencies, factual or logical lapses, and so on, but it is time to ask the obvious question: why did he write The General Theory this way? (p. 277)

And he offers the answer:

Keynes was a salesman. He was trying to sell a particular type of economic policy, and he was prepared to utilize any rhetorical device, from crystal clarity and wit all the way to complete unintelligibility, in order to make the sale.

Why would unintelligibility help to make the sale? Not just because it can be used to impress. Equally important, it can be used to intimidate. (p. 277)

Lewis suggests that these qualities, which made Keynes such a formidable debater, did not translate well into written arguments. Debate is fleeting and Keynes's opponents could be disoriented by his quick wit and confusing shifts of meaning. But written words are stable, so his critics have the time to go through them in detail. Hazlitt in particular was able to identify all of the shifting definitions and other tricks that might have passed by too quickly in verbal argument.

This review only skims the surface of Lewis's book. For instance, I have not devoted any space to his excellent coverage of recent events, including the corrupt bailouts. The work contains so many gems that it would be impossible to give due credit to the author without writing a review twice as long as the book itself. The book is highly readable. Lewis is an excellent writer, and I often found myself rereading particular passages.

I came away with an appreciation of the great mystery of Keynes: how did his ideas come to have the profound influence that they do now? The ideas in The General Theory form the foundation of modern macroeconomics, which itself guides the central banking and monetary policy in every country. Keynesianism, if not Keynes, is 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 (something wrong, perhaps, but surely something deep and profound). Could several generations of professional economists have been so wrong as to adopt an intellectual pile of rubbish as the basis for making decisions having impacts of trillions of dollars?

And this is the book's most important contribution: it demystifies Keynes. Lewis cites a story from one of Keynes's books in which

British Prime Minister Lloyd George "bamboozled" US President Woodrow Wilson … [then] found that "it was harder to de-bamboozle [Wilson] than it had been to bamboozle him." This describes our predicament today. Keynes has bamboozled us and it is very difficult to de-bamboozle ourselves. (p 304)

This book makes a significant contribution to that task.


Contact Robert Blumen

Robert Blumen is a software engineer and podcast editor. Send him email.