The Critics of Keynesian Economics

X

PHILIP CORTNEY, a life-long student of economics, is president of Coty, Inc., and of Coty International. He was graduated as an electrical engineer from the University of Nancy, France, and began his career in the steel business. He has been decorated as an officer of the French Legion of Honor and has been president of the United States Council of the International Chamber of Commerce. The following excerpt is taken from two articles which originally appeared in the Commercial and Financial Chronicle (New York) of February 8 and 15, 1945, and were later reprinted in his book, The Economic Munich, 1949.

THE PHILOSOPHY OF LORD KEYNES

PHILIP CORTNEY

It is essential to study the philosophy of Lord Keynes if we want to explain and understand his attitude toward gold. It is not the presupposed tyranny exercised by gold on men and economy which has led him to espouse his philosophy, but it is this last which determined his attitude regarding gold.

First of all, what does Lord Keynes think about human nature? The answer to this question seems of primary importance for it is impossible without it to have a workable political philosophy and also because economic phenomena are determined, to a large extent, by psychological factors. Men seem to him to have natural inclinations toward cruelty as well as a desire for personal power. Lord Keynes also admits that man has a passion for money. He even feels that it is better for humanity that man’s desire for power be directed towards increasing his bank account. Lord Keynes does not believe that we can change human nature, but he is of the opinion that we can “direct” it. (I am indeed very much afraid that if we push too far our control of money and economy, we will be obliged to direct human nature . . . with the help of a knout.) For what purpose should we educate human nature? The ruling class, answers Lord Keynes, should be trained to be satisfied with smaller returns than in the past in order to allow a more equitable distribution of revenue.

To the question of whether what Lord Keynes calls an equitable distribution of revenue is not going to decrease savings, he answers with satisfaction in the affirmative, since for him there is not only too much saving, but this latter is practically a sin. Too much saving and not enough consumption and investments, these are the source of all our evils, according to the diagnosis of Lord Keynes. He maintains that the needs for capital are too moderate and that interest rates on savings should tend toward zero. He is in favor of “the euthanasia of the rentier” and he predicts their eventual disappearance . . . when they will have finished their job (?). On the other hand, only last September, the “Economist” published a series of articles asserting that the increase of productivity of English industry—without which increase England is facing serious dangers—depends on savings, and, furthermore, that the investment of these savings will be governed by the possibility of realizing profits in proportion to the risks involved. Lord Keynes is fighting against savings maintained in the form of money and bank deposits. He has even declared himself in favor of “melting money” as recommended by a German, Silvio Gesell. This consists of a penalty on money not used which should be proportionate to the time it has not been utilized. One may recall that in France a former Prime Minister endorsed, in 1935, “melting money” as a remedy for the depression from which she was then suffering. But, may I ask, with such theories on saving and the functions of money, what part can gold well play?

Assuming that the national needs of well-to-do countries are satisfied, could the excess savings not be invested in those countries which need to be developed and equipped industrially? The development of backward countries was in 1933 not only the last and least of Lord Keynes’ worries but he frankly declared himself as being opposed to the export of capital. In the article published under his signature in the American publication, “Yale Review” (1933) entitled “National Self-Sufficiency,” he states: “above all, let finance be primarily national.” Perhaps in none of his other writings is the philosophy of Lord Keynes as clearly expounded as in this article. He herein states that he detests “individualistic and decadent capitalism” and he adds that he is beginning to be contemptuous of it. But does not economic liberalism contribute to the maintenance of peace through commerce and international division of labor? On the contrary! says Lord Keynes; it stimulates the struggle for markets between nations; it fosters the progress of economic imperialism and it necessitates the defense of investments abroad. One is certainly not misinterpreting his thought in attributing to him the conviction that the war of 1914 was due to economic internationalism. What is more, he can only see advantage from a national point of view that capital be prevented from emigrating. In reading Lord Keynes, one cannot help discovering a sort of aversion towards competition, the cornerstone of economic liberalism. For him, the Stock Exchange is only a casino for gambling! Summing up, Lord Keynes in 1933, was advocating the adoption of a form of economic nationalism (national self-sufficiency) which might lend itself for “experiments” in accordance with his doctrines and in order to bring about the realization of an “ideal social republic.” One may wonder what could well be the role of gold in such an “ideal social republic” and how should one be surprised at the pride Lord Keynes takes in having called gold “a barbarous relic”?

During the last few years, Lord Keynes has been defending exchange instability and disparity in national price levels in the name of the “full employment” dogma. He has published in the British magazine, “The Economic Journal” (September, 1943) a curious and rather obscure article in which he rejects stability of prices as a desirable objective of monetary policy. He justifies his position with the argument that politically it would not be expedient or possible to prevent the constant rise of wage rates, or rather what he calls “efficiency wages.” Furthermore, Lord Keynes thinks that the quantity of money available should not be an obstacle to the “natural” rise of wages. If I understand him correctly, he now declares himself against exchange stability in the name of the “full-employment” doctrine which has as a corollary a constant rise of nominal salaries, which rise would be difficult or impossible to control. It is clear, however, that exchange instability is defended presently by Lord Keynes for political rather than economic reasons. Lord Keynes also makes (innocently or facetiously?) the remark that a communist country is in a position to be very successful in preserving stability of internal prices and efficiency wages. Nazi Germany has demonstrated to the world by what means this double objective can be attained. They are simple and obvious: dictatorship, suppression of liberty and of labor unions, and last but not least, exchange control.

The political and economic-social philosophy of Keynes would suffice alone to explain his animosity towards gold and exchange stability which have been the excellent servants of liberalism and economic internationalism.

THE ANGLO-AMERICAN ECONOMIC RIVALRY

Another reason, however, for his position against the gold standard is the fact that after 1918 England lost her industrial and financial supremacy. It can be proven that the ideas, leanings and prejudices of many economists are often determined by the problems with which their era or their particular country is confronted. The struggle involving the gold standard is fundamentally only an aspect of the economic-financial rivalry between Englishmen and Americans. The extraordinary rise of American industrial power after 1918 and the switch of the financial center of gravity of the world from London to New York, explain, to a great extent, Lord Keynes’ hostility, as well as that of other English economists, towards the gold standard. Among these latter, we must mention Paul Einzig, one of the influential editors of the newspaper “Financial News,” and also author of the “Daily Express” article to which we have already referred. He has the merit of speaking in plain terms of the economic-financial rivalry between the Anglo-Saxon cousins. For several years he has been campaigning against the gold standard. After reading what he has to say on it at present, we cannot help but wonder if he has ever read the book, “The Future of Gold,” written by Paul Einzig in 1935 in which he himself states that if the gold standard did not exist, it would have to be invented.

There is still another reason which should incite us to listen with a critical mind to the ideas and opinions of Lord Keynes. He is the author of several new monetary theories, of which the most important is the one which deals with the influence of low rates of interest on investments and economic activity. It often happens that philosophers who have a system of their own, or economists who believe they have discovered the philosopher’s stone, suffer from a particular blindness which prevents them from being objective; they become prisoners and sometimes victims of their own theories. To the extent that Lord Keynes’ position against the gold standard is influenced by consideration of monetary doctrines, it is due to his theory concerning interest rates.