Keynes Was Right

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The
influence of economist John Maynard Keynes (1883–1946) is still
profound in government circles. I say government, instead of economic,
because economics is involved with human behavior, and government
is about the regulation and control of that behavior. An economist
who can provide the rulers with a plausible justification for their
control of the population is a valuable asset to any government,
as Keynes was to his.

The
full flowering of Keynes’ economic thought occurred toward the end
of his career, when he "discovered" the mistake of classical
economists, who held that, when goods were in surplus, the best
role of government was to allow wages and prices to fall, until
an equilibrium was resumed. Falling prices would stimulate consumption,
in other words. Supply would create demand.

Not
so, said Keynes. The best way to stimulate consumption was via spending
by governments. To "prove" this theory Keynes developed
highly sophisticated arguments, involving terms and concepts of
his own, such as "multipliers," "the marginal efficiency
of capital," "liquidity preference," and others.
In 1944, the British White Paper on Employment Policy said that
"the government accepts as one of their primary aims and responsibilities
the maintenance of a high and stable level of employment after the
war." In this country, the Employment Act of 1946 stated that
"The Congress hereby declares that it is the continuing policy
and responsibility of the Federal Government to – promote maximum
employment, production and purchasing power."

Sweden,
Canada, and Australia adopted similar policies. Keynes gave the
whole thing respectability, which, in fact, is an odd term to use
regarding Keynes, a member of the Bloomsbury group of leftist amoralists.

But
Keynes, earlier in his career, expressed different economic views,
in a slight book called The
Economic Consequences of the Peace
. He had attended the
Paris Peace Conference in 1919 as technical adviser to Prime Minister
Lloyd George, but resigned his post in protest of what he regarded
as outrageous demands being made upon a prostrate Germany for reparations.
His book (it is available on the internet) deals with the economic
condition of Europe prior to the war, the Conference itself, with
interesting portraits of the attendees, the Treaty which resulted,
and reparations. Keynes saw no ready solution, which "leads
me to a necessary digression on the currency situation of Europe."
What a digression!

It
begins: "Lenin is said to have declared that the best way to
destroy the Capitalist System was to debauch the currency. By a
continuing process of inflation, government can confiscate, secretly
and unobserved, an important part of the wealth of their citizens.
By this method they not only confiscate, but they confiscate arbitrarily;
and while the process impoverishes many, it actually enriches some.
– As the inflation proceeds and the real value of the currency
fluctuates wildly from month to month, all permanent relations between
debtors and creditors, which form the ultimate foundation of capitalism,
become so utterly disordered as to be almost meaningless; and the
process of wealth-getting degenerates into a gamble and a lottery.

"Lenin
was certainly right. There is no subtler, no surer means of overturning
the existing basis of society than to debauch the currency. The
process engages all the hidden forces of economic law on the side
of destruction, and does it in a manner which not one man in a million
is able to diagnose." Amazing words, predicting with great
accuracy what would happen in Germany just a few years hence, as
prices were raised weekly, then daily, then hourly, and "money"
was printed so rapidly that it was blank on one side. Has the "existing
basis of society" been overturned in America by inflation?
If so, how many have made the diagnosis?

Speaking
of various European currencies, Keynes writes: "But while these
currencies enjoy a precarious value abroad, they have never entirely
lost – their purchasing power at home. A sentiment of trust
in the legal money of the State is so deeply implanted in the citizens
of all countries that they cannot but believe that some day this
money must recover a part at least of its former value. To their
minds it appears that value is inherent in money as such, and they
do not apprehend that the real wealth, which this money might have
stood for, has been dissipated once and for all." Our Federal
Reserve System assures us that it is the people's confidence in
it that makes our money useful. There certainly isn't anything else,
as Keynes observed eighty-three years ago.

Price
controls were instituted, briefly, by President Nixon, who, in 1971,
declared himself a Keynesian. In 1919, however, Keynes saw the inevitable
failure of such controls, while unable to offer any satisfactory
alternative. "The presumption of a spurious value for the currency,
by the force of law expressed in the regulation of prices, contains
in itself, however, the seeds of final economic decay, and soon
dries up the sources of ultimate supply. – If, however, a government
refrains from regulation and allows matters to take their course,
essential commodities soon attain a level of price out of the reach
of all but the rich, the worthlessness of the money becomes apparent,
and the fraud upon the public can be concealed no longer."
Today, that "regulation" takes the form of taxation, being
much more agreeable than price controls, especially since the people
seem easily convinced that their high taxes are paying for "good"
things, like protecting the environment, and assisting backward
nations.

In
short, Keynes foresaw exactly the problems which would afflict the
countries whose governments adopted his theory. Of course, he may
have believed that gold would provide some sort of brake to rampant
inflation, although he was hardly an advocate of a gold standard.
In any event, doing away with any tangible form of money opened
wide the door to the economic problems he anticipated. Governments
continue to accept his belief that they can spend the country into
prosperity, while ignoring his earlier warnings of disaster if they
attempt to do so.

July
22, 2002

Dr.
Hein [send
him mail
] is a semi-retired ophthalmologist in St. Louis,
and the author of All
Work & No Pay
, which will soon be available at Amazon.com.

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