The Legacy of Lord Keynes


This address, given to the British Society For Individual Freedom on September 14, 1959, was first published in Freedom First, Autumn 1959.

Let the dead rest in peace. But would that the dead let us rest in peace! Today's case in point is John Maynard Keynes, who died in 1946, but whose ideas and troops go marching on, now openly, now insidiously, ever capturing new citadels of intellectual opinion.

It is these ideas, alive and virulent, sold so effectively by disciples of Keynes in the marketplace of ideas, that plague us today. Ideas have consequences, and it is these consequences – Keynes' legacy – that we examine now.

I need hardly remind you of the magnitude of Keynes' ideas or their far-reaching consequences into every crook and cranny of our existence. In America, Keynes has sparked the Keynesian Revolution, a "new economics." Professor Paul Samuelson of the Massachusetts Institute of Technology has hailed Keynes as a "genius." The London Times in its obituary called him not great, but "Very Great." In America, Congress passed the Full Employment Act of 1946, in effect a tribute to Keynes.

Keynes made his mark in history – as Marx made his. I do not mean this comparison to be odious, though of course it is. Marx, to be sure, wanted to destroy capitalism; Keynes wanted, merely, to reform it. But, while differing in degree, both wanted to enlist, and really to unleash, the power of the state. Both disdained individual freedom. Both were callous towards the rights of property. Both based their cases on the supposedly inherent tendency of free enterprise to veer into depression. Both were enemies of private ownership of the tools of production. Marx spoke of "the liquidation of the capitalists"; Keynes spoke of the "liquidation of the rentiers."

These similarities in philosophy differ – I repeat – in degree. Marx wanted total socialism, i.e., communism, or, as he himself called it, "scientific socialism." Keynes wanted some "socialization of demand," and "a somewhat comprehensive socialization of investment." Keynes, in brief, chose the middle way, forgetting that the middle has a strong and constant tendency to drift toward the left.

Clearly, then, Keynes was no friend of laissez faire capitalism. In an article in the Yale Review in 1933, he wrote:

"The decadent international but individualistic capitalism, in the hands of which we found ourselves after the war, is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous – and it doesn't deliver the goods. In short we dislike it, and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed."

Well, unfortunately, Keynes' perplexity didn't last long. He did indeed spin out a "new economics," a whole new set of momentous ideas. Capitalism betrays, he told us in 1935 when his General Theory appeared, long-run tendencies toward stagnation and an equilibrium "between workers and the economy at less than full employment." Underconsumption, he pontificated, stems in great measure from a mal-distribution of income. Money is but credit, and gold is but a "barbarous relic." Saving and investment are non-related, and saving amounts to hoarding and is, in effect, anti-social. There are also assorted ideas distributed among such semantic labels as "the multipliers," "the accelerator principle," "liquidity preference," "propensity to consume," "inducement to invest," and so on.

And in practice, what has this bundle of warmed-over mercantilism meant? I wish to look into the Keynes legacy in three ways. First, on the matter of inflation, then on the method of macro-economics and aggregate thinking, finally on the Keynesian treatment of the state.

Now, what of Keynes' penchant for inflation? Of course, Keynes did not openly embrace inflation, but certainly he was having quite an affair with it, and rather an illicit one. For behind Keynes' open sesame formula of Y = C + I lay Keynes' earth-shaking – to him, anyway – discovery. Keynes argued depression – more specifically, unemployment – was the offspring of the failure of consumption demand and the failure of investment demand.

Hence, underconsumption – i.e., underspending – was the economic culprit. Well, if too little private spending causes unemployment, then more public "compensatory" spending will create employment. Hence Keynes' banner in effect became "Let us spend ourselves into prosperity" and, "Lead us not into temptation of saving." Saving was thought virtuous in the days of Poor Richards Almanac – a penny saved is a penny earned, and all that – but in the modern 20th century, saving is downright sinful, cutting off as it does the flow of spending.

Ah, and how would the gentlemen of Whitehall and Washington spend that which was not available from taxes and that which they didn't already have? Well, that really is a small problem – they go into debt, beautiful, virtuous, just intelligent debt – and with an eye to the Radcliffe Report, may I add "indispensable" debt.

But debt, deficit spending, involves, almost invariably, inflation, and Keynes knew it. How callous Keynes was to inflation can be seen in his fanciful suggestion that burying banknotes is one way of giving people work – digging them up.

Inflation then, that's Keynes' big idea. Jail the counterfeiter, yes, but when the State counterfeits, when it inflates and cheats Society – the pensioned railroad worker, the saver who had bought an insurance policy or put money in a bank, the people locked in on salaries and wages – well these are, after all, personal matters. The great evil don't you see, is unemployment, and if you don't see it, you just don't understand Keynesian economics.

Keynes' method of macro-economics and aggregate thinking, his propensity to amass and then carve up astronomical G.N.P.'s – Gross National Products – into "public sectors" and "private sectors" and all sorts of little sectors and so on, you, as an individual are lumped in one of those sectors – labor, farm, capital, etc., and these sectors like pieces on a chess board, are moved about in a super-colossal national economic budget. And what did Lord Keynes use as his building block for these grandiose figures – bags of cement, tons of steel, baskets of wheat? No, much worse. He used currency units – pounds, dollars, francs, or anything else – money, the same battered creature we discussed under inflation. So the G.N.P. is a money sum, and as money is inflated, so are G.N.P.'s inflated and distorted.

And the G.N.P. is a statistical sum, too, based on assumed sellers' prices. But statistics and past prices record only the history that was, never the history that will be. Keynesian economists, understandably, who have boldly called the tune of economic times have, as you know, a woeful record. They assume constants in economic activity when there are only variables. They assume men are numbers with no independent will of their own. Little wonder, then, that the economists' predictions go astray.

Lastly, let us examine Keynesian legacy on "the new look" of the State. There is, permit me to say so – an enormous naïveté on the part of Keynes and the Keynesians on the nature of man and the State. In a typical statement Keynes declared in his General Theory:

"I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an even greater responsibility for directly organizing investment."

I read this statement for I believe it shows the most rosy view of politicians possible. Keynes seems not to have understood that politicians generally stress short views – upcoming election views – and not long views. He himself said "In the long run, we're all dead." And, as for "the general social advantage," Keynes either never heard of Lord Acton or totally ignored that Actonian advice, "Power tends to corrupt, and absolute power corrupts absolutely." Keynes, in short, never realized that Government, like the Tucker car in my country a decade ago – it could go only forward and could not reverse. Yes, government can "compensate" private spending, and hence, eventually, it must over-compensate. Again, Government can invest, but, inherently, it can't disinvest. In other words, power does not, cannot, will not dissolve itself. Power, unless checked, can move, but in one direction – more power.

Perhaps Keynes knew all this, knew what he was playing with, that he was, to say the least, immoral about the whole business, for in a posthumous essay "Two Memoirs" published by Augustus Kelly of New York (1949), he wrote:

"We repudiated entirely customary morals, conventions and traditional wisdom. We were, that is to say, in the strict sense of the term, immoralists. The consequences of being found out had, of course, to be considered for what they were worth. But we recognized no moral obligation on us, no inner sanction, to conform or to obey. Before heaven we claimed to be our own judge in our own case. I have to think this is, perhaps, rather a Russian characteristic. It is certainly not an English one. It resulted in a general, widespread, though partly covert, suspicion affecting ourselves, our motives, and our behavior. This suspicion still persists to a certain extent, and it always will. It has deeply coloured the course of our lives in relation to the outside world. It is, I now think, a justifiable suspicion. Yet so far as I am concerned, it is too late to change. I remain, and always will remain, an immoralist."

I ask this question for you to decide: Is the essence of Keynesian economics taken all in all, social immorality?

In the long run, we're all dead, Keynes was fond of reminding us. Yes, Keynes is dead. But the devil of it is that we, the living must live out the terribly loaded short runs of John Maynard Keynes.

October 25, 2006