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Casey Mulligan suggests that the earlier Keynes -- the Keynes before the "General Theory" -- was a much better economist than the Keynes that emerges from reading that most famous 1936 volume of his.

Alas, I beg to differ. Yes, one can some very insightful and even reasonable passages in those earlier works. In "The "Economic Consequences of the Peace," (1919) Keynes indeed eloquently highlights the serious harm from inflation. And in "The Tract on Monetary Reform"(1924), he points out that inflation is a hidden form of taxation.

But already in the 1920s he shows clearly his anti-capitalist, and anti-free market views. For instance, in his 1925 lecture, "Am I a Liberal?" Keynes says that liberalism and the British Liberal Party are only worth supporting if the Liberal Party accepted a “new wisdom for a new age.” A wisdom that entailed accepting an ideological transition from supporting free market "economic anarchy to a regime which deliberately aims at controlling and directing economic forces in the interests of social justice and social stability.”

In another essay, he made clear that he did not support workers wages being determined by market forces, but must be regulated in the same of social justice:

"The truth is that we stand mid-way between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is 'fair' and 'reasonable' as between classes. The other theory – the theory of the economic juggernaut – is that wages should be settled by economic pressure, otherwise called 'hard facts,' and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the change consequences of the journey to individual groups."

In 1926, Keynes delivered in Berlin, Germany, his famous lecture, "The End of Laissez-faire." He argued, “It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no compact conferring perpetual rights on those who Have or on those who Acquire.” Nor could it be presumed, he said, that private individuals pursuing their enlightened self-interest would always serve the common good.

In a period in which industry was becoming concentrated and controlled by handfuls of industrial managers, Keynes proposed “a return, it may be said, towards medieval conceptions of separate [corporate] autonomies.” But instead of these corporate entities being left to their own profit-making purposes, Keynes’s proposed semi-monopolistic structures that would operate under government approval and clearly with government supervision.

In a world of “uncertainty and ignorance” that sometimes resulted in periods of unemployment, Keynes suggested “the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution.”

It also required the government’s centralized collection of statistics and data about “the business situation” so the government could exercise “directive intelligence through some appropriate organ of action over many of the inner intricacies of private business.”

And he believed that “some coordinated act of intelligent judgment” by the government was required to determine the amount of savings in the society and how much of the nation’s savings should be permitted to be invested in foreign markets as well as the relative distribution of that domestic savings among “the most nationally productive channels.”

Finally, Keynes argued that government had to undertake a “national policy” concerning the most appropriate size of the country’s population, “and having settled this policy, we must take steps to carry it into operation.” Furthermore, Keynes proposed serious consideration of adopting a policy of eugenics: “The time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members.”

This agenda for an activist and planning government did not make Keynes a socialist or a communist in any strict sense of these words. Indeed, after a visit to Soviet Russia he published an essay in 1925 strongly critical of the Bolshevik regime.

“For me, brought up in a free air undarkened by the horrors of religion, with nothing to be afraid of, Red Russia holds too much which is detestable. . . . I am not ready for a creed which does not care how much it destroys the liberty and security of daily life, which uses deliberately the weapons of persecution, destruction, and international strife. . . . It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here.”

But where Soviet Russia had an advantage over the West, Keynes argued, was in its almost religious revolutionary fervor, in its romanticism of the common working man, and its condemnation of money-making.

Indeed, the Soviet attempt to stamp out the “money-making mentality” was, in Keynes’s mind, “a tremendous innovation.” Capitalist society, too, in Keynes’s view, had to find a moral foundation above self-interested “love of money.” What Keynes considered Soviet Russia’s superiority over capitalist society, therefore, was its moral high ground in opposition to capitalist individualism.

And he also believed that “any piece of useful economic technique” developed in Soviet Russia could easily be grafted onto a Western economy following his model of a New Liberalism “with equal or greater success” than in the Soviet Union.

It is also worth recalling that in "The Tract on Monetary Reform" Keynes abandoned all allegiance to the gold standard and advocated a government-managed and manipulated currency.

The gold standard meant that the value of a country’s money was determined by international market forces to which each country had to conform in terms of appropriate adjustments in its domestic structure of prices and wages.

If trade unions were strong and would not conform their wage demands to market conditions, then adherence to a market-guided gold standard could result in unemployment if the money wages that trade unions insisted upon were above what the global market determined those wages should be.

Instead, Keynes advocated abandoning the fixed exchange rate between gold and the British pound; the foreign exchange value of the British pound should be raised or lowered by the central bank to maintain domestic prices and wages at the politically determined desired level.

Or as Keynes expressed it, “When stability of the internal price level and stability of the external exchanges are incompatible, the former is generally preferable.” As far as Keynes was concerned “there is no escape from a ‘managed’ currency, whether we wish it or not. . . . In truth, the gold standard is already a barbaric relic.”

With the coming of the Great Depression Keynes once again rejected the idea of a free market solution to the rising unemployment and idled industry that intensified following the crash of 1929.

His remedy was outlined in two “open letters” to Franklin D. Roosevelt in December 1933 and June 1934, as well as in some addresses and speeches he delivered in England evaluating the possibilities and results of the New Dea1.

In one of those open letters to FDR, Keynes made clear that he advocated inflation as the cure to all unemployment problems, including emphasis on "shovel ready" employment projects as soon as possible:

"[P]ublic authority must . . . create additional current incomes through the expenditure of borrowed or printed money. . . . When more purchasing power is spent, one expects rising output at rising prices. Since there cannot be rising output without rising prices, it is essential to insure that the recovery shall not be held back by the insufficiency of the supply of money to support the increased monetary turnover. . . . The increased stimulation of output by increased aggregate purchasing power is the right way to get prices up. . . . I put in the forefront, for the reasons given above, a large volume of loan expenditure under government auspices. . . . [P]reference should be given to those which can be made to mature quickly on a large scale. . . . The object is to get the ball rolling. . . I put in the second place the maintenance of cheap and abundant credit, in particular the reduction of the long-term rate of interest."

I must confess, I search in vain for the "better" Keynes, the "good" Keynes in any of these earlier works before the appearance of "The General Theory" in 1936.

Richard Ebeling


Excellent. Many "free market" economists who often write about how Keynes was "misunderstood", that he had some pretty sexy and acceptable views on economy, unlike those awful "Keynisians", should read this your little reminder.

Can someone specify to what extent Keynes reverted to the "classical" stance after the war? Hutt suggested (possibly in the preface of his second book on Keynes) that there was a suggestion to suppress some of his papers from that period.

Fascinating to find The Economic Consequences of the Peace on line; some of the information tests the classical liberal idea that the more a nation trades, the less likely it is to go to war. Germany pre-war had a very large volume of trade with many nations.

Usually, the claim that Keynes was reverting to the “classical” perspective is based on his June 1946 article on “The Balance of Payments of the United States,” which appeared in the ”Economic Journal” shortly after he passed away.

He discusses in some detail the likely patterns of trade between the U.S. and other countries, including Great Britain, in the postwar period, and whether or not America will run unsustainable trade imbalances.

The issue becomes, therefore, how much the international trading system is “self-correcting,” and how much acceptable trade balance requires conscious state intervention.

Towards the end of the article, Keynes says:

“In the long run more fundamental forces may be at work, if all goes well, tending toward equilibrium, the significance of which may ultimately transcend ephemeral statistics. I think myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance, which we are liable today to overlook because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past.”

But before one becomes too jubilant, that Keynes has returned to the “classical” fold, one must, then, read how he back tracks and qualifies this paragraph on the next page of the article. Here he says that the classical, long-run medicine is all to the good, but it cannot be left alone to do the work. No, there are many unpleasant things in the short run that require the government’s helping hand, including government manipulation of exchange rates and trade restrictions:

“I must not be misunderstood. I do not support that the classical medicine will work by itself or that we can depend on it. We need quicker and less painful aids of which exchange variation and overall import control are the most important. But in the long run these expedients will work better and we shall need them less, if the classical medicine is at work. And if we reject the medicine from our systems altogether, we may just drift on from expedient to expedient and never get really fit again. The great virtue of the Bretton Woods and Washington proposals, taken, in conjunction, is that they marry the use of the necessary expedients to the wholesome long-run doctrine. It is for this reason that, speaking in the House of Lords, I claimed that ‘Here is an attempt to use what we have learnt from modern experience and modern analysis, not to defeat, but to implement the wisdom of Adam Smith.’”

Here is the confident advocate of the “modern analysis,” (which clearly means his own ideas in “The General Theory”) who believes that he can implement a variety of short-run interventionist policies to lesson the impact of the “classical medicine” left to its own devices (money wages adjustment downwards) while somehow steering the economic policy ship-of-state in the direction of the equilibrium shore of the classical long-run.

This assumes, of course, that the (Keynesian) economist has the knowledge, wisdom and ability to do all these things, and that in the policy selection and implementation process the special interest groups do not influence or capture direction of the policies chosen and do not resist any attempt to reduce them in that longer run.

This is part of Keynes’ arrogance that the wise and the good (him and his friends) will be the elite to direct and guide policy above the fray of real-world special interest politics (see Buchanan and Wagner, “Democracy in Deficit”).

So, again, where is the “better” or “good” Keynes? I’m still looking.

Richard Ebeling

And one other point, this time in reference to Rafe's question about Imperial Germany, its trade policy, and peace vs. war.

We need to keep in mind that shortly after the unification of the German states under Prussian leadership following the Frano-Prussian War of 1870-1871, the newly constituted German Empire under Bismarck's leadership began to turn away from free trade.

In the 1870s and 1880s, Imperial Germany was the trendsetter for a return toward protectionism. To support state-assisted cartels tariff barriers were raised. Some export sectors, including cartelized industries received export subsidies from the German government. Also German agriculure was increasingly protected from less expensive foreign good supplies.

This went in step with the implementation in the 1870s, 1880s, and 1890s of the Welfare State. Germany established the modern versions of national health care, unemployment insurance, old-age pensions, public housing, workplace regulations, wage standards, etc.

Protectionism was essential to secure these programs and their higher costs for German manufacturing from lower-cost goods sold by other countries.

Finally, trade policy was influenced by the ideas and and ideals of many who made up the German Historical School. Gustav von Schmoller and company, for all their talk about "social justice" as guiding their domestic policies, were insistent that in international affairs Germany could only obtain its proper place in the sun through war and conquest. International relations were a zero-sum game; if Germany was to be strong on the global stage it could not avoid making France and English weaker.

Thus, trade policy was to be manipulated to serve the wider national interests to assure German "greatness."

Richard Ebeling

I would agree that much of Keynes's "The Economic Consequences of the Peace" seems to be a pretty good recounting of conditions before, during, and after the treaty. However, his *great* economic analysis seems to consist entirely of a) observing that Germany would be incapable of paying the reparations and b) that Germany had experienced inflation. Both these points were obvious even to the people writing the treaty, but were ignored for political reasons.

His solutions involved lowering reparation payments (reasonable) and giving Europe a bunch of money through American loan forgiveness and additional loans. These aren't particularly compelling, but not horrible.

When he gets into really broad economic analysis, he shows his underdeveloped theory of capital, which I understand led to some his big problems in the General Theory. Speaking of the economic conditions leading up to the war he writes:

"Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of "saving" became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory,—the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you."

Comparing a growing capital stock to a cake that never gets eaten seems wrong-headed to me, sorta like the "paradox of thrift". It ignores that capital is used to allocate resources and make them more productive. An uneaten cake is indeed a waste, because a cake does not produce anything and its only purpose is to be eaten.


The notion that capital is useful because it expands production (true enough) is beside the point. Why expand production? The only sensible reason is to expand future consumption. The sensible purpose is saving is for the saver to expand future consumption. From a market wide perspectives, saving in total allows the use of more round about methods of production, which are more productive. But the only sensible purpose of expanding production is to be able to consume more in the future.

If there are people who make wealth an end in itself, so that they accumulate wealth in order to accumulate wealth, then it is possible that the natural interest rate could become negative. That is, people should have to pay for accumulating wealth. If they really want to do that, I suppose it is OK, but it seems a bit silly to me.

Keynes appeared to worry to much about this scenario. It is the secular stagnation theory. Growing income, growing saving, very low natural interest rates, problems maintaining sufficent real demand for goods and services. Not too realistic.


Much of your comments point out that Keynes is an excellent example of the shift of liberalism from free markets to statism. By our current standard, he was pretty bad. That is.. Krugman isn't nearly as bad as Keynes in terms of crazed interventionism.

My understanding of the "sensible" pre-General Theory Keynes, is that he correctly emphasized that issues relating to a general glut of goods involved issues with the supply and demand for money. And then, the diversion in the General Theory, where the monetary nature of the problem is hidden in the background.

Some of your criticism of Keynes, in fact, were places where he recognized the problem as monetary, and, of course, he advocates intervention to fix the monetary problems.


My point was mainly that the book mentioned doesn't contain any novel economic insights by Keynes (as the OP suggested). Where he actually uses economic analysis, Keynes doesn't seem to be any more or less insightful then usual. Keynes's main point in the book is that Germany would be unable to pay back the reparations, but that was no secret to the French. My understanding is the French felt threatened by the newly unified Germany and wanted to weaken it as much as possible. Unpayable reparations was their chosen method.

As for Keynes's 'insight' that printing tons of money causes inflation, economists had been talking about that for a pretty respectable period of time, therefor it wasn't novel. I'm not knocking Keynes on his representation of contemporary historical facts. I just disagree with the OP that this book somehow showed Keynes to be a better economist than people give him credit for

Bill, accumulation for the sake of accumulation cannot make interest rates negative. Close to zero perhaps.

However, a person who prefers less in the future to more now is extremely unlikely to exist. Any person who does this doesn't prefer accumulation, he prefers to become poorer.

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