Wednesday, June 10, 2009

Keynes was Right

John Maynard Keynes wrote several books, among them:

(1) A General Theory, of Employment, Interest and Money. This is the most widely known book, which is incorrect or at best unintelligible. So-called "Keynesians" -- such as people who (erroneously) believe that government spending encourages private spending -- look back to this book.

(2) A Tract on Monetary Reform. In contrast, this book is easy to understand, with some elegant passages describing basic tenets of economics such as the fact that printing money, printing government debt, and levying taxes are really all the same thing -- the government's taking purchasing power from the people.

(3) The Economic Consequences of the Peace. It is very rare that economists say something that is: (a) of huge world wide importance, (b) the opposite of conventional wisdom, and (c) obviously correct in hindsight. Keynes' Economic Consequences of the Peace is one of those instances. Philipson and Posner's Private Choices and Public Health is another. Milton Friedman's Capitalism and Freedom may be another.

Today I wrote in the New York Times' Economix blog that the Economic Consequences of the Peace might be the most insightful and important economics books ever.

I expect that commenters -- unaware that Keynes' writings are not all of the same quality -- will think I refer to the General Theory and say something like "at last someone at the University of Chicago is a Keynesian." If appreciation of Economic Consequences of the Peace is what constitutes Keynesianism (it is not), then the University of Chicago has been leading Keynesianism for almost 100 years!

P.S. If you need some strong praise of Milton Friedman, tune in next Wednesday.


Anonymous said...

Of course, you are right. However, I would suggest that the post General Theory Keynes is also better than the GT Keynes. Unfortunately, most of that work is only available in the volumes of his Collected Writings which appear to be out of print. But there we find interesting material on the limits to the fine tuning of aggregate demand via public works and more. I have talked about this stuff at the ThinkMarkets blog. I should also add that some of the Chicago economists on the late 1920s and early 30s were big advocates of deficit spending and public works to combat recessions. Not the best period -- but this was the "old Chicago school."

Mario Rizzo.

Sextus Empiricus said...

You've neglected one of his best books -- his Treatise on Probability (1921). It covers the mathematical and philosophical foundations of probability and statistics. It foreshadows many subsequent developments in subjective probability and Bayesian statistics.


Richard Ebeling said...

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.

In fact reading through the many of the chapters that make up Keynes book, "Essays in Persuasion," makes it very clear that he opposed market-based solutions to almost everything.

He believed in a government-managed monetary system; a corporativist economic system not much different that Italian fascism (and was sympathetic to eugenics); considered market-based wages and prices as an "economic jaggernaut" that did not show enough empathy for special interest groups; and advocated printing lots of paper money and public works as a solution to the Great Depression long before the appearance of "The General Theory."

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

Skip Sauer said...


Keynes could have believed in the tooth fairy (which is basically the case you make) and still gotten the analysis in Economic Consequences of the Peace correct.


Anonymous said...

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.

Unknown said...

There is no tragedy in Keynes' work. Sure, he was mistaken on a lot of things (and ridiculously unintelligible), but many economists have gotten many things wrong. Proposing ideas that turn out to be incorrect is just as important for the development of the science as proposing ideas that are actually factual.

The tragedy is that most of his ideas are still taught as gospel, with no room for alternatives, or critiques, in public high schools across the country. Compounded with how the goal of courses is to pass the AP Exam, not explore economics, it is rather hard to get past outdated models of government boosted Aggregate Demand.

Unknown said...

Casey - any comment on Posner's article in The New Republic? (