The name of Hunter Lewis’ book says it all: Where Keynes went wrong – and why world governments keep creating inflation, bubbles and busts.
What Mr Lewis has done is to update Henry Hazlitt’s “The Failure of the New Economics” – the classic line by line refutation of Lord Keynes that the older ones among us read as undergraduates (before such works were purged from university libraries). Of course Hunter Lewis uses work on Keynes that was not available to Hazlitt in the 1950’s and he explains the terrible effects that the influence of Keynesian ideas on the policies of modern governments (especially in the United States), but basically Hunter Lewis is a Hazlitt for our time.
To say this is not to diminish the achievement of Mr Lewis – which is a considerable one. Many people when the first come upon Keynesian doctrines at school and then at university spot some of the absurdities (such as the idea that the government spending more money makes a nation more wealthy), and when not satisfied by textbooks and by the explanations of teachers and lecturers, we go on to seek out J.M. Keynes’ “General Theory of Employment, Interest and Money” (1936) but then we are confronted with a tested mess. Not just a very badly written book (so different from the witty paragraphs that are quoted in the textbooks), but such a complex mass of absurdities and contradictions that one despairs (or let me be honest “one despairs” means “I despaired”) of writing a full refutation of the work that was actually readable.
For example, the use of mathematics. It was obvious even to someone as ignorant of mathematics as me that Keynes used mathematics improperly – he used mathematical means that assumed, in their very structure, the very things the mathematics were supposed to “prove”. Yet Keynes also downplayed the importance of mathematics in the “General Theory…” and in other works – so what was the point of trying to explain his misuse of mathematics? Hunter Lewis deals with this problem (as he deals with all the other problems that trying to seriously examine Keynes presents), by using enough words to fully explain what Keynes is doing – whilst not falling into the trap of making the language so complex that his book becomes unreadable. The great strength of Keynes’ “General Theory…” is that it is almost unreadable – the nature of the writing is not an accident (Keynes could write perfectly clearly if he wanted to), it is deliberate – in order to obscure the line of “argument” and intimidate the reader into thinking “I can not follow this – Keynes must be a genius”. Paul Samuelson (the main American spreader of the ideas to undergraduates in the post World War II world) admits all of the above, but then (without irony) takes it as proof of the ‘genius’ of Keynes – as Hunter Lewis explains in chapter 20 of his work, especially on pages 267 to 268. Hunter Lewis takes the opposite approach, he writes very clearly indeed. And when he comes upon something in Keynes (as one does so often) that goes off at a tangent or raises a different subject he does not follow him in the main text of “Where Keynes Went Wrong” he carefully takes the matter and makes it an endnote of the book. This means that an person can read Mr Lewis’ book at one sitting and see the full argument -and then (if someone wishes to do so) one can follow the various tangents and side issues.
Mr Lewis manages to do what I thought impossible – he takes the work of Keynes and divides it into logical themes and sections. He also fits the “General Theory…” into the background of the other works of Keynes and into the philosophical and social thought of Keynes. Neither over-stressing links (as, for example, Hayek once did by saying that Keynes lack of concern with the long term was explained by his homosexuality – i.e. because he was not going to have children he did not care about future generations), nor pretending that the personality and general philosophical beliefs of Keynes had no influence on his economics. After all Keynes himself accepted that they did – for him economics was not a value free science (for all his use of the authority of “science” to try and make people accept his suggestions) economics was a “side of ethics” (page 45 of this work).
For the sake of critics, Hunter Lewis calls calls chapter four of the book “a digression” but in truth the “immoralism” of Keynes is clearly directly relevant to his work in economics. The lack of a sense of honour in Keynes (his Cambridge Apostles Club and general Bloomsbury group view that the ends justify the means that an enlightened elite may use any means in order to rule the ignorant masses). Keynes does not produce illogical arguments (or rather arguments that look logical, but when one examines them with care one finds to be based on on violations of logical reasoning) out of ignorance – he does so because deception does not matter to him, indeed to deceive people by violating the laws of reasoning, or by just confusing them with a mist of words in debate is a good thing, if it leads to good ends – as Keynes defines good ends. In this I (although not Mr Lewis) might be tempted to add that Keynes is a true academic – in the sense of being in the tradition of Plato the prince of the “noble lie”.
However, Hunter Lewis does not make the mistake of thinking that all was well with the theory and practice of money and banking before J.M. Keynes came along. On the contrary, several times (in different sections – as the matter becomes relevant) Mr Lewis shows us that things were very bad indeed. Not just were there terrible booms and busts (the worst of all being the credit money boom of Benjamin Strong in the late 1920’s – see pages 323-325 of this work), but the basic understanding of such things by the establishment was fundamentally mistaken.
The people with influence did not warn against either government expansion of the money supply or the fundamental idea that bankers (nor anyone else) can not really lend out money that has not been first really saved (real savings being income that people choose not to consume – but make available to be lent to others) and that the same money can not be in the hands of different people in different places at the same time (a violation of basic logic). Indeed most people with influence did not even hold that banks that got into trouble should be faced with the same consequences as other business enterprises that got into trouble.
The warnings of men like Thomas Hankey in the 19th century were ignored and the policy advice of his foe Walter Bagehot (the second editor of the “Economist” magazine) was followed by, for example, the people who set up the Federal Reserve system in 1913. What Keynes did was to take the errors of men like Walter Bagehot and vastly inflate them (whilst removing the rational side of the writings of men like Bagehot) – mixing them with the worst elements of the various monetary cranks (i.e. the people who thought wealth could be increased by increasing “demand”, spending, rather than by the hard road of work and saving). Keynes would not have had the success he did if he had not poisoned ground on which to plant his corrupt seed. Indeed he was careful to not be a revolutionary in how he suggested policy be put into effect.
Keynes may have told jokes from time to time about putting money in bottles, putting the money in old coal mines and allowing it to be dug up. But for the most part Keynes kept to the established policy of expanding the money supply by the route of working with the banks and other financial enterprises – governments would not just print money and spent it, there would be complex (and, for some people, profitable) game played. Keynes may have sometimes written as a radical (sometimes to the harm of his reputation – as with his friendly words about the new German system of government in the introduction to the German edition of the General Theory…), but at heart he was an establishment man. Even in economics Keynes did not try to really produce a revolutionary “New Economics” – he worked with the errors that already existed in theory, vastly expanding them and trying (as much as was practical) to distort or get rid of elements in economics that were true. Even the language of economics remained much the same – even if the meanings were altered. As the late W.H. Hutt was fond of pointing out (and Hunter Lewis knows well) Keynesians were not interested in open battle (for all Keynes love of debating – with people he knew would be respectful of course, he was not fond of debating with people who treated him with the contempt he treated them) Keynesians worked as their master had worked. They gained control of the leading journals, and they took control of academic appointment and the setting of examinations – they were masters of academic politics, just as they are masters of political manipulations in London and Washington D.C.
We will not be seeing a review of “Where Keynes Went Wrong” in the “Economist” magazine or in the “learned journals” – because that is not how Keynesians work, they work by marginalizing their critics (either trying to shout them down – or just ignoring them) not be trying to refute their arguments. At best the Keynesian will sneer at their foes – such as when “Nobel Price” winning Paul Krugman sneered at the Austrian theory of the boom-bust cycle as a “moral theory”, to a Keynesian of course (when they are being honest) the use of the word “moral” is meant as an insult – just as using the term “common sense” is an insult. To say people should not try and lend out money that they do not really have sounds “moral” (it sounds like “do not spend money you have not got”) and, therefore, the Keynesian is vile and common – no matter how “value free” the point may be as part of economics. Just as to say something is “common sense” (i.e. is accordance with the basic laws of reasoning) is an insult to the Keynesian – as to them if something goes along with traditional reasoning it must (again) be vile, something from the common herd. More government spending makes a nation richer, if you have a problem with deficits and debt – make them bigger, saving is not a virtue in fact it can undermine an economy, financial investment is not a matter of long term judgement – it is just casino betting, interest payments are just payments to rich parasites – ideally interest rates would be zero, “profit” is a dirty word and one should try and avoid using it in economics, taxing the rich is just a way of improving “social justice” it has no negative economic consequences one should be concerned about, and on and on. All this (and more) is what “Keynesian economics” is actually based on, when one strips away the (rigged) equations, and the mist of obscuring words.
I looked hard for errors in Hunter Lewis’ work, but I was not successful. The closest I came was his failure to fully go into the arguments against fractional reserve banking as much as he should. If one is going to take this, very controversial position (which Mr Lewis does on pages 196-8) then one has to defend it more fully or at least refer to works that do. Mr Lewis does cite Murry Rothbard and he refers to George Reisman’s “Capitalism”. But this is not enough – if one is going to go into the deep and dangerous waters one must at least also cite Huerto de Soto’s “Money, Bank Credit and Economic Cycles” for the full historical, legal and economic context.
However, overall I must recommend “Where Keynes Went Wrong” by Hunter Lewis. It is an important work, a major achievement and a vital book of warning for our times.
I expect the Hockey Team figured that if it worked for the Keynesians…
“Hayek once did by saying that Keynes lack of concern with the long term was explained by his homosexuality – i.e. because he was not going to have children he did not care about future generations)”
I would like a reference for this. It does not seem in character with his would normally write.
I do know that Hans Herman Hoppe got in trouble for saying the same thing in class. Which seems to me in character, but Hayek?
Henry Hazlitt’s book remains one of the most devastating take-downs of an economics point of view ever written. It ranks up there with Bohm-Bawerk’s demolition of Marxian exploitation theory.
The book is indeed excellent and unlike Hazlitt, the author doesn’t get bogged down in the wording of the General Theory (which isn’t to deny that Hazlitt’s effort is also superb).
The only petty complaint I would make is that Keynes’ Tract on Monetary Reform (or Economic Consequences of the Peace, I can’t remember which) is described by the author in differing locations as both his first and second book.
“However, Hunter Lewis does not make the mistake of thinking that all was well with the theory and practice of money and banking before J.M. Keynes came along.”
Just as well really – considering that Von Mises’ “The Theory Of Money & Credit” (1912) was itself essentially a monumental effort toward dealing with such problems well before anyone had ever heard of Keynes.
“Keynes would not have had the success he did if he had not poisoned ground on which to plant his corrupt seed.”
The Act of 1913?
“Keynesians were not interested in open battle (for all Keynes love of debating – with people he knew would be respectful of course, he was not fond of debating with people who treated him with the contempt he treated them).”
“When opposite basic principles are clearly and openly defined, it works to the advantage of the rational side; when they are not clearly defined, but are hidden or evaded, it works to the advantage of the irrational side.”
– Guess Who?
One of the most effective tactics the left constantly use is partial obscurity. I am currently finishing this book by one Francois Jullien, in which both the manipulative and educational powers of this strategy are laid bare. I found it fascinating, especially when read in comparison with things like this. Somebody really knew what she was talking about.
“Huerto de Soto’s “Money, Bank Credit and Economic Cycles”
I want to make time for this, as I’ve found some of his other writing on politics and law interesting.
“…or let me be honest “one despairs” means “I despaired”
At least one other person understood. It isn’t very nice to think the men in white coats are coming for “one” because “one” dares to take issue with what “one” really ought to understand as the trivia of language and thought.
mike, give it a miss, fcrissakes!!
One despairs (giggle)
Keynes is wrong, but I’m not convinced that governments do create booms and busts, though they may well amplify them. The problem is the natural assumption that booms and busts must have discernible causes, which is simply false.
The typical complex system has no stable static solutions; it spontaneously falls into a natural cycle, or goes off to infinity. The economy has more than two variables, and is non-linear, so definitely counts as complex.
This strongly implies that even in the complete absence of governments – no central banking, free floating interest rates, etc – the business cycle would still exist, and might well be little different from how it is now.
Robert, I think that this goes without saying – at least on this blog, AFAIK. There certainly would be cycles, only they wouldn’t be as vicious.
I’ve seen posts on this blog arguing that booms and busts are caused by governments, at least one of which cited an economist saying, essentially, that booms and busts could not possibly happen spontaneously.
Indeed, the very title of thw book this post refers to suggests that the book referred to holds much the same false view. Governments don’t create inflation; they only aggravate it.
“..I’m not convinced that governments do create booms and busts, though they may well amplify them.”
Well ok then, neither am I, let’s figure it out – why would an institution, issuing its’ own generally accepted currency, freely choose to issue at extremely low interest rates for so long as to knowingly cause a very large increase in the supply of that currency?
Hmm, I should add that I accept there are non-government causes of price inflation, but to say this…
“…the business cycle would still exist, and might well be little different from how it is now.”
… is surely a bit like saying a domestic cat is really a dangerous animal, and if only it was a hundred times bigger, it might well be little different from a tiger.
The difficulty is with measurement.
You are right Robert: I should only speak for myself. To me personally it seems silly to assume that there would be no high-low cycles if the markets were left alone – but I could certainly be wrong. It’s not like we have much empirical evidence in the form of such markets.
How much difference government activity makes depends, loosely speaking, on how fast perturbations decay.
At one extreme, it’s possible that all government activity has no more effective than burning the equivalent amount of money would have, that all the frantic whirl beloved of the left amounts to no more than spitting in the face of the oncoming tide, then claiming credit when it goes out.
At the other extreme, government activity could equally well be the dominant factor shaping the economy.
Where the truth actually lies cannot be determined a priori, and possibly not at all, given paucity of the available evidence. Simple extrapolations are not reliable in non-linear systems.
That’s a secondary issue though; the important point is that, while we don’t know what the business cycle would look like in the absence of government, we can confident that there would be one.. Recessions and inflation cannot be prevented by any means whatsoever, not even masterly inactivity
I agree, Robert. But there is another point to consider: it seems to me that the government creating/exacerbating the cycles is not nearly as damaging as the government “trying to fix the problem” when it occurs.
Nick – the Hayek reference.
It is from “New Studies” (1978) what Hayek says is (from my tired old memory).
In my previous book (Studies in Politics, Philosophy and Economics) I wrote an essay on why I thought Keynes neglected the long term – I have since found he was a homosexual so my essay was not needed.
Not “homophobic” perhaps – but remember Hayek was Austrian (Austrian in culture – not just Austrian school economics), unlike Germans (although Hoppe is German) Austrians do not have much of a “gay rights” tradition.
Mike “the poisoned ground”:
Most people did not follow Ludwig Von Mises “Theory of Money and Credit”.
Walter Baghot (second editor of the Economist – the first editor was O.K, but Walter wormed his way in by marrying the daughter of his employer) was fairly representative of the people who were followed.
If banks get into trouble – bail them out (but do it quiet – behind the scenes so the common herd do not get angry).
Of course W.B. was wildly more moderate than Keynes – but the work of the old establishment was what Keynes built on.
It is much less difficult to say “let us do stuff that we are already doing – just let us do it a lot more” than it is to say “let us start doing stuff that everyone has always opposed” – Keynes was an establishment man pushing at an unlocked door.
That is why you are right and you are wrong.
Of course fractional reserve bankers can produce a boom-bust without a government, but in a free market they would then go “bust” (i.e. bankrupt) themselves.
Even if we do not take the Rothbardian line (by the way see his history of economics for all the economists before Mises who opposes credit money expansion) that this is “fraud” a business practice that led to its practioners begging for food in the streets (rather than pensioned off on millions of Pounds a year) would not be wildly popular.
Also remember that each government “rescue of the financial system” makes the bubble bigger.
For example, the dotcom bubble (produced by Alan Greenspan) burst – but no liquidation was allowed, instead “Alan Greenspan saved the world” with an load of new credit money that created the housing bubble.
Now that has burst – but the world has been “saved” again by another influx of money.
The “Economist” loves this – it boasts about it every week, and then it wonders why free market people have such a “vicious” hatred of it and the politicians it supports – by the way the Economist is wrong, most tea party people are not “vicious” at all, nor are they mostly concerned with “anti tax” stuff their main concern is anti government SPENDING, although the Economist may be thinking of people like me – and in that they would be correct, I really would like to work on the avarage Economist writer with a blow torch (and I would take my time as well), but most free market people are not like me.
Anyway the final bubble has now been created – it is beyond all salvation, the comming bust will bring down the system.
I have had nothing to do with this (I am poor and powerless) the elite have done it to themselves – by their refusal to go through a 1981-1982 style liquidation of malinvestments.
Even such establishment people as the Chancellor of Germany know that the next crises (which can not be delayed for more than a couple of years – at most) will bring the roof down.
That is settled now – what is not settled is “what happens then”.
“Where the truth actually lies cannot be determined a priori, and possibly not at all, given paucity of the available evidence.”
I’ll grant you it cannot be directly measured, but that does not justify a refutation of the claim that government monetary and fiscal policies significantly amplify the peaks and troughs of the business cycle. Bastiat’s broken window fallacy is instructive here given that the size of government spending and borrowing – particularly in the U.S. right now – is simply enormous.
“It is much less difficult to say “let us do stuff that we are already doing – just let us do it a lot more” than it is to say “let us start doing stuff that everyone has always opposed”
Mmm, I understand.
“Even such establishment people as the Chancellor of Germany know that the next crises (which can not be delayed for more than a couple of years – at most) will bring the roof down.”
Really? Is that just your inference from the facts, or has she actually given some sort of hint that that is her privately held view?
“That is settled now – what is not settled is “what happens then.”
Mmm – I think one of your more important contributions that deserves much wider echo is your insistence that government spending is a far more structurally significant problem than taxation (which of course goes to Robert’s challenge earlier). It seems to me (understandably) easier for conservatives to get worked up about tax and tax increases than it is for them to get worked up about rises in government spending.
Mike – A.M. said last year that if the policies that were then being proposed were put into effect that they would lead to a “worse crises within five years”.
The polices (both “fiscal” and “monetary”) were put into effect – both in the United States and Britain (even Germany was pushed into makeing a few gestures).
Government spending the problem – I quite agree (along as we remember that issuing more money by the Fed for private companies is also “spending”).
The tea party protestors understand the spending point – they are not “anti tax protestors” (as the “Economist” and the rest of the “mainstream” media claim) they chant “stop the spending” not “cut taxes”.
The a priori point.
Many things are a priori – for example A is A, I am myself (law of indenity) and many other logical principles.
“What is that got to do with economics”.
Well, for example, borrowing can not be greater than real savings (basic logic). New money is not “savings” (Keynes was abusing language).
And as for different people having the same money in different places at the same time………….
Yet that insanity is the basis of “modern banking” – and was long before Keynes.
Walter Baghot claimed it was fine as long as the central bank (privately) propped up banks that got into trouble – but things are not fine, because the basic idea is flawed (logically flawed).
Of course there is a vast difference between a bit of fraud (to use a hard word) at the margin – and a vast level of abuse.
But each time government “saves the financial system” it makes the bubble bigger (not smaller).