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Keynes the Man as Rotten as His Economic Theory

Economics / Economic Theory Nov 20, 2009 - 03:25 AM GMT

By: Murray_N_Rothbard


Diamond Rated - Best Financial Markets Analysis ArticleJohn Maynard Keynes, the man – his character, his writings, and his actions throughout life – was composed of three guiding and interacting elements. The first was his overweening egotism, which assured him that he could handle all intellectual problems quickly and accurately and led him to scorn any general principles that might curb his unbridled ego. The second was his strong sense that he was born into, and destined to be a leader of, Great Britain's ruling elite.

Both of these traits led Keynes to deal with people as well as nations from a self-perceived position of power and dominance. The third element was his deep hatred and contempt for the values and virtues of the bourgeoisie, for conventional morality, for savings and thrift, and for the basic institutions of family life.

Born to the Purple

Keynes was born under special circumstances, an heir to the ruling circles not only of Britain but of the British economics profession as well. His father, John Neville Keynes, was a close friend and former student of Alfred Marshall, Cambridge professor and unchallenged lion of British economics for half a century. Neville Keynes had disappointed Marshall by failing to live up to his early scholarly promise, producing only a bland treatise on the methodology of economics, a subject disdained as profoundly "un-English" (J. N. Keynes [1891] 1955).

The classic refuge for a failed academic has long been university administration, and so Neville happily buried himself in the controllership and other powerful positions in Cambridge University administration. Marshall's psyche compelled him to feel a moral obligation toward Neville that went beyond the pure loyalty of friendship, and that sense of obligation was carried over to Neville's beloved son Maynard. Consequently, when Maynard eventually decided to pursue a career as an economist at Cambridge, two extremely powerful figures at that university – his father and Alfred Marshall – were more than ready to lend him a helping hand.

The Cambridge Apostle

The most favored education available to the English elite was secured for Maynard by his doting father. First, he was a scholarship student at "College" in Eton, the intellectual subdivision of England's most influential public school. From there, Maynard went on to King's College, which, along with Trinity, was one of the two dominant colleges at Cambridge University.

At King's, Maynard was soon tapped for coveted membership in the secret society of the Apostles, an organization that rapidly shaped his values and his life. Keynes grew to social and intellectual maturity within the confines of this small, incestuous world of secrecy and superiority. The Apostles were not simply a social club, in the manner of Ivy League secret fraternities. They were also a self-consciously intellectual elite, especially interested in philosophy and its applications to aesthetics and life.

Apostle members were chosen almost exclusively from King's and Trinity, and they met every Saturday evening behind locked doors to deliver and discuss papers.[1] During the rest of the week, members virtually lived in each others' rooms. Moreover, Apostleship was not simply an undergraduate affair; it was membership for life and cherished as such. For the rest of their lives, adult Apostles (known as "Angels"), including Keynes, would often return to Cambridge for meetings, and they participated actively in recruiting new undergraduates.

In February 1903, at the age of 20, John Maynard Keynes took his place as Apostle number 243 in a chain that stretched back to the society's founding in 1820. For the next five or six formative years, Maynard spent almost all his private life among the Apostles, and his values and attitudes were shaped accordingly. Furthermore, most of his adult life was spent among older and newer Apostles, their friends, or their relations.

An important reason for the potent effect of the Society of the Apostles on its members was its heady atmosphere of secrecy. As Keynes's biographer, Robert Skidelsky, writes,

One should never underestimate the effect of secrecy. Much of what made the rest of the world seem alien sprang from this simple fuel. Secrecy was a bond which greatly amplified the Society's life relative to its members' other interests. It is much easier, after all, to spend one's time with people from whom one does not have to keep large secrets; and spending much time with them reinforces whatever it was that first drew them together. (Skidelsky 1983: p. 118; see also Deacon 1986)

The extraordinary arrogance of the Apostles is best summed up in the Society's Kantian half joke: that the Society alone is "real," whereas the rest of the world is only "phenomenal." Maynard himself would refer to non-Apostles as "phenomena." What all this meant was that the world outside was regarded as less substantial, less worthy of attention than the Society's own collective life.

It was a joke with a serious twist (Skidelsky, 1983: p. 118). "It was owing to the existence of the Society," wrote Apostle Bertrand Russell in his Autobiography, "that I soon got to know the people best worth knowing." Indeed, Russell remarked that when the adult Keynes left Cambridge, he traveled the world with a feeling of being the bishop of a sect in foreign parts. "True salvation for Keynes," remarked Russell perceptively, "was elsewhere, among the faithful at Cambridge" (Crabtree and Thirlwall 1980: p. 102). Or, as Maynard himself wrote during his undergraduate days in a letter to his friend and co-leader, Giles Lytton Strachey, "Is it monomania – this colossal moral superiority that we feel? I get the feeling that most of the rest [of the world outside the Apostles] never see anything at all – too stupid or too wicked" (Skidelsky 1983: p. 118).[2]

Two basic attitudes dominated this hermetic group under the aegis of Keynes and Strachey. The first was their overriding belief in the importance of personal love and friendship, while scorning any general rules or principles that might limit their own egos; and the second, their animosity toward and contempt for middle-class values and morality. The Apostolic confrontation with bourgeois values included praise for avant-garde aesthetics, holding homosexuality to be morally superior (with bisexuality a distant second[3]), and hatred for such traditional family values as thrift or any emphasis on the future or long run, as compared to the present. ("In the long run," as Keynes would later intone in his famous phrase, "we are all dead.")


After graduation from Cambridge, Keynes and many of his Apostle colleagues took up lodgings in Bloomsbury, an unfashionable section of north London. There they formed the now-famous Bloomsbury Group, the center of aesthetic and moral avant-gardism that constituted the most influential cultural and intellectual force in England during the 1910s and 1920s.

The formation of the Bloomsbury Group was inspired by the death of that eminent Victorian philosopher and classical liberal, Sir Leslie Stephen, in 1904. The young Stephen children, who felt liberated by the departure of their father's stern moral presence, promptly set up house in Bloomsbury and began to hold Thursday evening salons. Thoby Stephen, while not an Apostle, was a close friend at Trinity of Lytton Strachey. Strachey and other Apostles, as well as another of Strachey's good friends from Trinity, Clive Bell, became regular salon guests.

After Thoby died in 1906, Vanessa Stephen married Bell, and Bloomsbury gatherings divided into two groups. Since Clive was a budding art critic and Vanessa a painter, they established the Friday Club salons, concentrating on the visual arts. Meanwhile, Virginia and Adrian Stephen resumed the Thursday emphases on literature, philosophy, and culture. Eventually, Trinity Apostle Leonard Woolf, a friend and contemporary of Keynes, married Virginia Stephen. In late 1909, Keynes moved to a Bloomsbury house very close to the Stephens', sharing a flat there with Bloomsbury artist Duncan Grant, a cousin of Strachey's.

Bloomsbury's values and attitudes were similar to those of the Cambridge Apostles, albeit with more of an artistic twist. With a major emphasis on rebellion against Victorian values, it is no wonder that Maynard Keynes was a distinguished Bloomsbury member. One particular emphasis was pursuit of avant-garde and formalistic art – pushed by art critic and Cambridge Apostle Roger Fry, who later returned to Cambridge as Professor of Art. Virginia Stephen Woolf would become a prominent exponent of formalistic fiction. And all of them energetically pursued a lifestyle of promiscuous bisexuality, as was brought to light in Michael Holroyd's (1967) biography of Strachey.

As members of the Cambridge cultural coterie, the Bloomsbury Group enjoyed inherited, although modest, wealth. But, as time went on, most of the financing for the various Bloomsbury exhibits and projects came from their loyal member Maynard Keynes. As Skidelsky writes, Keynes "came to give Bloomsbury financial muscle, not just by making a great deal of money himself [largely through investment and financial speculation], which he spent lavishly on Bloomsbury causes, but by his ability to organize financial backing for their enterprises." Indeed, from the first World War onwards it was almost impossible to find any enterprise, cultural or domestic, in which members of Bloomsbury were involved, which did not benefit in some way from his largesse, his financial acumen, or his contacts. (1983: p. 250; see also pp. 242–51).

The Moorite Philosopher

The greatest impact on Keynes's life and values, the great conversion experience for him, came not in economics but in philosophy. A few months after Keynes's initiation into the Apostles, G.E. Moore, a professor of philosophy at Trinity who had become an Apostle a decade earlier than Keynes, published his magnum opus, Principia Ethica (1903). Both at the time and in reminiscence three decades later, Keynes attested to the enormous impact that the Principia had had upon him and his fellow Apostles.

In a letter at the time of its publication, he wrote that the book "is a stupendous and entrancing work, the greatest on the subject" [Keynes's italics], and a few years later he wrote to Strachey, "It is impossible to exaggerate the wonder and originality of Moore.… How amazing to think that only we know the rudiments of a true theory of ethic[s]." And, in a 1938 paper to the Bloomsbury Group, entitled "My Early Beliefs," Keynes recalls that the Principia's "effect on us, and the talk which preceded and followed it, dominated and perhaps still dominates, everything else." He added that the book "was exciting, exhilarating, the beginning of a new renaissance, the opening of a new heaven on earth" (Skidelsky 1983: pp. 133–34; Keynes [1951] 1972: pp. 436–49). Very strong words about a book on technical philosophy!

What is their source? First was the personal charisma that Moore exercised upon the students at Cambridge. But beyond that personal magnetism, Keynes and his friends were attracted not so much to Moore's doctrine itself as to the particular interpretation and twist that they themselves gave to that doctrine. Despite their enthusiasm, Keynes and his friends accepted only what they held to be Moore's personal ethics (i.e., what they called Moore's "religion"), while they totally rejected his social ethics (i.e., what they called his "morals").

Keynes and his fellow Apostles enthusiastically embraced the idea of a "religion" composed of moments of "passionate contemplation and communion" of and with objects of love or friendship. They repudiated, however, all social morals or general rules of conduct, totally rejecting Moore's penultimate chapter on "Ethics in Relation to Conduct." As Keynes states in his 1938 paper,

In our opinion, one of the greatest advantages of his [Moore's] religion was that it made morals unnecessary.… We entirely repudiated a personal liability on us to obey general rules. We claimed the right to judge every individual case on its merits, and the wisdom to do so successfully. This was a very important part of our faith, violently and aggressively held, and for the outer world it was our most obvious and dangerous characteristic. We repudiated entirely customary morals, conventions and traditional wisdom. We were, that is to say, in the strict sense of the term, immoralists. (Keynes [1951] 1972: pp. 142–43)

Shrewd contemporary observers perceptively summed up the attitude of Keynes and his fellow Apostles. Bertrand Russell wrote that Keynes and Strachey twisted Moore's teachings; they "aimed at a life of retirement among fine shades and nice feelings, and conceived of the good as consisting in the passionate mutual admirations of a clique of the elite" (Welch 1986: p. 43). Or, as Beatrice Webb neatly observed, Moorism among the Apostles was "nothing but a metaphysical justification for doing what you like – and what other people disapprove of" (ibid.).

The question then arises, how seriously did this immoralism, this rejection of general rules that would restrict one's ego, mark Keynes's adult life? Sir Roy Harrod, a disciple and hagiographical biographer, insists that immoralism, as with any other unpleasant aspect of Keynes's personality, was only an adolescent phase, quickly outgrown by his hero.

But many other aspects of his career and thought confirm Keynes's lifelong immoralism and disdain for the bourgeoisie. Moreover, in his 1938 paper, delivered at the age of 55, Keynes confirmed his continuing adherence to his early views, stating that immoralism is "still my religion under the surface.… I remain and always will remain an immoralist" (Harrod 1951: pp. 76–81; Skidelsky 1983: pp. 145–46; Welch 1986: p. 43).

In a notable contribution, Skidelsky demonstrates that Keynes's first important scholarly book, A Treatise on Probability (1921), was not unrelated to the rest of his concerns. It grew out of his attempt to copper rivet his rejection of Moore's proposed general rules of morality. The beginnings of the Treatise came in a paper, which Keynes read to the Apostles in January 1904, on Moore's spurned chapter, "Ethics in Relation to Conduct." Refuting Moore on probability occupied Keynes's scholarly thoughts from the beginning of 1904 until 1914, when the manuscript of the Treatise was completed.

He concluded that Moore was able to impose general rules upon concrete actions by employing an empirical or "frequentist" theory of probability, that is, through observation of empirical frequencies we could have certain knowledge of the probabilities of classes of events. To destroy any possibility of applying general rules to particular cases, Keynes's Treatise championed the classical a priori theory of probability, where probability fractions are deduced purely by logic and have nothing to do with empirical reality. Skidelsky makes the point well:

Keynes's argument, then, can be interpreted as an attempt to free the individual to pursue the good … by means of egotistic actions, since he is not required to have certain knowledge of the probable consequences of his actions in order to act rationally. It is part, in other words, of his continuing campaign against Christian morality. This would have been appreciated by his audience, although the connection is not obvious to the modern reader. More generally, Keynes links rationality to expediency. The circumstances of an action become the most important consideration in judgments of probable rightness.… By limiting the possibility of certain knowledge Keynes increased the scope for intuitive judgment. (Skidelsky 1983: 153–54)

We cannot get into the intricacies of probability theory here. Suffice it to say that Keynes's a priori theory was demolished by Richard von Mises (1951) in his 1920s work, Probability, Statistics, and Truth. Mises demonstrated that the probability fraction can be meaningfully used only when it embodies an empirically derived law of entities which are homogeneous, random, and indefinitely repeatable.

This means, of course, that probability theory can only be applied to events which, in human life, are confined to those like the lottery or the roulette wheel. (For a comparison of Keynes and Richard von Mises, see D.A. Gillies [1973: pp. 1–34].) Incidentally, Richard von Mises's probability theory was adopted by his brother Ludwig, although they agreed on little else (L. von Mises [1949] 1966: pp. 106–15).

The Burkean Political Theorist

"If Moore was Keynes's ethical hero, Burke may lay strong claim to be being his political hero," writes Skidelsky (1983: p. 154). Edmund Burke? What could that conservative worshiper of tradition have in common with Keynes, the statist and rationalist central planner? Once again, as with Moore, Keynes venerated his man with a Keynesian twist, selecting the elements that fitted his own character and temperament.

What Keynes took from Burke is revealing. (Keynes presented his views in a lengthy, undergraduate, prize-winning English essay on "The Political Doctrines of Edmund Burke.") There is, first, Burke's militant opposition to general principles in politics and, in particular, his championing of expediency against abstract natural rights. Secondly, Keynes agreed strongly with Burke's high time preference, his downgrading of the uncertain future versus the existing present. Keynes therefore agreed with Burke's conservatism in the sense that he was hostile to "introducing present evils for the sake of future benefits."

There is also the right-wing expression of Keynes's general deprecation of the long run, when "we are all dead." As Keynes put it, "It is the paramount duty of governments and of politicians to secure the wellbeing of the community under the case in the present, and not to run risks overmuch for the future" (ibid.: pp. 155–56).

Thirdly, Keynes admired Burke's appreciation of the "organic" ruling elite of Great Britain. There were differences over policy, of course, but Keynes joined Burke in hailing the system of aristocratic rule as sound, so long as governing personnel were chosen from the existing organic elite. Writing of Burke, Keynes noted, "the machine itself [the British state] he held to be sound enough if only the ability and integrity of those in charge of it could be assured" (Ibid., p. 156).

In addition to his neo-Burkean disregard for principle, lack of concern for the future, and admiration for the existing British ruling class, Keynes was also sure that devotion to truth was merely a matter of taste, with little or no place in polities. He wrote: "A preference for truth or for sincerity as a method may be prejudice based on some aesthetic or personal standard, inconsistent, in politics, with practical good" (Johnson, 1978: p. 24).

Indeed Keynes displayed a positive taste for lying in politics. He habitually made up statistics to suit his political proposals, and he would agitate for world monetary inflation with exaggerated hyperbole while maintaining that "words ought to be a little wild – the assault of thoughts upon the unthinking." But, revealingly enough, once he achieved power, Keynes admitted that such hyperbole would have to be dropped: "When the seats of power and authority have been attained, there should be no more poetic license" (Johnson and Johnson 1978: pp. 19–21).

The Economist: Arrogance and Pseudo Originality

Maynard Keynes's approach in economics was not unlike his attitude in philosophy and life in general. "I am afraid of 'principle,'" he told a Parliamentary committee in 1930 (Moggridge 1969: p. 90). Principles would only restrict his ability to seize the opportunity of the moment and would hamper his will to power. Hence, he was eager to desert his earlier beliefs and change his mind on a dime, depending on the situation.

His stand on free trade serves as a blatant example. As a good Marshallian, his one, seemingly fixed, lifelong politicoeconomic principle was a devoted adherence to freedom of trade. At Cambridge he wrote to a good friend, "Sir, I hate all priests and protectionists.… Down with pontiffs and tariffs." For the next three decades, his political interventions were almost solely concerned with championing free trade (Skidelsky, 1983: pp. 122, 227–29).

Then, suddenly, in the spring of 1931, Keynes loudly called for protectionism, and during the 1930s, he led the parade for economic nationalism and for policies frankly designed to "beggar-thy-neighbor." But during World War II, Keynes swung back to free trade. Never did any soul-searching or even hesitation seem to hobble his lightning-fast changes.

Indeed, in the early 1930s, Keynes was widely ridiculed in the British press for his chameleon views. As Elizabeth Johnson writes, He was Keynes the India-rubber man: the Daily News and Chronicle of 16 March 1931, carried an article headed, "Economic Acrobatics of Mr. Keynes" – and illustrated it by a sketch of "A Remarkable Performance. Mr. John Maynard Keynes as the 'boneless man,' turns his back on himself and swallows a draught" (1978: p. 17).

Keynes, however, did not trouble himself about charges of inconsistency, considering himself always right. It was particularly easy for Keynes to adopt this conviction since he cared not a tap for principle. He was therefore always ready to change horses in pursuit of expanding his ego through political power.

As time went on, Elizabeth Johnson writes, Keynes "had a clear idea of his role in the world; he was … the chief economic adviser to the world, to the Chancellor of the Exchequer of the day, to the French minister of finance, … to the president of the United States." Pursuit of power for himself and a ruling class meant, of course, increasing adherence to the ideas and institutions of a centrally managed economy.

Among the good men of the organic elite governing the nation, he placed himself in the crucial role of scholar-technician, the 20th-century version of the "philosopher-king" or, at least, the philosopher guiding the king. It is no wonder that Keynes "hailed President [Franklin D.] Roosevelt as the first head of state to take theoretical advice as the basis for large-scale action" (Johnson and Johnson 1978: pp. 17–18).

Action is what Keynes sought from government, especially with Keynes himself making the plans and calling the shots. As Johnson writes,

His opportunism meant that he reacted to events immediately and directly. He would produce an answer, write a memorandum, publish at once, whatever the issue.… In the World War II Treasury, he nearly drove some of his colleagues crazy with his propensity to keep a finger in every pie. "Don't just stand there, do something" would have been his present-day motto. (Ibid.: p. 19)

Johnson notes that Keynes's "instinctive attitude to any new situation was to assume, first, that nobody was doing anything about it, and, secondly, that if they were, they were doing it wrong. It was a lifetime habit of mind based on the conviction that he was armed with superior brains … and, Cambridge Apostle that he was, gilled with superior sensibilities" (ibid.: p. 33).

One striking illustration of Maynard Keynes's unjustified arrogance and intellectual irresponsibility was his reaction to Ludwig von Mises's brilliant and pioneering Treatise on Money and Credit, published in German in 1912. Keynes had recently been made the editor of Britain's leading scholarly economic periodical, Cambridge University's Economic Journal. He reviewed Mises's book, giving it short shrift. The book, he wrote condescendingly, had "considerable merit" and was "enlightened," and its author was definitely "widely read," but Keynes expressed his disappointment that the book was neither "constructive" nor "original" (Keynes 1914). This brusque reaction managed to kill any interest in Mises's book in Great Britain, and Money and Credit remained untranslated for two fateful decades.

The peculiar point about Keynes's review is that Mises's book was highly constructive and systematic, as well as remarkably original. How could Keynes not have seen that? This puzzle was cleared up a decade and a half later, when, in a footnote to his own Treatise on Money, Keynes impishly admitted that "in German, I can only clearly understand what I already know – so that new ideas are apt to be veiled from me by the difficulties of the language" (Keynes 1930a: I, p. 199 n.2). Such unmitigated gall. This was Keynes to the hilt: to review a book in a language where he was incapable of grasping new ideas, and then to attack that book for not containing anything new, is the height of arrogance and irresponsibility.[4]

Another aspect of Keynes's swaggering conceit was his conviction that much of what he did was original and revolutionary. His letter to G.B. Shaw in 1935 is well known: "I believe myself to be writing a book on economic theory that will largely revolutionise … the way the world thinks about economic problems.… For myself I don't merely hope what I say, in my own mind I'm quite sure" (Hession 1984: p. 279). But this belief in his braggadocio was not confined to The General Theory.

Bernard Corry points out that "From about the beginning of his economic work he claimed to be revolutionising the subject." So imbued was Keynes with faith in his own creativity that he even proclaimed great originality in a paper on business cycles that was based on D.H. Robertson's Study of Industrial Fluctuations, shortly after the book was published in 1913. Corry links this attitude to the insistent emphasis of the Bloomsbury Group on "originality" (by which, of course, they mainly meant their own). Originality, he points out, was "one of the fixations of the Bloomsbury Group" (Crabtree and Thirlwall 1980: pp. 96–97; Corry 1986: pp. 214–15, 1978: pp. 3–34).

Keynes was greatly aided in his claims of originality by the tradition of economics that Alfred Marshall had managed to establish at Cambridge. As a student of Marshall and a young Cambridge lecturer under Marshall's aegis, Keynes easily absorbed the Marshallian tradition.

It was not that Marshall himself claimed blazing originality, although he did make claims to independent inventions of marginal utility and he was secretive, jealous of students who might steal his ideas. Marshall developed the strategy of maintaining a hermetically sealed Marshallian world at Cambridge (and hence in British economics generally). He created the myth that in his 1890 magnum opus, the Principles of Economics, he had constructed a higher synthesis, incorporating the valid aspects of all previously competing and clashing theories (deductivism and inductivism, theory and history, marginal utility and real cost, short run and long run, Ricardo and Jevons).[5]

Because he successfully pushed this myth, he therefore spawned the universal view that "it's all in Marshall," that, after all, there was no need to read anyone else. For if Marshall had harmonized all the one-sided, one-eyed economic views, there was no longer any reason except antiquarianism to bother to read them. As a result, the modal Cambridge economist read only Marshall, spinning out and elaborating on cryptic sentences or passages in the Great Book. Marshall himself spent the rest of his life reworking and elaborating The Text, publishing no less than eight editions of the Principles by 1920.

For the rest, there was the legendary Cambridge "oral tradition," in which Marshall's students and disciples were delighted to listen to and pass on the "Great Man's" words, as well as to read his lesser seminal writings in manuscript or in commission hearings, for Marshall kept most of his shorter writings out of publication until near the end of his life. Thus, the Cambridge Marshallians could take unto themselves the aura of a priestly caste, the only ones privy to the mysteries of the sacred writings denied to lesser men.

The tightly sealed world of Marshallian Cambridge soon dominated Great Britain; there were few challengers in that country. This dominance was accelerated by the unique role of Cambridge and Oxford in British social and intellectual life, especially in the years before the educational explosion that followed World War II. Since the days of Adam Smith, David Ricardo, and J.S. Mill, Great Britain had managed to dominate economic theory throughout the world, so Marshall and his sect managed to assume hegemony not only of Cambridge economics but of the world (see Crabtree 1980: pp. 101–5).[6]

"The Swindler"

The young Keynes displayed no interest whatsoever in economics; his dominant interest was philosophy. In fact, he completed an undergraduate degree at Cambridge without taking a single economics course. Not only did he never take a degree in the subject, but the only economics course Keynes ever took was a single-term graduate course under Alfred Marshall.

He found that spell of economics exciting, however, as it appealed both to his theoretical interests and to his thirst for cutting a giant swath through the real world of action. In the fall of 1905, he wrote to Strachey, "I find economics increasingly satisfactory, and I think I am rather good at it. I want to manage a railroad or organise a Trust or at least swindle the investing public" (Harrod 1951: p. 111).[7]

Keynes, in fact, had recently embarked on his lifelong career as investor and speculator. Yet Harrod was constrained to deny vigorously that Keynes had begun speculating before 1919.

Asserting that Keynes had "no capital" before then, Harrod explained the reason for his insistence in a book review six years after the publication of his biography: "It is important that this should be clearly understood, since there were many ill-wishers … who asserted that he took advantage of inside information when in the Treasury (1915–June 1919) in order to carry out successful speculations" (Harrod 1957). In a letter to Clive Bell, author of the book under review and an old Bloomsburyite and friend of Keynes, Harrod pressed the point further: "The point is important because of the beastly stories, which are very widespread … about his having made money dishonourably by taking advantage of his Treasury position" (ibid.; cf. Skidelsky 1983: pp. 286–88).

Despite Harrod's insistence to the contrary, however, Keynes had indeed set up his own "special fund" and had begun to make investments by July 1905. By 1914, Keynes was speculating heavily in the stock market and, by 1920, had accumulated £16,000, which would amount to about $200,000 at today's prices. Half of his investment was made with borrowed money.

It is not clear at this point whether his fund was used for investment or for more speculative purposes, but we do know that his capital had increased by more than threefold. Whether Keynes used inside Treasury information to make such investment decisions is still unproven, although suspicions certainly remain (Skidelsky 1983: pp. 286–88).

Even if we cannot prove the charge of swindling against Keynes, we must consider his behavior in the light of his own bitter condemnation of financial markets as "gambling casinos" in The General Theory. It seems probable, therefore, that Keynes believed his successes at financial speculation to have swindled the public, although there is no reason to think he would have regretted that fact. He did realize, however, that his father would disapprove of his activity.[8]

Keynes and India

While at Eton, young Keynes (aged 17 and 18) witnessed a wave of anti-imperialist sentiment in the wake of Britain's war against the Boers in South Africa. Yet he was never influenced by that sentiment. As Skidelsky notes, "Throughout his life he assumed the Empire as a fact of life and never showed the slightest interest in discarding it.… He never much deviated from the view that, all things being considered, it was better to have Englishmen running the world than foreigners" (Skidelsky 1983: p. 91).

In late 1905, despite Marshall's importuning, Keynes abandoned graduate studies in economics after one term and, the following year, took Civil Service exams, gaining a clerkship in the India Office. In the spring of 1907, Keynes was transferred from the Military Department to the Revenue, Statistics, and Commerce Department. While he was to become an expert on Indian affairs, he nevertheless blithely assumed that British rule was not to be questioned: Britain simply disseminated good government in places which could not develop it on their own.

"Maynard," Skidelsky points out, "always saw the Raj from Whitehall; he never considered the human and moral implications of imperial rule or whether the British were exploiting the Indians." In the grand imperialist tradition of the Mills and Thomas Macaulay in 19th-century England, moreover, Keynes never felt the need to travel to India, to learn Indian languages, or to read any books on the area except as they dealt with finance (ibid.: p. 176).

Despite his rise to high levels of the Civil Service, Keynes soon grew tired of his quasi sinecure and tried to return to Cambridge by way of a teaching post. Finally, in the spring of 1908, Marshall wrote to Keynes, offering him a lectureship in economics. Although Marshall was on the point of retirement, he easily persuaded his friend, favorite student, and handpicked successor, Arthur C. Pigou, to follow Marshall's practice of paying for the lectureship out of his own salary; Neville Keynes promptly offered to match the stipend.

In 1908, Keynes happily took up the insular role of lecturing in Marshallian economics at his old school, King's College, Cambridge. But most of his time and energy were spent as a busy man of affairs in London (Corry 1978: p. 5). One of his functions was to be an informal but valued adviser to the India Office; indeed, his association with the office actually expanded after 1908 (Keynes 1971: p. 17). As a result, he played an important role in Indian monetary affairs, writing his first major journal article on India for the Economic Journal in 1909; writing influential memoranda out of which grew his first book, the brief monograph on Indian Currency and Finance in 1913; and playing an influential role on the Royal Commission on Indian Finance and Currency, to which distinguished post he was appointed before the age of 30.

Keynes's role in Indian finance was not only important but also ultimately pernicious, presaging his later role in international finance. Upon converting India from a silver to a gold standard in 1892, the British government had stumbled into a gold-exchange standard, instead of the full gold-coin standard that had marked Britain and the other major Western nations. Gold was not minted as coin or otherwise available in India, and Indian gold reserves for rupees were kept as sterling balances in London rather than in gold per se.

To most government officials, this arrangement was only a halfway measure toward an eventual full gold standard; but Keynes hailed the new gold-exchange standard as progressive, scientific, and moving toward an ideal currency. Echoing centuries-old inflationist views, he opined that gold coin "wastes" resources, which can be "economized" by paper and foreign exchange.

The crucial point, however, is that a phony gold standard, as a gold-exchange standard must be, allows far more room for monetary management and inflation by central governments. It takes away the public's power over money and places that power in the hands of the government. Keynes praised the Indian standard as allowing a far greater "elasticity" (a code word for monetary inflation) of money in response to demand. Moreover, he specifically hailed the report of a US government commission in 1903 advocating a gold-exchange standard in China and other Third World silver countries – a drive by progressive economists and politicians to bring such nations into a US-dominated and -managed gold-dollar bloc (Keynes 1971: pp. 60–85; see also Parrini and Sklar 1983; Rosenberg 1985).

Indeed, Keynes explicitly looked forward to the time when the gold standard would disappear altogether, to be replaced by a more "scientific" system based on a few key national paper currencies. "A preference for a tangible reserve currency," Keynes opined, is "a relic of a time when governments were less trustworthy in these matters than they are now" (1971: p. 51). Here was the foreshadowing of Keynes's famous dismissal of gold as a "barbarous relic." More broadly, Keynes's early monetary views presaged the disastrous gold-exchange standard engineered by Britain during the 1920s, as well as the deeply flawed Bretton Woods scheme of a managed gold-dollar imposed by the United States – with the help of Britain and Lord Keynes – at the end of World War II.

The Cambridge economist, however, was not content to defend the gold-exchange status quo in India. Believing that the march toward managed inflation was not proceeding rapidly enough, he urged the creation of a central bank (or "State Bank") for India, thus enabling centralization of reserves, far greater monetary elasticity, and far more monetary expansion and inflation. Although he was unable to convince the Royal Commission to come out in support of a central bank, he was highly influential in its final report.

The report included his central-bank view in an appendix, and Keynes also led the harsh cross-examination of pro–gold coin standard and anti–central bank witnesses. An interesting footnote to the affair was the reaction to Keynes's central-bank appendix by his old teacher, Alfred Marshall. Marshall wrote Keynes that he was "entranced by it as a prodigy of constructive work" (ibid.: p. 268).

Keynes generally liked to tackle economic theory in order to solve practical problems. His primary motivation for plunging into the Indian currency question was to defend the record of his first and most important political patron, Edwin Samuel Montagu, of the influential Montagu and Samuel families of London international banking. Montagu had been president of the Cambridge Union, the university debating society, when Keynes was an undergraduate, and Keynes had become a favorite of his. In the 1906 general elections, Keynes had campaigned for Montagu's successful bid for a Parliamentary seat as a Liberal.

In late 1912, when Montagu was Undersecretary of State for India, a scandal developed in Indian finance. The Indian government, of which Montagu was second-in-command, had contracted secretly with the banking firm of Samuel Montagu and Company to purchase silver. It turned out that nepotism had figured strongly in this contract. Lord Swaythling, a senior partner in the firm, was the father of undersecretary Edwin S. Montagu; another partner, Sir Stuart Samuel, was the brother of Herbert Samuel, postmaster general of the Asquith government (see Skidelsky 1983: p. 273).

Selling the General Theory

Keynes's General Theory was, at least in the short run, one of the most dazzlingly successful books of all time. In a few short years, his "revolutionary" theory had conquered the economics profession and soon had transformed public policy, while old-fashioned economics was swept, unhonored and unsung, into the dustbin of history.

How was this deed accomplished? Keynes and his followers would answer, of course, that the profession simply accepted a starkly self-evident truth. And yet The General Theory was not truly revolutionary at all but merely old and oft-refuted mercantilist and inflationist fallacies dressed up in shiny new garb, replete with newly constructed and largely incomprehensible jargon. How, then, the swift success?

Part of the reason, as Schumpeter has pointed out, is that governments as well as the intellectual climate of the l930s were ripe for such conversion. Governments are always seeking new sources of revenue and new ways to spend money, often with no little desperation; yet economic science, for over a century, had sourly warned against inflation and deficit spending, even in times of recession.

Economists – whom Keynes was to lump into one category and sneeringly disparage as "classical' in The General Theory – were the grouches at the picnic, throwing a damper of gloom over attempts by governments to increase their spending. Now along came Keynes, with his modern "scientific" economics, saying that the old "classical" economists had it all wrong: that, on the contrary, it was the government's moral and scientific duty to spend, spend, and spend; to incur deficit upon deficit, in order to save the economy from such vices as thrift and balanced budgets and unfettered capitalism; and to generate recovery from the depression. How welcome Keynesian economics was to the governments of the world!

In addition, intellectuals throughout the world were becoming convinced that laissez-faire capitalism could not work and that it was responsible for the Great Depression. Communism, fascism, and various forms of socialism and controlled economy became popular for that reason during the 1930s. Keynesianism was perfectly suited to this intellectual climate.

But there were also strong internal reasons for the success of The General Theory. By dressing up his new theory in impenetrable jargon, Keynes created an atmosphere in which only brave young economists could possibly understand the new science; no economist over the age of thirty could grasp the New Economics. Older economists, who, understandably, had no patience for the new complexities, tended to dismiss The General Theory as nonsense and refused to tackle the formidably incomprehensible work. On the other hand, young economists and graduate students, socialistically inclined, seized on the new opportunities and bent themselves to the rewarding task of figuring out what The General Theory was all about.

Paul Samuelson has written of the joy of being under 30 when The General Theory was published in 1936, exulting, with Wordsworth, "Bliss was it in that dawn to be alive, but to be young was very heaven." Yet this same Samuelson who enthusiastically accepted the new revelation also admitted that The General Theory "is a badly written book; poorly organized.… It abounds in mares' nests of confusions.… I think I am giving away no secrets when I solemnly aver – upon the basis of vivid personal recollection – that no one else in Cambridge, Massachusetts, really knew what it was all about for some twelve to eighteen months after publication" (Samuelson [1946] 1948: p. 145; Hodge 1986: pp. 21–22).

It must be remembered that the now-familiar Keynesian cross, IS-LM diagrams, and the system of equations were not available to those trying desperately to understand The General Theory when the book was published; indeed, it took 10 to 15 years of countless hours of manpower to figure out the Keynesian system. Often, as in the case of both Ricardo and Keynes, the more obscure the content, the more successful the book, as younger scholars flock to it, becoming acolytes.

Also important to the success of The General Theory was the fact that, just as a major war creates a large number of generals, so did the Keynesian revolution and its rude thrusting aside of the older generation of economists create a greater number of openings for younger Keynesians in both the profession and the government.

Another crucial factor in the sudden and overwhelming success of The General Theory was its origin in the most insular university of the most dominant economic national center in the world. For a century and a half, Great Britain had arrogated to itself the role of dominance in economics, with Smith, Ricardo, and Mill all aggrandizing this tradition. We have seen how Marshall established his dominance at Cambridge and that the economics he developed was essentially a return to the classical Ricardo/Mill tradition.

As a prominent Cambridge economist and student of Marshall, Keynes had an important advantage in furthering the success of the ideas in The General Theory. It is safe to say that if Keynes had been an obscure economics teacher at a small, Midwestern American college, his work, in the unlikely event that it even found a publisher, would have been totally ignored.

In those days before World War II, Britain, not the United States, was the most prestigious world center for economic thought. While Austrian economics had flourished in the United States before World War I (in the works of David Green, Frank A. Fetter, and Herbert J. Davenport), the 1920s to early 1930s was largely a barren period for economic theory. Antitheoretical institutionalists dominated American economics during this period, leaving a vacuum that was easy for Keynes to fill.

Also important to his success was Keynes's tremendous stature as an intellectual and politicoeconomic leader in Britain, including his prominent role as a participant in, and then severe critic of, the Versailles treaty. As a Bloomsbury member, he was also important in British cultural and artistic circles.

Moreover, we must realize that in pre–World War II days only a small minority in each country went to college and that the number of universities was both small and geographically concentrated in Great Britain. As a result, there were very few British economists or economics teachers, and they all knew each other. This created considerable room for personality and charisma to help convert the profession to Keynesian doctrine,

The importance of such external factors as personal charisma, politics, and career opportunism was particularly strong among the disciples of F.A. Hayek at the London School of Economics. During the early 1930s, Hayek at the LSE and Keynes at Cambridge were the polar antipodes in British economics, with Hayek converting many of Britain's leading young economists to Austrian (that is, Misesian) monetary, capital, and business-cycle theory.

Additionally, Hayek, in a series of articles, had brilliantly demolished Keynes's earlier work, his two-volume Treatise on Money, and many of the fallacies Hayek exposed applied equally well to The General Theory (see Hayek 1931a, 1931b, 1932). For Hayek's students and followers, then, it must be said that they knew better. In the realm of theory, they had already been inoculated against The General Theory. And yet, by the end of the 1930s, every one of Hayek's followers had jumped on the Keynesian bandwagon, including Lionel Robbins, John R. Hicks, Abba P. Lerner, Nicholas Kaldor, G.L.S. Shackle, and Kenneth E. Boulding.

Perhaps the most astonishing conversion was that of Lionel Robbins. Not only had Robbins been a convert to Misesian methodology as well as to monetary and business-cycle theory, but he had also been a diehard pro-Austrian activist. A convert since his attendance at the Mises privatseminar in Vienna in the 1920s, Robbins, highly influential in the economics department at LSE, had succeeded in bringing Hayek to LSE in 1931 and in translating and publishing Hayek's and Mises's works.

Despite being a longtime critic of Keynesian doctrine before The General Theory, Robbins's conversion to Keynesianism was apparently solidified when he served as Keynes's colleague in wartime economic planning. There is in Robbins's diary a decided note of ecstatic rapture that perhaps accounts for his astonishing abasement in repudiating his Misesian work, The Great Depression (1934).

Robbins's repudiation was published in his 1971 Autobiography: "I shall always regard this aspect of my dispute with Keynes as the greatest mistake of my professional career, and the book, The Great Depression, which I subsequently wrote, partly in justification of this attitude, as something which I would willingly see forgotten." (Robbins 1971: p. 154). Robbins's diary entries on Keynes during World War II can only be considered an absurdly rapturous personal view. Here is Robbins at a June 1944 pre–Bretton Woods draft conference in Atlantic City:

Keynes was in his most lucid and persuasive mood: and the effect was irresistible….Keynes must be one of the most remarkable men that have ever lived – the quick logic, the wide vision, above all the incomparable sense of the fitness of words, all combine to make something several degrees beyond the limit of ordinary human achievement. (Ibid.: p. 193)

Only Churchill, Robbins goes on to say, is of comparable stature. But Keynes is greater, for he

uses the classical style of our life and language, it is true, but it is shot through with something which is not traditional, a unique unearthly quality of which one can only say that it's pure genius. The Americans sat entranced as the godlike visitor sang and the golden light played all around. (Ibid.: p. 208–12 cf. Hession 1984: p. 342)

This sort of fawning can only mean that Keynes possessed some sort of strong personal magnetism to which Robbins was susceptible.[9]

Central to Keynes's strategy in putting The General Theory over were two claims: first, that he was revolutionizing economic theory, and second, that he was the first economist – aside from a few "underworld" characters, such as Silvio Gesell – to concentrate on the problem of unemployment. All previous economists, whom he lumped together as "classical," he said, assumed full employment and insisted that money was but a "veil" for real processes and was therefore not a truly disturbing presence in the economy.

One of Keynes's most unfortunate effects was his misconceiving of the history of economic thought, since his devoted legion of followers accepted Keynes's faulty views in The General Theory as the last word on the subject. Some of Keynes's highly influential errors may be attributed to ignorance, since he was little trained in the subject and mostly read work by his fellow Cantabrigians. For example, in his grossly distorted summary of Say's law ("supply creates its own demand"), he sets up a straw man and proceeds to demolish it with ease (1936: p. 18).

This erroneous and misleading restatement of Say's law was subsequently repeated (without quoting Say or any of the other champions of the law) by Joseph Schumpeter, Mark Blaug, Axel Leijonhufvud, Thomas Sowell, and others. A better formulation of the law is that the supply of one good constitutes demand for one or more other goods (see Hutt 1974: p. 3).

But ignorance cannot account for Keynes's claim that he was the first economist to try to explain unemployment or to transcend the assumption that money is a mere veil exerting no important influence on the business cycle or the economy. Here we must ascribe to Keynes a deliberate campaign of mendacity and deception – what would now be called euphemistically "disinformation."

Keynes knew all too well of the existence of the Austrian and LSE Schools, which had flourished in London as early as the 1920s and more obviously since 1931. He himself had personally debated Hayek, the chief Austrian at LSE, in the pages of Economica, the LSE journal. The Austrians in London attributed continuing large-scale unemployment to wage rates kept above the free-market wage by combining union and government action (e.g., in extraordinarily generous unemployment-insurance payments).

Recessions and business cycles were ascribed to bank credit and monetary expansion, as fueled by the central bank, which pushed interest rates below genuine time-preference levels and created overinvestment in higher-order capital goods. These then had to be liquidated by a recession, which in turn would emerge as soon as the credit expansion stopped. Even if he had not agreed with this analysis, it was unconscionable for Keynes to ignore the very existence of this school of thought then prominent in Great Britain, a school which could never be construed as ignoring the impact of monetary expansion on the real state of the economy.[10]

In order to conquer the world of economics with his new theory, it was critical for Keynes to destroy his rivals within Cambridge itself. In his mind, he who controlled Cambridge controlled the world. His most dangerous rival was Marshall's handpicked successor and Keynes's former teacher, Arthur C. Pigou. Keynes began his systematic campaign of destruction against Pigou when Pigou rejected his previous approach in the Treatise on Money, at which point Keynes also broke with his former student and close friend, Dennis H. Robertson, for refusing to join the lineup against Pigou.

The most glaring misstatement in The General Theory, and one which his disciples accepted without question, is the outrageous presentation of Pigou's views on money and unemployment in Keynes's identification of Pigou as the major contemporary "classical" economist who allegedly believed that there is always full employment and that money is merely a veil causing no disruptions in the economy – this about a man who wrote Industrial Fluctuations in 1927 and Theory of Unemployment in 1933, which discuss at length the problem of unemployment! Moreover, in the latter book, Pigou explicitly repudiates the money-veil theory and stresses the crucial centrality of money in economic activity.

Thus, Keynes lambasted Pigou for allegedly holding the "conviction … that money makes no real difference except frictionally and that the theory of unemployment can be worked out … as being based on 'real' exchanges." An entire appendix to chapter 19 of The General Theory is devoted to an assault on Pigou, including the claim that he wrote only in terms of real exchanges and real wages, not money wages, and that he assumed only flexible wage rates (Keynes 1936: pp. 19–20, pp. 272–79).

But, as Andrew Rutten notes, Pigou conducted a "real" analysis only in the first part of his book; in the second part, he not only brought money in, but pointed out that any abstraction from money distorts the analysis and that money is crucial to any analysis of the exchange system. Money, he says, cannot be abstracted away and cannot act in a neutral manner, so "the task of the present part must be to determine in what way the monetary factor causes the average amount of, and the fluctuation in, employment to be different from what they otherwise would have been."

Therefore, added Pigou, "it is illegitimate to abstract money away [and] leave everything else the same. The abstraction proposed is of the same type that would be involved in thinking away oxygen from the earth and supposing that human life continues to exist" (Pigou 1933: pp. 185, 212).[11] Pigou extensively analyzed the interaction of monetary expansion and interest rates along with changes in expectations, and he explicitly discussed the problem of money wages and "sticky" prices and wages.

Thus, it is clear that Keynes seriously misrepresented Pigou's position and that this misrepresentation was deliberate, since, if Keynes read any economists carefully, he certainly read such prominent Cantabrigians as Pigou. Yet, as Rutten writes, "These conclusions should not come as a surprise, since there is plenty of evidence that Keynes and his followers misrepresented their predecessors" (Rutten 1989: p. 14). The fact that Keynes engaged in this systematic deception and that his followers continue to repeat the fairy tale about Pigou's blind "classicism" shows that there is a deeper reason for the popularity of this legend in Keynesian circles. As Rutten writes,

There is one plausible explanation for the repetition of the story of Keynes and the classics.… This is that the standard account is popular because it offers simultaneously an explanation of, and a justification for, Keynes's success: without the General Theory, we would still be in the economic dark ages. In other words, the story of Keynes and the Classics is evidence for the General Theory. Indeed, its use suggests that it may be the most compelling evidence available. In this case, proof that Pigou did not hold the position attributed to him is … evidence against Keynes.… [This conclusion] raises the … serious question of the methodological status of a theory that relies so heavily on falsified evidence (Ibid.: p. 15).

In his review of The General Theory, Pigou was properly scornful of Keynes's "macédoine of misrepresentations," and yet such was the power of the tide of opinion (or of the charisma of Keynes) that, by 1950, after Keynes's death, Pigou had engaged in the sort of abject recantation indulged in by Lionel Robbins, which Keynes had long tried to wrest from him (Pigou 1950; Johnson and Johnson 1978: p. 179; Corry 1978: p. 11–12).

But Keynes used tactics in the selling of The General Theory other than reliance on his charisma and on systematic deception. He curried favor with his students by praising them extravagantly, and he set them deliberately against non-Keynesians on the Cambridge faculty by ridiculing his colleagues in front of these students and by encouraging them to harass his faculty colleagues. For example, Keynes incited his students with particular viciousness against Dennis Robertson, his former close friend.

As Keynes knew all too well, Robertson was painfully and extraordinarily shy, even to the point of communicating with his faithful, longtime secretary, whose office was next to his own, only by written memoranda. Robertson's lectures were completely written out in advance, and because of his shyness he refused to answer any questions or engage in any discussion with either his students or his colleagues. And so it was a particularly diabolic torture for Keynes's radical disciples, led by Joan Robinson and Richard Kahn, to have baited and taunted Robertson, harassing him with spiteful questions and challenging him to debate (Johnson and Johnson 1978: p. 136ff.).

Continues in Part 2 here

Murray N. Rothbard (1926–1995) was dean of the Austrian School. He was an economist, economic historian, and libertarian political philosopher. See Murray N. Rothbard's article archives. Comment on the blog.

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23 Nov 09, 03:26

I have read less than half way. The merit of Keynes was that he showed how to circumvent the internal contradiction Marx showed in Capitalism.

When Capitalism collapsed in 1929, it was half of Keynes Theory that set the foundation for recovery. Unfortunately ignorant politicians never put it on a sound base by implementing the second half apart for one budget by Stafford Cripps.

We now face Hyperinflation and extinction through the misuse of Keynes. People should have read "The Negative Outcome of Economics" when it was on

Joseph E Fasciani
23 Nov 09, 13:47
Keynes the Man as Rotten as His Economic Theory

This is an extremely well-written paper, and had the author been one of my students, s/he would have received an "A-". The minus sign is because of a glaring contradiction, one which must be pointed out, as it greatly vitiates Rothbard's argument.

Rothbard first states approvingly that "Keynes therefore agreed with Burke's conservatism in the sense that he was hostile to " '...introducing present evils for the sake of future benefits.' "

However, shortly afterward he then writes "There is also the right-wing expression of Keynes's general deprecation of the long run, when "we are all dead." As Keynes put it, "It is the paramount duty of governments and of politicians to secure the wellbeing of the community under the case in the present, and not to run risks overmuch for the future" (ibid.: pp. 155–56).

Either Keynes was truly concerned for 'the wellbeing of the community' and did not want 'to run risks overmuch for the future' or he was not. It can't be true both ways. Yet we know that Rothbard holds that Keynes was an unrepenting proponent of both inflation and deficit spending, which are present delusions of wellbeing at grave cost to the future wellbeing of the community.

I must also point out that both as a matter of style and of substance, Rothbard continues the long-standing incorrect definitions and uses of the words "money" and "currency" as they are commonly used. Just as "number" is the concept and "numeral" is its sign, so "money" is the concept and "currency" its medium of expression. When you pay your taxes, your government wants currency, generally in the form of a cheque. I have not learned of any government in North America which has accepted gold or silver as a "money payment" for taxes. If a reader has evidence to the contrary, please send it to me at

Finally, Rothbard demeans himself when he drags in ad homineum remarks about Keynes's sexual preferences and life-style. If he wishes to do so, then Rothbard must also accept if and when a critic lashes out at him for what that critic perceives as Rothbard's heterosexual biases and blatant behaviours.

Otherwise, this is a strong and well-reasoned work!

All best,

Joseph E Fasciani

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