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Keynes the Man as Rotten as His Economic Theory - Part 2

Economics / Economic Theory Nov 20, 2009 - 03:47 AM GMT

By: Murray_N_Rothbard


Continued From Part 1

Keynes's Political Economy

In The General Theory, Keynes set forth a unique politicoeconomic sociology, dividing the population of each country into several rigidly separated economic classes, each with its own behavioral laws and characteristics, each carrying its own implicit moral evaluation. First, there is the mass of consumers: dumb, robotic, their behavior fixed and totally determined by external forces. In Keynes's assertion, the main force is a rigid proportion of their total income, namely, their determined "consumption function."

Second, there is a subset of consumers, an eternal problem for mankind: the insufferably bourgeois savers, those who practice the solid puritan virtues of thrift and farsightedness, those whom Keynes, the would-be aristocrat, despised all of his life. All previous economists, certainly including Keynes's forbears Smith, Ricardo, and Marshall, had lauded thrifty savers as building up long-term capital and therefore as responsible for enormous long-term improvements in consumers' standard of living. But Keynes, in a feat of prestidigitation, severed the evident link between savings and investment, claiming instead that the two are unrelated.

In fact, he wrote, savings are a drag on the system; they "leak out" of the spending stream, thereby causing recession and unemployment. Hence Keynes, like Mandeville in the early 18th century, was able to condemn thrift and savings; he had finally gotten his revenge on the bourgeoisie.

By also severing interest returns from the price of time or from the real economy and by making it only a monetary phenomenon, Keynes was able to advocate, as a linchpin of his basic political program, the "euthanasia of the rentier" class: that is, the state's expanding the quantity of money enough so as to drive down the rate of interest to zero, thereby at last wiping out the hated creditors. It should be noted that Keynes did not want to wipe out investment: on the contrary, he maintained that savings and investment were separate phenomena. Thus, he could advocate driving down the rate of the interest to zero as a means of maximizing investment while minimizing (if not eradicating) savings.

Since he claimed that interest was purely a monetary phenomenon, Keynes could then also sever the existence of an interest rate from the scarcity of capital. Indeed, he believed that capital is not really scarce at all. Thus, Keynes stated that his preferred society "would mean the euthanasia of the rentier, and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital."

But capital is not really scarce: "Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital." Therefore, "we might aim in practice … at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor [the rentier] will no longer receive a bonus." Keynes made it clear that he looked forward to a gradual annihilation of the "functionless" rentier, rather than to any sort of sudden upheaval (Keynes 1936: pp. 375–76; see also Hazlitt [1959] 1973: pp. 379–84).[12]

Keynes then came to the third economic class, to whom he was somewhat better disposed: the investors. In contrast to the passive and robotic consumers, investors are not determined by an external mathematical function. On the contrary, they are brimful of free will and active dynamism. They are also not an evil drag on the economic machinery, as are the savers. They are important contributors to everyone's welfare.

But, alas, there is a hitch. Even though dynamic and full of free will, investors are erratic creatures of their own moods and whims. They are, in short, productive but irrational. They are driven by psychological moods and "animal spirits." When investors are feeling their oats and their animal spirits are high, they invest heavily, but too much; overly optimistic, they spend too much and bring about inflation. But Keynes, especially in The General Theory, was not really interested in inflation; he was concerned about unemployment and recession, caused, in his starkly superficial view, by pessimistic moods, loss of animal spirits, and hence underinvestment.

The capitalist system is, accordingly, in a state of inherent macroinstability. Perhaps the market economy does well enough on the micro-, supply-and-demand level. But in the macro world, it is afloat with no rudder; there is no internal mechanism to keep its aggregate spending from being either too low or too high, hence causing recession and unemployment or inflation.

Interestingly enough, Keynes came to this interpretation of the business cycle as a good Marshallian. Ricardo and his followers of the Currency School correctly believed that business cycles are generated by expansions and contractions of bank credit and the money supply, as generated by a central bank, whereas their opponents in the Banking School believed that expansions of bank money and credit were merely passive effects of booms and busts and that the real cause of business cycles was fluctuation in business speculation and expectations of profit – an explanation very close to Pigou's later theory of psychological mood swings and to Keynes's focus on animal spirits.

John Stuart Mill had been a faithful Ricardian except in this one crucial area. Following his father, Mill had adopted the Banking School's causal theory of business cycles, which was then adopted by Marshall (Trescott 1987; Penman 1989: pp. 88–89).

To develop a way out, Keynes presented a fourth class of society. Unlike the robotic and ignorant consumers, this group is described as full of free will, activism, and knowledge of economic affairs. And unlike the hapless investors, they are not irrational folk, subject to mood swings and animal spirits; on the contrary, they are supremely rational as well as knowledgeable, able to plan best for society in the present as well as in the future.

This class, this deus ex machina external to the market, is of course the state apparatus, as headed by its natural ruling elite and guided by the modern, scientific version of Platonic philosopher kings. In short, government leaders, guided firmly and wisely by Keynesian economists and social scientists (naturally headed by the great man himself), would save the day. In the politics and sociology of The General Theory, all the threads of Keynes's life and thought are neatly tied up.

And so the state, led by its Keynesian mentors, is to run the economy, to control the consumers by adjusting taxes and lowering the rate of interest toward zero, and, in particular, to engage in "a somewhat comprehensive socialisation of investment." Keynes contended that this would not mean total state Socialism, pointing out that

it is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. (Keynes 1936: p. 378)

Yes, let the state control investment completely, its amount and rate of return in addition to the rate of interest; then Keynes would allow private individuals to retain formal ownership so that, within the overall matrix of state control and dominion, they could still retain "a wide field for the exercise of private initiative and responsibility." As Hazlitt puts it,

Investment is a key decision in the operation of any economic system. And government investment is a form of socialism. Only confusion of thought, or deliberate duplicity, would deny this. For socialism, as any dictionary would tell the Keynesians, means the ownership and control of the means of production by government. Under the system proposed by Keynes, the government would control all investment in the means of production and would own the part it had itself directly invested. It is at best mere muddleheadedness, therefore, to present the Keynesian nostrums as a free enterprise or "individualistic" alternative to socialism. (Hazlitt [1959] 1973: p. 388; cf. Brunner 1987: pp. 30, 38)

There was a system that had become prominent and fashionable in Europe during the 1920s and 1930s that was precisely marked by this desired Keynesian feature: private ownership, subject to comprehensive government control and planning. This was, of course, fascism.

Where did Keynes stand on overt fascism? From the scattered information now available, it should come as no surprise that Keynes was an enthusiastic advocate of the "enterprising spirit" of Sir Oswald Mosley, the founder and leader of British fascism, in calling for a comprehensive "national economic plan" in late 1930. By 1933, Virginia Woolf was writing to a close friend that she feared Keynes was in the process of converting her to "a form of fascism." In the same year, in calling for national self-sufficiency through state control, Keynes opined that "Mussolini, perhaps, is acquiring wisdom teeth" (Keynes 1930b, 1933: p. 766; Johnson and Johnson 1978: p. 22; on the relationship between Keynes and Mosley, see Skidelsky 1975: pp. 241, 305–6; Mosley 1968: pp. 178, 207, 237–38, 253; Cross 1963: pp. 35–36).

But the most convincing evidence of Keynes's strong fascist bent was the special foreword he prepared for the German edition of The General Theory. This German translation, published in late 1936, included a special introduction for the benefit of Keynes's German readers and for the Nazi regime under which it was published. Not surprisingly, Harrod's idolatrous Life of Keynes makes no mention of this introduction, although it was included two decades later in volume seven of the Collected Writings along with forewords to the Japanese and French editions.

The German introduction, which has scarcely received the benefit of extensive commentary by Keynesian exegetes, includes the following statements by Keynes: "Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a lance measure of laissez-faire." (Keynes 1973 [1936]: p. xxvi. Cf. Martin 1971: pp. 200–5; Hazlitt [1959] 1973: p. 277; Brunner 1987: p. 38ff.; Hayek 1967: p. 346)

As for communism, Keynes was less enthusiastic. On the one hand, he admired the young, intellectual, English Communists of the late 1930s because they reminded him, oddly enough, of the "typical nonconformist English gentlemen who … made the Reformation, fought the Great Rebellion, won us our civil and religious liberties, and humanized the working classes last century." On the other hand, he criticized the young Cambridge Communists for the other side of the Reformation/Great Rebellion coin: they were puritans. Keynes's lifelong antipuritanism emerged in the question, Are Cambridge undergraduates disillusioned when they go to Russia, when they "find it dreadfully uncomfortable? Of course not. That is what they are looking for" (Hession 1984: p. 265).

Keynes firmly rejected communism after his own visit to Russia in 1925. He did not like the mass terror and extermination, caused partly by the speed of the revolutionary transformation and partly too, Keynes opined, by "some beastliness in the Russian nature – or in the Russian and Jewish natures when, as now, they are allied together." He also had strong doubts that "Russian communism" would be able to "make Jews less avaricious" (Keynes 1925: pp. 37, 15).

Indeed, Keynes had long been anti-Semitic.[13] At Eton, Maynard wrote an essay titled "The Differences Between East and West," in which he condemned the Jews as an Eastern people who, because of "deep-rooted instincts that are antagonistic and therefore repulsive to the European," can no more be assimilated to European civilization than cats can be forced to love dogs (Skidelsky, 1986: p. 92). Later, as a British official at the Paris peace conference, Keynes wrote of his great admiration of Lloyd George's brutal anti-Semitic attack on the French Finance Minister, Louis-Lucien Klotz, who had tried to squeeze the defeated Germans for more gold in exchange for relieving the Allied food blockade.

First, there was Keynes's description of Klotz: "A short, plump, heavy-moustached Jew, well groomed, well kept, but with an unsteady, roving eye, and his shoulders a little bent with instinctive deprecation." Keynes then described the dramatic moment:

Lloyd George had always hated him and despised him; and now saw in a twinkling that he could kill him. Women and children were starving, he cried, and here was M. Klotz prating and prating of his "goold." He leant forward and with a gesture of his hands indicated to everyone the image of a hideous Jew clutching a money bag. His eyes flashed and the words came out with a contempt so violent that he seemed almost to be spitting at him. The anti-Semitism, not far below the surface in such an assemblage as that one, was up in the heart of everyone. Everyone looked at Klotz with a momentary contempt and hatred; the poor man was bent over his seat, visibly cowering. We hardly knew what Lloyd George was saying, but the words "goold" and Klotz were repeated, and each time with exaggerated contempt.

At that point, Lloyd George came to the climax of his performance: turning to the French premier, Clemenceau, he warned that unless the French ceased their obstructive tactics against feeding the defeated Germans, three names would go down in history as the architects of Bolshevism in Europe: Lenin and Trotsky and … as Keynes wrote, "The Prime Minister ceased. All around the room you could see each one grinning and whispering to his neighbor, 'Klotsky'" (Keynes 1949: p. 229; Skidelsky 1986: 360, 362).

The point is that Keynes, who had never particularly liked Lloyd George before, was won over by his display of George's savage anti-Semitic pyrotechnics. "He can be amazing when one agrees with him," declared Keynes. "Never have I more admired his extraordinary powers" (1949: p. 225).[14]

But the major reason for Keynes's rejection of communism was simply that he could scarcely identify with the grubby proletariat. As Keynes wrote after his trip to Soviet Russia: "How can I adopt such a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia who … are the quality in life and surely carry the seeds of all human advancement?" (Hession 1984: p. 224).

Rejecting the proletarian socialism of the British Labour Party, Keynes made a stark and similar point: "It is a class war and the class is not my class.… The class war would find me on the side of the educated bourgeoisie" (Brunner 1987: p. 28). John Maynard Keynes was a lifelong member of the British aristocracy, and he was not about to forget it.

Summing Up

Was Keynes, as Hayek maintained, a "brilliant scholar"? "Scholar" hardly, since Keynes was abysmally read in the economics literature: he was more of a buccaneer, taking a little bit of knowledge and using it to inflict his personality and fallacious ideas upon the world, with a drive continually fueled by an arrogance bordering on egomania. But Keynes had the good fortune to be born within the British elite, to be educated within the top economics circles (Eton/Cambridge/Apostles), and to be specially chosen by the powerful Alfred Marshall.

"Brilliant" is scarcely an apt word either. Clearly, Keynes was bright enough, but his most significant qualities were his arrogance, his unlimited self-confidence, and his avid will to power, to domination, to cutting a great swath through the arts, the social sciences, and the world of politics.

Furthermore, Keynes was scarcely a "revolutionary" in any real sense. He possessed the tactical wit to dress up ancient statist and inflationist fallacies with modern, pseudoscientific jargon, making them appear to be the latest findings of economic science. Keynes was thereby able to ride the tidal wave of statism and socialism, of managed and planned economies. Keynes eliminated economic theory's ancient role as spoilsport for inflationist and statist schemes, leading a new generation of economists on to academic power and to political pelf and privilege.

A more fitting term for Keynes would be "charismatic" – not in the sense of commanding the allegiance of millions but in being able to con and seduce important people – from patrons to politicians to students and even to opposing economists. A man who thought and acted in terms of power and brutal domination, who reviled the concept of moral principle, who was an eternal and sworn enemy of the bourgeoisie, of creditors, and of the thrifty middle class, who was a systematic liar, twisting truth to fit his own plan, who was a Fascist and an anti-Semite, Keynes was nevertheless able to cajole opponents and competitors.

Even as he cunningly turned his students against his colleagues, he was still able to cozen those same colleagues into intellectual surrender. Harassing and hammering away unfairly at Pigou, Keynes was yet able, at last and from beyond the grave, to wring an abject recantation from his old colleague. Similarly, he inspired his old foe Lionel Robbins to muse absurdly in his diary about the golden halo around Keynes's "godlike" head. He was able to convert to Keynesianism several Hayekians and Misesians who should have known – and undoubtedly did know – better: in addition to Abba Lerner, John Hicks, Kenneth Boulding, Nicholas Kaldor, and G.L.S. Shackle in England, there were also Fritz Machlup and Gottfried Haberler from Vienna, who landed at Johns Hopkins and Harvard, respectively.

Of all the Misesians of the early 1930s, the only economist completely uninfected by the Keynesian doctrine and personality was Mises himself. And Mises, in Geneva and then for years in New York without a teaching position, was removed from the influential academic scene. Even though Hayek remained anti-Keynesian, he too was touched by the Keynesian charisma. Despite everything, Hayek was proud to call Keynes a friend and indeed promoted the legend that Keynes, at the end of his life, was about to convert from his own Keynesianism.

Hayek's evidence for Keynes's alleged last-minute conversion is remarkably slight – based on two events in the final years of Keynes's life. First, in June 1944, upon reading The Road to Serfdom, Keynes, now at the pinnacle of his career as a wartime government planner, wrote a note to Hayek, calling it "a great book … morally and philosophically I find myself in agreement with virtually the whole of it." But why should this be interpreted as anything more than a polite note to a casual friend on the occasion of his first popular book?

Moreover, Keynes made it clear that, despite his amiable words, he never accepted the essential "slippery slope" thesis of Hayek, namely, that statism and central planning lead straight to totalitarianism. On the contrary, Keynes wrote that "moderate planning will be safe if those carrying it out are rightly oriented in their minds and hearts to the moral issue." This sentence, of course, rings true, for Keynes always believed that the installation of good men, namely, himself and the technicians and statesmen of his social class, was the only safeguard needed to check the powers of the rulers (Wilson 1982: p. 64ff.).

Hayek proffers one other bit of flimsy evidence for Keynes's alleged recantation, which occurred during his final meeting with Keynes in 1946, the last year of Keynes's life. Hayek reports,

A turn in the conversation made me ask him whether or not he was concerned about what some of his disciples were making of his theories. After a not very complimentary remark about the persons concerned he proceeded to reassure me: those ideas had been badly needed at the time he had launched them. But I need not be alarmed: if they should ever become dangerous I could rely upon him that he would again quickly swing round public opinion – indicating by a quick movement of his hand how rapidly that would be done. But three months later he was dead. (Hayek 1967b: p. 348)[15]

Yet this was hardly a Keynes on the verge of recantation. Rather, this was vintage Keynes, a man who always held his sovereign ego higher than any principles, higher than any mere ideas, a man who relished the power he held. He could and would turn the world, set it right with a snap of his fingers, as he presumed to have done in the past.

Moreover, this statement was also vintage Keynes in terms of his long-held view of how to act properly when in or out of power. In the 1930s, prominent but out of power, he could speak and act "a little wild"; but now that he enjoyed the high seat of power, it was time to tone down the "poetic license." Joan Robinson and the other Marxo-Keynesians were making the mistake, from Keynes's point of view, of not subordinating their cherished ideas to the requirements of his prodigious position of power.

And so Hayek too, while never succumbing to Keynes's ideas, did fall under his charismatic spell. In addition to creating the legend of Keynes's change of heart, why did Hayek not demolish The General Theory as he had Keynes's Treatise on Money? Hayek admitted to a strategic error, that he had not bothered to do so because Keynes was notorious for changing his mind, so Hayek did not think then that The General Theory would last. Moreover, as Mark Skousen has noted in chapter 1 of this volume, Hayek apparently pulled his punches in the 1940s in order to avoid interfering with Britain's Keynesian financing of the war effort – certainly an unfortunate example of truth suffering at the hands of presumed political expediency.

Later economists continued to hew a revisionist line, maintaining absurdly that Keynes was merely a benign pioneer of uncertainty theory (Shackle and Lachmann), or that he was a prophet of the idea that search costs were highly important in the labor market (Clower and Leijonhufvud). None of this is true. That Keynes was a Keynesian – of that much-derided Keynesian system provided by Hicks, Hansen, Samuelson, and Modigliani – is the only explanation that makes any sense of Keynesian economics.

Yet Keynes was much more than a Keynesian. Above all, he was the extraordinarily pernicious and malignant figure that we have examined in this chapter: a charming but power-driven statist Machiavelli, who embodied some of the most malevolent trends and institutions of the 20th century.


[1] Asking himself why the eminent constitutional historian Frederic W. Maitland had no influence over the Apostles in this era, even though a member, Derek Crabtree answers that Maitland was unfortunate enough to hold his chair at Downing College, one of the lesser, uninfluential colleges at Cambridge (see Crabtree 1980: 18–19).

[2] When the philosopher John E. McTaggart, a lecturer at Trinity who had been an Apostle since the 1880s, got married late in life, he assured the Apostles that his wife was merely "phenomenal" (Skidelsky 1983: 118).

[3] Bertrand Russell, who was a decade older than Keynes, did not like the Keynes/Strachey group that dominated undergraduate members during the first decade of the 20th century, largely because of their conviction that homosexuality was morally superior to heterosexuality.

[4] In view of his friendship with Keynes, Hayek's account of this episode characteristically misses Keynes's arrogance and gall, treating the story as if it were merely unfortunate that Keynes did not know German better: "The world might have been saved much suffering if Lord Keynes's German had been a little better" (Hayek [1956] 1984: 219; see also Rothbard 1988: 28).

[5] There is no space here to elaborate my conviction that this was a false and even pernicious myth, that what Marshall really did was not to synthesize but to reestablish the dominance of Ricardo and Mill and their long-run equilibrium and cost-of-production theories, overlaying them with a thin veneer of trivialized marginal-utility analysis.

[6] Thus, as late as World War II and shortly thereafter, my honors seminar at Columbia College consisted of a chapter-by-chapter reading and analysis of Marshall's Principles. And when I was preparing for my doctoral oral examination in the history of thought, the venerable John Maurice Clark told me that there was no real need for me to read Jevons because "all his contributions are in Marshall."

[7] As Skidelsky points out, it is typical of Roy Harrod's whitewashing biography that, in quoting this letter, he leaves out his hero's remark about "swindling the investing public" (Skidelsky 1983: 165n).

[8] In a letter to his mother on September 3, 1919. Keynes wrote of his speculation in foreign exchange, "which will shock father but out of which I hope to do very well" (Harrod 1951: 288). For a penetrating critique of Keynes's views on speculation as gambling, see Hazlitt ([1959] 1973: 179–85).

[9] Harry Johnson put the strategy perceptively: "In this process, it helps greatly to give old concepts new and confusing names … [T]he new theory had to have the appropriate degree of difficulty to understand. This is a complex problem in the design of new theories. The new theory had to be so difficult to understand that senior academic colleagues would find it neither easy nor worthwhile to study, so that they would waste their efforts on peripheral theoretical issues, and so offer themselves as easy market for criticism and dismissal by their younger and hungrier colleagues. At the same time, the new theory had to appear both difficult enough to challenge the intellectual interest of young colleagues and students, but actually easy enough for them to master adequately with a sufficient investment of intellectual endeavor. These objectives Keynes's General Theory managed to achieve: it neatly shelves the old and established scholars, like Pigou and Robertson, enabled the most enterprising middle-and lower-middle-aged like Hansen, Hicks, and Joan Robinson to jump on and drive the bandwagon, and permitted a whole generation of students … to escape from the slow and soul-destroying process of acquiring wisdom by osmosis from their elders and the literature into an intellectual realm in which youthful iconoclasm could quickly earn its just reward (in its own eyes at least) by the demolition of the intellectual pretensions of its academic seniors and predecessors. Economics, delightfully, could be reconstructed from scratch on the basis of a little Keynesian understanding and a lofty contempt for the existing literature – and so it was" (1978: pp. 188–89).

[10] Robbin's biographer, D.P. O'Brien, labors hard to maintain that, despite what he admits is Robbins's "elaborate" and "exaggerated contrition," Robbins never really, deep down, converted to Keynesianism. But O'Brien is unconvincing, even after he tries to show how Robbins waffled on some issues. Moreover, O'Brien admits that Robbins dropped his Misesian macro approach, and he fails to mention Robbins's astonishing treatment of Keynes as "godlike" (O'Brien 1988: pp. 14–16, 117–20).

[11] Keynes's only reference to Mises in The General Theory does not concern his business-cycle theory or monetary analysis, which were most relevant to the book, but expresses Keynes's surprise at Mises's "peculiar" theory of interest, which "confused" the "marginal efficiency of capital" (essentially Keynes's term for the rate of return on investment) with the ratio of consumers' to capital goods' prices and with the rate of interest. If Keynes had known anything about capital theory, he would have recognized Mises's position as a Böhm-Bawerkian one, similar to much 19th-century capital theory, which concentrated on the long-run rate of profit as the rate of interest. One of Keynes's greatest fallacies was his belief that interest was a purely monetary phenomenon, making only the loan rate of interest important (Keynes 1936: pp. 192–93; cf. Rothbard [1962] 1970: I, pp. 454–55).

[12] See also the illuminating article by Andrew Rutten (1989). I am indebted to Dr. Rutten for calling this article to my attention.

[13] Earlier, Keynes had called for a "transformation of society," which "may require a reduction in the rate of interest toward the vanishing point within the next thirty years" (Keynes 1933: p. 762).

[14] Keynes could rise above his generally anti-Semitic attitude, especially when a wealthy international banker, capable of conferring favors, was involved. Thus, we have seen that Edwin Samuel Montagu was Keynes's earliest and most important political patron; and Keynes also became fond of Germany's representative at the Paris peace conference, Dr. Carl Melchior: "In a sort of way I was in love with him" (Keynes 1949: p. 222). The fact that Melchior was a partner in the prominent international banking firm of M.M. Warburg and Company might have had something to do with Keynes's benign attitude.

[15] Harry Johnson recorded a similar impression, at Keynes's presentation of his posthumously published paper on the balance of payments, in which Johnson concludes that Keynes's reference to "how much modernist stuff, gone wrong and turned sour and silly, is circulating in our system," refers to the left-Keynesian, or Marxo-Keynesian, Joan Robinson (Johnson 1978: p. 159n).

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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