Wednesday, November 07, 2007

The Myth of Keynes

UPDATE: I guess this wasn't published at all, as we had an influx of letters to the editor and my trip downstate prevented me from submitting this article until late Monday night. It's just as well.

I've never been accused of being overly topical. This week, I want to take a look at the false prophet John Maynard Keynes. In 1936, his book The General Theory of Employment, Interest and Money was published. Therein, Keynes advocates high taxes and extensive governmental involvement as a solution to economic crises. Divorcing himself from overt Socialism, Keynes proposed a happy medium between laissez-faire capitalism, and the colder, more barbaric, Communist system of total government control. Since the United States was still stuck in the rut of a global recession, and since FDR was an interventionist, Keynes is often credited with improving the economy and ending the Great Depression. As always, it is worth examining the validity of the popular account.

As historian Paul Johnson notes in his book, A History of the American People: "One of the myths of the inter-war years is that laissez-faire capitalism made a mess of things until Keynes, with his great book, The General Theory of Employment, Interest and Money (1936), introduced 'Keynesianism'—another word for government interference—and saved the world. In fact Keynes' Tract [on Monetary Reform (1923)], advocating 'managed currency' and a stabilized price-level, both involving constant government interference, coordinated internationally, was part of the problem... For most of the Twenties... domestically and internationally, [Benjamin Strong and Montague Norman] constantly pumped more money into the system, and whenever the economy showed signs of flagging they increased the dose."

President Hoover is often portrayed as a slick capitalist, wining and dining in the White House while the country starved. Yet this is patently false, mere propaganda meant to contrast Hoover with FDR, so as to allow the latter to achieve iconic status. It was not laissez-faire economics which caused the Depression; rather, Keynesian style interference, antedating his magnus opus by some years, caused inflation, decreased the power of the currency, and brought about the Great Depression. Hoover, like FDR, had no problem using the newly created Federal Reserve to inflate the money supply. In the words of Paul Johnson, “It is likely that the efforts of both merely served to prolong the crisis.”

And again, “"The real recovery from the boom atmosphere of the 1920s came only on the Monday after the Labor Day weekend of September 1939 [ten years into the depression and seven years into FDR's presidency], when news of war in Europe plunged the New York Stock Exchange into a joyful confusion which finally wiped out the traces (though not the memory) of October 1929. Two years later, with America on the brink of war itself, the dollar value of production finally passed the 1929 levels for good. If interventionism worked, it took nine years and a world war to demonstrate the fact.”

Insofar as Keynesian thought had anything to do with the Great Depression, his school served to aid in its perpetuation. Unfortunately, both the Republicans and the Democrats have since enrolled therein. Today's arguments revolve around the intensity of the flow of government money into the economy. Turning off the spigot entirely cannot be considered. This isn't because people believe interventionism works—history tells us that it doesn't. The reason, as usual, is because it allows the feds a greater hand in our own lives. Meanwhile, the people, most of whom remain ignorant of the myth, continue to show a willingness to support those who promise to use the government to help them. It's too bad that government help is largely a contradiction in terms.

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