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This
important book fills a gap in the literature. It is an Austrian critique of
Keynes that is concise and accessible to the general reader.
Hunter
Lewis says that he set out to write the book that Hazlitt had planned when he
began composing The Failure of the New Economics (p.
10). Hazlitt started out planning to produce a popular book, but as he delved
more deeply into his task, the result was something closer to an academic
treatise. Lewis's book is accessible to anyone who has had a macroeconomics
course, and to the general reader of the business media.
Keynes
is a famously difficult writer to understand. While his ideas have achieved
tremendous influence, most people have been exposed to them only by reading
macroeconomics textbooks (which provide a second- or third-generation
graphical synthesis of The
General Theory), or through media buzzwords such as
"stimulus" and "monetary policy."
Lewis
writes, "Because few people have read Keynes, it is easy to be confused
about what he said" (p. 7). Another source of confusion is that
Keynes
himself is often obscure, even at first glance self-contradictory. In some
cases, very close examination reveals that Keynes was not actually
contradicting himself. Often he was simply being sloppy, although sometimes he
seems to be intentionally opaque, rather like former US Federal Reserve
Chairman Alan Greenspan.… Opacity has its uses in politics, especially
when there is a logical difficulty to obscure or evade.
Where
is the logical place to start in order to gain a clear understanding of this
difficult original material? Lewis's strategy is to go directly to the
source. In part 2 of the book, he presents Keynes's views in a series of
short quotes and excerpts from his works (mainly The General Theory). Lewis presents
the original words with a minimum of analysis and interpretation.
Reaching
chapter 5, in part 2, Lewis summarizes Keynes's macroeconomics as a series of
main points (p. 47): (1) people are too future oriented; (2) society tends to
underconsume and oversave; (3) interest rates tend to be too high; (4)
monetary policy can lower interest rates by money printing; and (5), the core
of the theory, "unused savings … interrupt the flow of money
through the economy and lead to unemployment. Unemployment reduces society's
income."
Keynes
believed markets to be fundamentally broken. Markets do not clear, the price
system does not allocate resources, and generally, the entire system is
unstable and possesses no self-correcting features.
In
part 3, "Why Keynes Was Wrong,"
Lewis presents common-sense arguments and counterfactual evidence that refute
the doctrines presented in part 2. He attacks Keynes from several directions:
in some cases, showing that what Keynes said makes no sense or contradicts
itself; in other cases, citing empirical studies that have produced results
contrary to Keynes; and finally, developing alternative theories that make
more sense.
"Keynes
believed markets to be fundamentally broken."
The
alternative theories are thoroughly Austrian: the author draws upon Mises,
Hayek, Rothbard, Reisman, Hutt, Rueff, and Hazlitt for most of his analytical
tools. Lewis clearly has a deep understanding of the Austrian teachings on
production, money, banking, and the business cycle.
Part 3
parallels the structure of part 2. In fact, in the table of contents, the two
parts of the book are lined up in vertical columns, with the heading for each
fallacy on the left aligned with the one for the refutation of that fallacy
on the right. For example, "Spend More, Save Less, and Grow
Wealthy" is lined up across from "Spend More, Save Less, and Grow
Poorer."
I will
provide a couple of examples of Lewis's analysis. In response to Keynes's
view that "interest rates are [too] high because people refuse to lend
… on reasonable terms" (p. 91), Lewis writes,
The
idea that lenders are obstinately holding out for exorbitant rates is
particularly odd. It suggests a one-sided market in which the lenders have
all the power and borrowers have little or none.…
Neither
lender nor borrower can dictate terms in the market for money any more than
in the market for other products or property. (pp. 91–92)
Lewis
comes down especially hard on one of the most damaging fallacies of the
Keynesian system: the proposition that "new money that has been injected
into the banking system is 'just as genuine as any other savings'" (p.
98). Lewis writes,
It is
Orwellian to refer to newly printed government money as "savings."
Whatever the merits or demerits of "printing press" money, it is
not the same as savings. The word savings describes money that has been
earned, and having been earned, is not spent but rather set aside for
emergency or investment use.…
The
government's new money will eventually destroy traditional savings. This is
true because the resulting inflation … will ultimately erode the
purchasing power of traditional savings and thus ruin the saver, especially
the small saver.
Several
main themes emerge from Lewis's detailed analysis. One is that most of
Keynes's doctrines are paradoxical. The most well-known example is the paradox
of thrift: saving is good for the individual but
if everyone tries to save, then it drives the economy downwards into a bust.
Another example is "unemployment equilibrium" — the
proposition that a market with unemployed resources has no tendency toward
their employment.
Keynes's
method of contrasting paradoxical truth against naïve common sense
brings to mind philosopher Michael Levin's discussion of the "skim milk
fallacy":
According
to this paradigm, science always shows that things are the reverse of how
they seem. Deep scrutiny of virtually any phenomenon will reveal that
everyday convictions about it are wrong. In fact, taking things at face value
betrays naiveté, while readiness to debunk is the mark of the
sophisticate. (p. 129)
Lewis
tackles Keynes's obscurantism head-on with clear, logical arguments that
reveal the nonsense within the paradoxes. He shows how Keynes relied on rhetorical
tricks such as shifting definitions, statements that appear plausible but on
closer examination make no sense, and hidden self-contradictions.
Contra
the "paradox of thrift," Lewis writes,
There
is no paradox here; Keynes is wrong. It is prudent for families facing job
loss to put something away. It is also prudent for a society that has
overspent and overborrowed to start saving. This is true with or without an
economic slump.
As we
have discussed, the slump came because the government … artificially
stimulated the economy by printing new money and injecting it into the
economy through the financial system. This lowered interest rates and
encouraged a wave of wasteful borrowing and spending by both businesses and
consumers. In particular, vast sums were borrowed which would never be paid
back.…
The
bad investments of the recent past need to be liquidated, or at least marked
down in price. Until this happens, savers should build their cash positions
and refuse to use them. To invest at the old, unrealistic asset prices would
just continue the old pattern of throwing money away. (pp. 129–130)
Another
recurring theme in Where
Keynes Went Wrong is Keynes's reliance on hunches not supported
by facts. For example,
Keynes
offers not a shred of evidence that savings have exceeded investment
throughout human history. This is another of his hunches.
He is
correct that rich societies, like rich individuals, save more. But it does
not follow that they produce more "excess" or "unused"
savings.
Lewis
demonstrates that Keynes frequently uses a hunch to decide a point in his
reasoning that cannot be decided on theoretical grounds. The direction of his
hunches was always in the direction that he needed the argument to go in
order to get to the result he wanted. As Lewis later argues, Keynes in fact
had the answer in advance; he knew what type of policy recommendations he
wanted to make and he built his intellectual system to arrive at that
destination. In those cases where empirical data existed at the time of his
writing, Keynes often dismissed it with no counterevidence.
A
running theme of Lewis's critique is Keynes's masterful use of satire and
condescension: "satirical burlesques are a Keynesian specialty" (p.
121). Keynes loved to heap scorn and ridicule on the opposing view. Lewis
inserts "pauses" in the book where the reader can give
"Applause (for the satire)."
Keynes
aimed to show, through this satire, that individual behaviors that economists
have always thought to be rational and self-interested were in reality
irrational and dogmatic. He characterizes saving, for example, as a religion
with no practical end (p. 120). Likewise, he claims that policies usually
considered sound and prudent, such as balanced budgets, in reality restrain
economic growth. Governments, for example, should welcome disasters as an
opportunity for deficit spending (p. 131).
Most
of part 4, and some digressions in parts 2 and 3, cover what might be called
the sociology of Keynes: the way that certain features of his personality and
particular talents contributed to the widespread adoption of his views. His
success requires explanation because it is entirely undeserved on the merits
of the ideas themselves. Lewis identifies several factors, especially
Keynes's writing style, his debating skill, his political maneuvering, and
his gift for inflicting ridicule and embarrassment on his opponents, as keys
in winning the day.
Finally,
Lewis arrives at an important juncture:
One
could go on, almost indefinitely, citing Keynes's obscurities, convolutions,
inconsistencies, factual or logical lapses, and so on, but it is time to ask
the obvious question: why did he write The
General Theory this way? (p. 277)
And he
offers the answer:
Keynes
was a salesman. He was trying to sell a particular type of economic policy,
and he was prepared to utilize any rhetorical device, from crystal clarity
and wit all the way to complete unintelligibility, in order to make the sale.
Why
would unintelligibility help to make the sale? Not just because it can be
used to impress. Equally important, it can be used to intimidate. (p. 277)
Lewis
suggests that these qualities, which made Keynes such a formidable debater,
did not translate well into written arguments. Debate is fleeting and
Keynes's opponents could be disoriented by his quick wit and confusing shifts
of meaning. But written words are stable, so his critics have the time to go
through them in detail. Hazlitt in particular was able to identify all of the
shifting definitions and other tricks that might have passed by too quickly
in verbal argument.
This
review only skims the surface of Lewis's book. For instance, I have not
devoted any space to his excellent coverage of recent events, including the
corrupt bailouts. The work contains so many gems that it would be impossible
to give due credit to the author without writing a review twice as long as
the book itself. The book is highly readable. Lewis is an excellent writer,
and I often found myself rereading particular passages.
I came
away with an appreciation of the great mystery of Keynes: how did his ideas
come to have the profound influence that they do now? The ideas in The General Theory
form the foundation of modern macroeconomics, which itself guides the central
banking and monetary policy in every country. Keynesianism, if not Keynes, is
deeply embedded in academic economics, government, and the public
consciousness
It is
difficult not to think that there must be something really deep and profound
there (something wrong, perhaps, but surely something deep and profound).
Could several generations of professional economists have been so wrong as to
adopt an intellectual pile of rubbish as the basis for making decisions
having impacts of trillions of dollars?
And
this is the book's most important contribution: it demystifies Keynes. Lewis
cites a story from one of Keynes's books in which
British
Prime Minister Lloyd George "bamboozled" US President Woodrow
Wilson … [then] found that "it was harder to de-bamboozle [Wilson]
than it had been to bamboozle him." This describes our predicament
today. Keynes has bamboozled us and it is very difficult to de-bamboozle
ourselves. (p 304)
This
book makes a significant contribution to that task.
Robert Blumen
Also
by Robert Blumen
Robert Blumen is
an independent software developer based in San Francisco, California
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