John Maynard Keynes: The Damage Still Done by a Defunct Economist

By Ebeling, Richard M. | Freeman, May 2006 | Go to article overview

John Maynard Keynes: The Damage Still Done by a Defunct Economist


Ebeling, Richard M., Freeman


Seventy years ago, on February 4,1936, the English economist John Maynard Keynes (1883-1946) published what soon became his most famous work, The General Theory of Employment, Interest, and Money. Few books, in so short a time, have gained such wide influence and generated so destructive an impact on public policy. What Keynes succeeded in doing was to provide a rationale for what governments always like to do: spend money and pander to special interests.

In the process Keynes helped undermine what had been three of the essential institutional ingredients of a free-market economy: the gold standard, balanced government budgets, and open competitive markets. In their place Keynes's legacy has given us paper-money inflation, government deficit spending, and more political intervention throughout the market.

It would, of course, be an exaggeration to claim that without Keynes and the Keynesian revolution inflation, deficit spending, and interventionism would not have occurred. For decades before the appearance of Keynes's book, the political and ideological climate had been shifting toward ever-greater government involvement in social and economic affairs, due to the growing influence of collectivist ideas among intellectuals and policymakers.

But before the appearance of The General Theory, many of the advocates of such collectivist policies had to get around the main body of economic thinking which still argued that in general the best course was for government to keep its hands off the market, maintain a stable currency backed by gold, and restrain its own taxing and spending policies.

The classical economists of the eighteenth and nineteenth centuries had persuasively demonstrated that government intervention prevented the smooth functioning of the market. They constructed a body of economic theory which clearly showed that governments have neither the knowledge nor the ability to direct economic affairs. Freedom and prosperity are best assured when government is, in general, limited to protecting people s lives and property, with the competitive forces of supply and demand bringing about the necessary incentives and coordination of people's activities.

During the Napoleonic wars of the early nineteenth century, many European countries experienced serious inflations as governments resorted to the printing press to fund their war expenditures. The lesson the classical economists learned was that the hand of the government had to be removed from the handle of that printing press if monetary stability was to be maintained. The best way of doing this was to link a nation's currency to a commodity like gold, require banks to redeem their notes for gold on demand at a fixed rate of exchange, and limit any increases in the amount of such bank notes in circulation to additional deposits of gold left in the banks by their depositors.

They also concluded that deficit spending was a dangerous means of funding government programs. It enabled governments to create the illusion that they could spend without imposing a cost on society in the form of higher taxes; they could borrow and spend today, and defer the tax cost until some tomorrow when the loans would have to be repaid. The classical economists called for annually balanced budgets, enabling the electorate to see more clearly the cost of government spending. If a national emergency, such as a war, were to force the government to borrow, then when the crisis passed, the government should run budget surpluses to pay off the debt.

These were considered the tried and true policies for a healthy society. And these were the policies that Keynes did his best to try to overthrow in the pages of The General Theory. He argued that a market economy was inherently unstable, open to swings of irrational investor optimism and pessimism, which resulted in unpredictable and wide fluctuations in output, employment, and prices. Only government, he believed, could take the long view and rationally keep the economy on an even keel by running deficits to stimulate the economy during depressions and surpluses to rein it in during inflationary booms. …

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