Far be it from me, a humble lawyer, to tell people about economics. This article is a summary of the thinking of various economists/philosophers, who explained the realities of economics before John Keynes came on the scene in the 1930s with a highly influential book that's still causing problems 90 years later. Having not found a good summary of why the The General Theory Of Employment, Interest And Money can't be right, I put together this piece. My first intuition about the book was based on its logical problems and bad writing, but further reflection led me to write up a note for myself that became this blog post. If you enjoyed this, please send me an email to let me know: addison@cameronhuff.com. My unique contributions in this article are, beyond the synthesis of various viewpoints, the doctor prescribing bronzer example in section 5 and the geometric analogy of a circle in a square in section 13.
---
Introduction
In the early 1900s, the mandate of government expanded, and taxes rose to meet the occasion. Seeing this huge power, theorists wondered: can government intervention improve the efficiency of an economy? These theorists are the “Economic Utopians”.
What was the pre-1930s view of economic intervention? Here are five key points that made previous generations of theorists hesitant:
1. Deficit of timely information compared to the people faced with making choices.
2. Virtually no awareness of individual circumstances and goals.
3. The correct paths for growth are unknown before they’re discovered.
4. Laws foreclose possibilities for economic growth by closing off paths that could be taken.
5. Costs are never fully known and are often 'unseen' to government, which creates the illusion of net benefits.
The key thinkers who’ve explicated the above are four Europeans born in the 19th century: Frédéric Bastiat, Ludwig Mises, Joseph Schumpeter, and Friedrich Hayek.
1. Robbing Peter To Pay Paul
The honest purveyors of government tell it like it is: some shall pay taxes so that others shall receive money. In simple terms: the government “robs” Peter to pay Paul. Every society operates like this, but the justifications and methods for robbing Peter vary enormously. In tribal societies it was easily understood: the chief demands Peter hand over the beaver pelts to Paul. In complex societies, the relationship between action and result is obscured in a fog of indirect action.
In modern times, with regulators, tax authorities, agencies, departments, laws, regulations, licenses, central banks, NGOs, tax breaks, and tax credits - it’s hard to call what happens to Peter as “robbery”. People lack the vocabulary to say what’s happening. People lack the data to know what’s happening. Into this data gap steps smart people who claim that they’ve come up with a new means of taxation that will result in profits for all. This is what Economic Utopians offer.
2. The Economic Utopian Par Excellence: John Keynes
John Maynard Keynes, mathematician, bureaucrat, economist, and writer, is the perfect example of Economic Utopians as a class. He was a brilliant writer who helped to invent new methods of probability. Kenyes is most famous for his book, The General Theory Of Employment, Interest And Money, which redefined economics and set the agenda for government action from the 1940s onward. What’s now called “Keynesianism" is macroeconomics due to his enormous influence.
Keynes actually claimed that he’d invented a new means of robbery/intervention whereby Peter is robbed now but will benefit later (to a much greater degree). In short, John Keynes thought he’d hit on an alchemical method of making money (for everyone) that he claimed no “classical economist” had seen. Not only will Paul gain but Peter too! Short-term losses are transmuted into large long-term gains for all through what Keynes considered a world-defining new way of thinking.
There were, of course, economic prophets before Keynes. In 1936, when his famous book was published, Communist economists would tell you that good economics is more than dollars, it’s the “well being of the soviet” or maybe “liquidation of the oppressive capitalist class.” A Fascist economist in 1936 would have demanded that “blood and soil” be part of the equation. But Keynes proposed a theory that he said would stand purely on economic grounds, where everyone would become richer. He promised a “permanent … quasi-boom” without “slumps” (like the Great Depression).
The Keynes plan is simple:
1) Rob Peter, use the money to hire the unemployed Paul; and,
2) Rob Peter to buy a bunch of stuff (that no one wants at current prices).
Of course, if he’d written that instead of 450 pages of math-y essay, it wouldn’t have sold many copies! The basic theory was that spending money is so amazing that (at least? especially?) in times of poor business conditions, governments could make things better by activities like pointlessly digging holes. He even thought an earthquake at the right time could be good if it caused a lot of repairs. In a 1929 pamphlet (Keynes & Henderson, p. 13) Keynes wrote: “Yet even if half of [government spending] were wasted, we should still be better off.” His view was that a government must merely have the will to make his scheme the law in order to bring about a permanent economic utopia.
Here’s a passage from the General Theory that is not taken out of context:
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is."
3. The Free Energy Generator
Keynes, and everyone else like him, is the economic equivalent of an inventor who proposes a free energy generator. A free energy generator is a machine that makes more power than it uses. The investor says that they had come up with a machine with a new kind of physics where you plug it into the wall and you get more power out of it than you put in. There’s no need to figure out why it doesn’t work because we know by principle that it can’t be true. The quack inventor challenges us to wade through their convoluted writing and refute what obviously can’t be true.
4. Rolling Back The Law
There is actually one way to improve an economy overall: eliminate the bad laws that have already been passed. But that’s boring, hard, unpopular, and unintuitive. In contrast, Keynes took a ‘common sense' view that government planning, regulation and supervision would be better than the unplanned and unorganized masses could ever accomplish. He failed to recognize that businesses are meticulously planned already.
Nothing is more economically efficient than what people choose to do, given their own preferences, capabilities knowledge, place, network, capital, and a thousand other factors to make or save money. But Keynes thought he had a better plan.
Keynes said the government should lower interest rates because he noticed that when interest rates are low the economy does well. But it’s actually the other way around: low interest rates are the product of a good economy, not a dial to be turned. Keynes figured that lowering the cost of borrowing would be better, but his method of doing that wasn’t court reform or banking reform (i.e. removal of laws). That might work! Lots of laws saddle businesses with costs that reduce overall efficiency. But Keynes had in mind an expansion of government: an increase in control over lending, not a reduction.
5. Bronzer Or Skin Whitening?
Keynes observed that high spending causes increased investment, so he figured more spending would be better. In making this conclusion he confused the results of a good economy with its cause. He is like a doctor who prescribes either bronzer or skin whitening to his sick patients. When asked “why?” the doctor says he’s “noticed that the patients with the best complexion are the healthiest.”
Keynes targetted the unemployment rate, figuring that less unemployment is better. He has a 'common sense' explanation: people who are unemployed want jobs, and people who have jobs earn money. Therefore, in the world of Keynes, government should cause everyone who wants a job to be able to get one. But he didn’t want it to be like Fascist Germany with its labour gangs and 72 hour work week (and of course; evil.) He had in mind high wages and nobody unemployed, rather than Soviet/Fascist model of low wages with everyone forced to be employed.
Near-zero unemployment is certainly achievable by the methods used in Europe in the 1930s, but it’s not a good thing. Freedom isn’t a price that’s paid for inefficiency, it’s what creates efficiency. Even if freedom wasn’t morally good, it is and must be economically good, unlike what Keynes thought.
6. The Optimal Number Is The Current One
The optimal amount of unemployment - for society overall - is whatever it is without intervention. The unemployment rate is the collective measure of all the decisions made right now, not a dial to be adjusted by the almighty academic or bureaucrat. Keynes admired the “authoritarian states” but he said he’d found a kinder method than that of the 1936 Soviet Constitution: “He who does not work shall not eat.” (That’s a literal quote, not an exaggeration of what the Soviet system was.) Well, it’s easy to be kinder than that! But the problem isn’t one of brutality or morality, but rather that collectives measurements are not dials to be turned.
Confusing causes with measurements is an easy mistake to make at the 10000 foot level of a government economist like Keynes.
7. Picking Paths
The doctor is right about the patients: the healthiest are the ones with normal looking skin. Bad skin colour does indicate a problem, but the remedy is wrong. The solution is not to make sick patients look healthy, it’s to do the hard work of curing their problem.
Utopians declare that people shall be forced to do the right thing. In reality, the path someone is forced to walk down (by the government) cannot be more efficient (collectively) than what they would have taken by their own personal interest. The reason? People freely take the best paths, without being forced to. Does that mean everyone always picks the 'best' one? No. But in general, over time, people are motivated to pick the most rewarding paths. This process is how technology improves (i.e. the ability to make more things for less).
Keynes said he had a shortcut that no one else noticed, and intended for governments to force their people down the path to the land of milk and honey. But every intervention means foreclosing some potential paths to wealth, which is a net drag on efficiency. So the government is faced with two problems: knowing which path to force people down, and knowing which paths will foreclose future economic growth.
State planning is the less accurate, more removed, and less incentivized version of life (Mises 1935, pp. 95-107). When state-level planning replaces individual/corporate-level planning it results in less efficient transactions, and this is unavoidable because of the reduction in the possibilities. Economic Utopians, whether it’s Communist Lenin or ostensibly pro-business Keynes, have simplistic plans for society that substitute individual judgement based on the facts with bureaucratic, top-down targets.
In 1917 HL Mencken wrote that “there is always a well-known solution to every human problem — neat, plausible, and wrong.”
8. The Unscientific Method
Keynes thought the Nazis and Communists had solved the problem of unemployment with brutality, but they actually lessened efficiency too. The Nazi business environment was terrible: widespread corruption, shortages, bad laws, and outright thefts from Jewish businesspeople. The Soviet business environment hardly existed by 1936, with even 'rich peasants' being sent to labour camps. They were brutal and bad for the economy. The benefits, like no unemployment, were what was seen, but the costs (e.g. USSR deportations of homeless people to Siberia and a million people in labour camps) were not publicized.
There will never be a shortage of economic prophets who follow the unscientific method:
1. Form a goal (e.g. unemployment going down)
2. Create a model based on “common sense”
3. Find statistics or other patterns in numbers that appear to support the model
4. Think of government action that would change the numbers to be “better”
5. Require everyone to follow the plan, on pain of legal penalty (i.e. jail if they don’t comply)
The unscientific method thrives in economics/political economy because any project, such as building a canal, may very well be a “good” investment (i.e. makes a cash profit), but it’s less good than whatever people would have done instead (Bastiat 1879, p. 3). If by law everyone gets a slightly less optimal job, and a little lower pay, or less options, or more expensive stuff, it’s difficult to trace the cause in the cacophony of dynamic changes that occur in complex systems. International comparisons provide some empirical checks, but the data is too noisy usually. Where the law destroys a counterfactual by making alternatives illegal, there is typically no way to measure whether efficiency was reduced. But it must be lower.
9. What Is Not Seen: Hidden Costs
In the canal example above, the beautiful canal is what is seen. The costs of the canal are what is not seen. Despite Bastiat’s excellent write up in the mid-19th century of the difference between “what is seen” and “what is not seen”, people still think there’s a free lunch out there only because they haven’t recognized all of the costs (Bastiat 1879, p. 7).
Just like the free energy generator, we don’t need to bother identifying the specific flaws. The crackpot challenges you to spot the problem in their theory, and the answer is that it’s theoretically impossible, rather than an error on line 38 of their unscientific proof. Economic Utopians always have complex schemes and endless complex definitions, but if we zoom out, we see the nature of the proposal is to defy how people work.
Where the objective is purely economic and the means is government, and no law eliminated, there can only be one outcome.
10. Unnecessary Surgery Is Not Without Harm
Economic Utopians are like a surgeon hovering over a healthy person lying on the operating table. It doesn’t matter how good a surgeon they are, or how good their knowledge of medicine is; any cut will be bad. Keynes the Utopian believes the patient is ill and insists that we must operate, and, once their wounds heal, they’ll be better than ever.
Hayek’s write up of the “knowledge problem” appeared in print a decade after Keynes was writing (Hayek 1945). But academic knowledge is not necessary to see that 'force' and 'plunder' have never made anyone richer (Bastiat 1879, p. 21), and never will: 'away, then, with quacks and organizers!' (Bastiat 1874, p. 76).
The fact that all interventions reduce efficiency is not to say that all laws are not necessary. For example: environmental and criminal laws justify themselves without reference to the economy, and are necessary to prevent harm, but this is fundamentally different than attempting to boost the economy. The unfortunate truth of the world is that there are only trade-offs. There are not free lunches waiting to be discovered by armchair economists, no matter how smart their books may sound.
11. Other People’s Money
Economic Utopians will always be among us, as they’re selling what people want: a shortcut to wealth. It’s tempting to think that the amazing power of government to do so much can also be used to make people richer, but the strength of the tool does not dictate its results.
With enough taxes, nearly anything is possible, whether that’s nuclear weapons or sending spaceships to the moon. The second and third US presidents exchanged letters in the 1700s about the dire need for raising taxes to fight North African pirates - they believed it would pay for itself because merchant trade would increase (Cappon 1959, pp. 142-144 & 146-147). There’s always an explanation like this. Whether it’s war, space, pirates, or building houses for those who can’t afford them - someone always has a good plan for other people’s money. John Keynes and John Adams both thought the solution to the payor’s reticence was to take the money using the law.
12. The Correct Combinations Are Not Yet Known
Even if the Economic Utopian could meddle with society without transaction costs, they would still not know how to direct society. Keynes said it doesn’t matter because even wasting money is fine, but that’s certainly wrong. The wealth of society can only grow when it’s responsibly managed and improved. It requires active effort to improve productive processes, and all waste is a lessening of economic efficiency.
Unfortunately, we cannot know right now what countless combinations will improve efficiency because it hasn’t happened yet. That’s progress; the discovery of which combinations work best (Schumpeter, 1934 p. 98). It’s a messy process, and it’s tempting for the Utopian to want to try their hand at directing it, but in every case, they are like an academic who wanders down the street, telling each person to do something different, critiquing their performance at this and suggesting such-and-such method. They tell the gardener to use a bigger shovel, the dry cleaner to switch to a new cleaning chemical, and the graphic designer to put up a new sign. For every good suggestion they might make there’ll be a hundred more that aren’t fit for the circumstances at hand. Keynes proposed to do this by law, and promised the whole street, all professions and people, will become richer by his method.
We don’t need to see the results of any bureaucratic command to know they’ll be less ideal than what critics call “doing nothing” (i.e. meticulous individual-level and small group planning). Where the remedy is anything but the removal of existing laws, economic efficiency cannot possibly increase. There may be good reasons for laws, but Keynesianism is economic alchemy, and so are all other proposals to use the law to command people to become rich (Smith 1880, p. 416).
13. Taxes And Closed Paths
To give a clear ending: total economic efficiency and wealth formation are inhibited in proportion to the cost of government (typically proportionate to the tax level) and in proportion to the number of otherwise-good paths that are closed off by law.
The more “effective” the law, the greater its disruption of order in the economy, and the less the overall efficiency and lower the rate of wealth formation. Laws that propose to meddle with the economy to benefit solely for the benefit of the economy are always snake oil, sold to an unsuspecting public by promoters who haven’t yet figured out much real life diverges from their model.
In geometric terms: imagine a circle within a square. The circle is bounded by the edges of the square. The square is the solution space for humanity, the total of all possibilities that people will one day make use of to create new technology like jet airplanes, electric cars, and computers - all of which were to come long after Keynes’s death. The area around the circle, but within the square is the lost possibilities for economy improvement. The more effective the law, the smaller the circle within the square, and the fewer possibilities there are for improvement within the bounds of the law.
References
Bastiat, F. 1874. The Law. Irvington-on-Hudson, NY: Foundation For Economic Freedom (First published in English in 1874, translated from the 1850 original.)
Bastiat, F. 1879. Things Seen & Not Seen. London: Newcastle Weekly Chronicle. (First published in English in 1874, translated from the 1850 original titled 'Ce qu'on voit et ce qu'on ne voit pas, ou l'Économie politique en une leçon'.)
Cappon, L., ed. 1959. The Adams-Jefferson Letters. Williamsburg, VA: The University of North Carolina Press.
Hayek, F. 1945. ‘The Use of Knowledge in Society.’ The American Economic Review 35(4): 519–530.
Keynes, J. 1936. The General Theory Of Employment, Interest And Money. London: Macmillan And Co. Limited.
Keynes, J. M. and H. Henderson. 1929. ‘Can Lloyd George Do It? The Pledge Examined.’ London: The Nation and Athenaeum.
Mises, L. 1935. ‘Economic Calculation in the Socialist Commonwealth.’ In F. A. Hayek (ed.), Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. London: Routledge & Sons, pp. 87–130. (Translated from the 1920 German original.)
Schumpeter, J. 1934. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Cambridge, MA: Harvard University Press. (Translated from the 1912 German original.)
Smith, A. 1880. ‘Book V, Chapter II, Part II.’ In An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford, England:Clarendon Press. (First published in 1776.)
Postscript: An Economics Professor Read This Article And Did Not Like It
A tenured professor of economics at a Northern Ontario university read this article. They said they don't think I "read Keynes" and said it's a "grave mistake" to refer to him as John Keynes ("John Maynard Keynes" is the right answer). First off, I want to acknowledge that it was exceedingly generous of them to actually read this, and that to give feedback on anything an amateur has written is beyond what anyone should ask of them. That said, on to their review: they didn't like that I called his book "mathy-y" and said it is poorly written. But it is! And I am far from the first person to draw that conclusion from reading Keynes.
Neo-keynesianism later created the more mathematical version of Keynes (which is what's taught today in schools) becuase it wasn't up to standards. But even then, the use of math in economics is often more confusing than elucidating, and can give people the wrong idea about the credibility of thinking. Keynes definitely had a math-y bent to his work which was undoubtedly a key part of his success - the vast majority of readers surely cannot follow it or understand why his conclusions do not follow like 4 follows 2+2. Had he written his premises and conclusions clearly I am skeptical that his work would have gone on to make such an impact. Although perhaps it might have anyway since Keynes (and similar Economic Utopians) deliver to politicians what they want: an explanation for why it's justified to spend a lot of money. I doubt many people following these prescriptions have attempted to wade through the book that started it all.
Even Keynes himself wasn't quite sure where his book was going in some parts. When exactly should government step in to start spending money? He doesn't provide any clear entry and exit points for his program of action. So his book suffers from a two-fold problem of being an unclear explanation of unclear ideas. This is probably also a part of the enduring success of his book! You can read it and find in the book what you want to see. People may also not want to criticize it becuase the confusing math/logic/arguments makes them wonder if they're not smart enough to get it. (Maybe that's my problem as a reader!)
The prof's overall review of my article is best summed up as this line: "perhaps a blog [post], at most." Maybe they're right! I submitted it to a lower tier journal that allows non-academic submissions to see what the feedback would be. I think it's fair to criticize it for not having a scholarly tone but I think it's readable. And perhaps interesting for other people so I decided to post what would otherwise have stayed as my personal reflections on a bad book. Why? Because perhaps somebody else will find this interesting and it may advance their own reading on an interesting subject that feeds into contemporary economics, politics, law, etc.
Is economics actually a rafified subject that only PhD experts can participate in? I think the answer to that should be "no". Part of the reason for that is that economics, of the kind practicsed by Keynes, is really more of a branch of politics as it is recommends what politicians ought to tell government to do. And where theories are converted into laws, it becomes the domain of law. Economists are far from the law, and may not fully understand the ramifications of issuing commands, in the same way that lawyers may not understand economics. But probably only through dialogue between disciplines can bridges be built and a more holistic view of how the world ought to work be formed. I do not know how the world should work, but I do know that anyone following the prescriptions of John Keynes will cause untold disasters for the people who bear the consequences, which is never the economists, political science profs, and bureaucrats who come up with new ideas for building the utopia of the future. Strong skepticism is warranted.