The General Theory of Employment, Interest, and Money (Great Minds Series)

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The key Keynesian argument is that there can be an imbalance between savings and investment: savers may try to save more than they invest, in effect taking money out of circulation and thereby throwing the economy into depression.

Of course, they have to do something with this money, presumably holding it as cash in some form. Therefore, if you follow through the analysis to the end, Keynes is saying that people are trying to hold more cash than is available: the demand of savers to hold savings in cash rather than as investments is what causes depressions.

Keynes and his followers accept this conclusion: the term which came to be used was that there was a "liquidity trap," the desire to hold more cash ("liquidity") than was actually supplied in the economy is what produces depressions.

However, as soon as the matter is phrased in terms of an imbalance between the supply and demand of money, anyone who passed economics 101 should remember that market economies are _very_ good at equilibrating supply and demand. If the current demand for a good is too high, then the current market value is too low, and a rise in the market value of that commodity will solve the problem.

It works for money, too. A rise in the value of money is called "price deflation," and economists have known for centuries that price deflation does indeed naturally occur in depressions. As the general price level falls, the existing supply of money becomes more valuable -- in effect, the real supply of money becomes greater. It becomes more tempting to spend one's cash on now cheaper goods or investments. Price deflation, if allowed to occur by governments, cures liquidity traps.

I figured this out for myself as a high-school student (there is an alternative but equivalent analysis based on "dimensional analysis" which, as a budding physicist, I found especially cogent).

I was not of course the first to work this out: even _before_ Keynes published the "General Theory," the British economist A. C. Pigou had worked through this analysis and the matter is often therefore referred to as the "Pigou effect." Since Pigou, various eminent economists have worked out the mechanism in great detail with careful mathematical analyses, but the basic idea is freshman economics. When I entered college, I found out that the advanced graduate-level "macro" books did indeed let the secret out that Keynes' analysis was wrong. It was only undergrads, politicians, and the general public that were expected to believe the Keynesian fallacy.

So why the decades of lying?

Just as the Communist governments of the old Soviet empire needed Karl Marx's goofy economics theories and laughable philosophical scribblings in order to prop up their own corrupt regimes, so also the rising mid-twentieth-century predatory military-university-government-industrial complex in Western nations needed an ideology to justify the corporatist-socialist regimes it was creating.

Keynes' prescriptions for monetary inflation, deficit spending, rejection of the gold standard, and high levels of government spending and taxation were tailor-made for the democratic-socialist welfare/warfare states then being erected in various Western nations.

As corporate liberals are so fond of saying, Keynes did indeed "save capitalism" if by "capitalism" one means not free-market capitalism but rather the corrupt crony capitalism under which we now all live.

Keynes himself knew this of course. The infamous statement he made in the introduction to the German translation of the "General Theory" ("theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire") obviously does not prove that Keynes was sympathetic to Nazism. But it does show that Keynes rightly recognized that his proposals were of great potential value for the oppressive political regimes that were being created during the twentieth century.

Even though Keynesian theories are now intellectually discredited "flat-earth" economics, they live on because they serve a political need. Even conservative politicians nowadays often spout Keynesian nostrums ("stimulating demand" via tax cuts or monetary growth) rather than make the painful acknowledgement that it is the corporate-socialist economic system under which we live which is the problem.

No regime lasts forever. Eventually, the present corporatist-collectivist regime will collapse, probably when the majority of the human race figures out how to free itself from the current American geopolitical hegemony. At that point, Keynes will be universally viewed as the economically incompetent charlatan that he actually was.

(For a more detailed analysis of the Keynesian system, I recommend Henry Hazlitt's classic "Failure of the New Economics" and the collection of critical essays Hazlitt edited, "Critics of Keynesian Economics." For an analysis that goes beyond Keynes in analyzing the process which causes the initial imbalance in the investment sector and the resulting liquidity crisis, see Murray Rothbard's "America's Great Depression." Keynes purported to believe that the triggering forces of the investment crisis were irrational and inexplicable "animal spirits." Rothbard shows that, on the contrary, these forces can be rationally explained and understood: in essence, it is incompetent financial policy, of the sort Alan Greenspan has provided in the last decade, which causes economic crises. Milton Friedman's and Anna Schwartz's famed "The Great Contraction" focuses solely on the monetary aspects of the Great Depression, thereby missing the causative process in the investment sector.)

Most educated Americans know something of John Maynard Keynes, the great British economist whose hugely influential work “T"The General Theory of Employment, Interest and Money", strongly influenced economic theory and practice during the last half of the twentieth century, particularly with regard to the role of government in stimulating and regulating a nation's’s economic life. Nevertheless it remains true that almost all of the "intelligentsia" in general, and most economists in particular, have never read the book, despite the fact that it is readily available in today’s mega-bookstores such as of course, Amazon.com (at a reasonable price and) in a good quality paperback.

Indeed, by a curious twist, the people who seem most to have made some attempt to read Keynes' oeuvre are those who appear most outraged by it and determined to revile it. If one is skeptical about this, (read the reviews), where veritable "frothing at the mouth" denunciations seem to dominate. These would hardly be worth reading except for the mindset they reveal, which goes far toward illuminating some of the attitudes of the 1930's otherwise inexplicable at the beginning of the twenty-first century. Their very virulence convinces one that Keynes was clearly on to something; if an author enrages half the world he must be at least half right.

Keynes detractors are right about one thing: "General Theory..." is a tough read, though not for some of the reasons they indicate. Keynes actually uses very little mathematics, the alleged prevalence of which is one of the points usually cited in criticism. He uses a little elementary algebra and a little differential calculus, hardly enough to swamp even the most modestly gifted sophomore who has been exposed to the subject.
He does not generally contradict himself, as some allege, beyond the level of ambivalence to be expected of anyone who realizes he is treating an inexact science where many conflicting views can hold some claim to legitimacy. Rather, what makes Keynes' work an ideal bedtime companion for those inflicted with insomnia is the obsessive care
the author takes to be absolutely precise, the somewhat antique 1930's British English
employed (though some, including the present reviewer, may see that as one of its charms)
and the regular use of Latin phrases familiar to Keynes and his contemporaries, such as, e.g., "ceteris paribus" (roughly translated "all things being equal", meaningless to American readers whose formative collegiate experience included little in the way of foreign languages of any kind, let alone classical ones. The trick in reading Keynes is to get beyond these inconveniences of packaging and unwrap the very real gift of ideas enclosed.

Keynes' economic prescriptions are now so generally accepted, even by most conservatives, certainly including "W", that many of us find it hard to recognize what the argument is all about. These days it is taken for granted that the government has a responsibility to stimulate the economy out of recession, at least to the extent of reducing interest rates, and modestly applying the brakes during overexuberant expansion. It is accepted that two of the factors exacerbating economic downturns are the fearfulness of investors in the face of declining corporate earnings and the reluctance of consumers to to put down money they suspect they may need later if they are laid off from their jobs. It was not always so.

Some imagine that Keynes work, along with the massive nineteenth century tomes of Karl Marx, constitute a response to Adam Smith's "Wealth of Nations" a work at least as misunderstood, often deliberately so, as "General Theory...". That is not the case; Keynes hardly ever, refers to Smith and, in any case, those who have read "Wealth of Nations" are well aware that Smith, a truly charming writer quite apart from his undeniable genius, is far more sympathetic to the average worker and much more critical of monopolistic business practices than imagined by those who have deified him but never read him. Instead, the dragons which Keynes sets forth to slay are those who later built a truly "Dark Tower" on Smith's rather benign foundation. Those dragons include, most notably, David Ricardo, Alfred Marshall and "Professor (A. C.) Pigou".

Keynes cannot help but admit to the suspicion that these economists' written views on the question of employment, or the more pressing question of unemployment, reflected their identification of the social classes most likely to buy their books; he never states it quite that baldly, of course. It seems almost incredible to us in this age that the prevailing opinion expressed in those writings is that all unemployment, at the organizational if not the individual level, is voluntary; that depressions and large scale unemployment result from the perverse refusal of workers or their labor union representatives to recognize their labor as just another good in the market, subject to a reduced price in the absence of demand occasioned by downturns in economic activity.
One wonders if some of the tolerance for Adolf Hitler manifested by large segments of the British upper and middle classes, and smaller segments of their American counterparts, in part reflected his action on accession to the Chancellorship to reduce German wages by one third all around. Whether that, by itself, increased German employment numbers or simply made economic room for a huge rearmament program that effectively eliminated labor redundancy is a good question ?but for some other essay.

Keynes argues quite persuasively that a perception of fairness is essential in a democratic society. (10 points to Adolf for fairness?) Wage reductions in capitalist economies tend to be spotty and opportunistic, rather than universal, typically affecting those who can least afford them. Keynes also argues that they do virtually nothing to solve the problems of the economy, partly because employers may very well decide not to decrease prices comparably and, more importantly, because of cascading effects on overall demand; workers on reduced wages don't rush out to buy new automobiles.

For the most part however, Keynes brand of economics has been a dismal failure. One need to look no further than the stagflation of the 1970's to see this. Keynes work is outdated and discredited. If youre looking to gain a real understanding about economics I suggest you read "Basic Economics" by Thomas Sowell.

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