Chapter XXIV KEYNES LETS HIMSELF GO

In his final chapter—“Concluding Notes on the Social Philosophy Towards Which the General Theory Might Lead”—Keynes really lets himself go. Here he assumes that all his previous propositions have been proved, and draws his triumphant and sweeping conclusions. This chapter, therefore, is even more tightly packed with fallacies and unwarranted deductions than any of the others. But it has the advantage of stating its fallacies in relatively clear and un-technical language, and it will therefore give us the opportunity also of reviewing them in clearer and less technical language than heretofore.

1. Inequalities of Income

“The outstanding faults of the economic society in which we live,” Keynes begins, “are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” (p. 372).

There are four chief things wrong with this statement:

(1) The vagueness of Keynes’s “full employment” concept (to which we shall return later for closer examination).

(2) Prolonged mass unemployment is not the fault of our economic “society,” but of governmental interventions in labor-management relations, wage-rates, and money and banking policy—the very kind of intervention that Keynes wished to increase.

(3) The distribution of wealth and incomes is in the main neither “arbitrary” nor “inequitable” in a competitive free market system. As John Bates Clark showed so brilliantly in “The Distribution of Wealth” (1899) “free competition tends to give to labor what labor creates, to capitalists what capital creates, and to entrepreneurs what the coordinating function creates.” Individual inequities are bound to occur, but they are not systematic. Capitalism itself tends constantly to reduce them by its rewards to production. If we are looking for really “arbitrary” and “inequitable” distribution, we can find it in the East, or in backward and “underdeveloped” countries, or in Communist Russia and China—in short, in either pre-capitalistic or socialist societies.

(4) It is even a misnomer in capitalist countries to call this process “distribution.” Income and wealth are not “distributed” but produced, and in general go to those who produce them.

But even if all this were not true, there is no reason to suppose that the Keynesian nostrums would remedy the situation.

Keynes next goes on to praise the “significant progress” brought about by the progressive income tax and death duties (a “progress” that economists are coming increasingly to doubt).

Up to the point where full employment prevails [he tells us], the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it (pp. 372-373). An increase in the habitual propensity to consume will in general (i.e., except in conditions of full employment) serve to increase at the same time the inducement to invest” (p. 373). The growth of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it. One of the chief social justifications of great inequality of wealth is, therefore, removed (p. 373).

How marvelous is the Keynesian world! The more you spend the more you save. The more you eat your cake, the more cake you have. The less you save the more inducement you have to invest. But there is, perhaps, a flaw in this logic. Even Keynes has insisted that saving and investment must be equal. As you can only invest what you save, the less you save the less you are able to invest—no matter how great the “inducement” to invest. Moreover, it is not excessive saving that creates unemployment, but excessive wage-rates—wage-rates, that is, above the marginal-productivity point. But we have been over and over all this ground before.

There follows a long paragraph in which Keynes concedes that “there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today” (p. 374). It appears that “there are valuable human activities which require the motive of money-making,” but “much lower stakes will serve the purpose equally well,” and “the task of transmuting human nature must not be confused with the task of managing it.”

This paragraph is revelatory. It betrays the totalitarian touch. It shows Keynes in the role of “father knows best.” He and his friends know, just by personal judgment, exactly what rewards and penalties are necessary. The people are to be “managed” by the Keynesian elite. A man does not have a right to keep what he earns; but allowing him to keep some of it is a gracious privilege in which a government clique of omniscient Keynesians may indulge him, like allowing a child to have just a little candy.

Just what (except expediency) prevented Keynes from announcing himself a complete socialist I do not know. What he seemed to want was a government-managed economy that would imitate some of the features of capitalism.

2. The Euthanasia of the Rentier

Keynes next turns back to his theory of the rate of interest.

The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest.... Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment. There can be no doubt that this criterion will lead to a much lower rate of interest than has ruled hitherto... (p. 375).

Now many (non-Keynesian) economists are not sure that the inducement to save increases in direct proportion to the rate of interest. We need not go into the pros and cons of this argument, except to point out that a certain minimum interest rate is necessary to induce, if not saving, at least investment, which Keynes tells us is his main interest. (Keynes persistently thinks of investment as merely what a borrowing entrepreneur puts into his own business; I am here using the term to mean also any loan that a man makes with his savings, the purchase of a bond, etc.)

When Keynes tells us that “the scale of effective saving is necessarily determined by the scale of investment,” he forgets that the primary causation is the other way round. Saving determines investment. Without saving, there is nothing to invest. Even on Keynes’s own definitions, investment cannot come into being without equivalent savings. To say that “the scale of investment is promoted by a low rate of interest” is to look at the matter solely from the point of view of the borrower, and to forget the point of view of the lender.

Suppose we applied Keynes’s dictums to buying and selling. We would then write something like this: “Buying is not determined by purchasing power, but effective purchasing power is determined by the scale of buying; and the scale of buying is promoted by low prices.” This would be immediately recognized as nonsense. Even a Keynesian might be expected to see that the scale of selling (or of producing for sale) is promoted by high prices which give the highest inducement to produce. Of course, in practice, the maximum production, buying, and selling are achieved by the right equilibrium price—the price which does most to harmonize the desires and incentives of producers, sellers, buyers, and consumers respectively.

So it is with interest rates. The interest rate that promotes the maximum saving, lending, borrowing, and investment is neither the highest interest rate nor the lowest interest rate, but an equilibrium interest rate at which the greatest numbers of desires and incentives of both lenders and borrowers are reconciled.

Keynes’s theory of the interest rate, like his emphasis on the monetary income of consumers and on the “propensity to consume,” is purely a demand theory. Just as he seems to think in terms solely of the propensity to spend and buy, and not of the propensity to work or produce or sell, so he thinks solely of the incentive to borrow, and ignores the need of the incentive to save and to lend. When he takes account of the latter incentive, he does so only to denounce it as anti-social and wicked.

How does Keynes know that “there can be no doubt” that a rate of interest fixed in accordance with “the marginal efficiency of capital at which there is full employment” will be “a much lower rate of interest than has ruled hitherto”? Apparently because his personal feelings tell him so. “I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure,” where the return from capital instruments “would have to cover little more than their exhaustion by wastage and obsolescence” (p. 375).

Insofar as there is any argument at all for the conclusion on page 375, it seems to rest on the question-begging assumption that unemployment is the result of excessive interest rates rather than excessive wage-rates. Keynes does not appear to understand even the main purpose of capital and capital goods. That purpose is not merely to increase output, and to produce consumer goods that could not otherwise be produced, but to reduce costs of production.

Why would anybody invest in capital goods if he got no net return worth speaking of? Let us take, for example, a house that costs $20,000 to build. One can understand that a man might build such a house to live in himself. One can understand that he might build it to rent out to someone else—provided, of course, that he got a good deal more rent than simply enough to cover exhaustion by wastage and obsolescence. But suppose he were asked, instead, to lend a mortgage for the full value of such a house, to enable someone else to build it to rent out to still a third person. It is obvious that, in order to induce him to do this, the interest offered would have to be equal to the presumptive rent of the house minus the annual estimated depreciation, compensation for the worry and trouble of management (the landlord function), and relative protection against the risks of vacancy and of real estate speculation. The mortgagee’s return, in short, is intimately connected with the prospective return of the legal owner of the building.

This is merely a special case of the constant close relationship between the rate of interest and the marginal yield of specific capital goods. If the intended mortgagee were not offered such a return, he would not lend the money; if the builder of the house were not allowed to charge a rent making it worth while, he would not build houses, either with his own money or somebody else’s.

How, then, would Keynes force down interest rates and even the return to the entrepreneur and still get his saving, investment, and production? What he really has in mind, apparently, is seizing the money through taxation and creating forced “investment” through the government.

Does my assumption go too far? Then listen to this:

Though this state of affairs [just about enough return to cover cost of capital replacement] would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital (pp. 375-576).

For the light it throws on the heart of Keynes’s message and on the popularity of his ideas among leftists, this sentence is one of the most revealing in the book. Notice how patronizingly individualism (i.e., individual liberty) is treated. Keynes would graciously allow “some measure of” it. But he insists on “the euthanasia of the rentier.” Euthanasia means painless death. That is, the death of the rentier would be painless to Keynes. There is an old proverb that if you want to hang a dog you must first call him mad. If you want to knock a man down you should first give him a bad name. So Keynes uses the French rentier as a smear word. The rentier is the terrible fellow who saves a little money and puts it in a savings bank. Or he buys a bond of United States Steel, and uses his cumulative oppressive power as a capitalist to exploit the U. S. Steel Corporation.

All this is demagogy and claptrap. It differs from the Marxist brand only in technical detail.

3. Robbing the Productive

Interest today [Keynes goes on] rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there can be no intrinsic reasons for the scarcity of capital.... Even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce (p. 376).

How does Keynes know that interest rewards no genuine sacrifice? Certainly savers in moderate circumstances are constantly making sacrifices of immediate gratifications in order to save for a home, for the education of their children, or against possible ill-health. What does Keynes know about the individual sacrifices, abstentions, and choices of individual savers?

And does the rent of land reward no genuine sacrifice? Doesn’t Keynes know that the capital and rental value of most land in the civilized world today is in large part the result of the capital that has gone into the roads and other communications that lead to it, as well as the clearing, leveling, draining, irrigation, plowing, fertilization, and building that have been put into it—all at a capital cost?

What does Keynes mean when he declares that “there are no intrinsic reasons for the scarcity of capital”? Isn’t the greatest and sufficient intrinsic reason the fact that (in America, for example) there was no capital at all when we got here, and all of it had to be created by somebody? By some people’s work and saving, even if some of them wouldn’t have been admitted into the Bloomsbury circle? There is still scarcity of capital simply and solely because not enough of it has been created by work and saving.

Incidentally, people are not rewarded in economic life for “sacrifice,” but simply for producing something that somebody else wants enough to be willing to pay for. I don’t pay the General Motors Corporation $3,000 to reward its “sacrifice” in producing an Oldsmobile; I pay it because I want the Oldsmobile. If a man turns out something that you or I don’t want, we are not interested in how much sacrifice his product cost him; it is not up to us to reward him for producing something for which we can find no use. In Keynes’s topsy-turvy economics, in which only “genuine sacrifice” is rewarded, we would pay nothing to an inventor, musical composer, artist, or author unless he could prove that he didn’t actually enjoy inventing, composing, painting, or writing.

To say that the owner of capital or the owner of land exploits “scarcity” is merely an ominous way of saying that all economic value is scarcity value. A market price for anything whatever can be obtained only because that thing is relatively scarce, in the sense that it is not a free gift of nature.

Keynes’s economics of abundance for capital goods could be set down as a dream world, if it were not for the final sentence from Keynes quoted above. There he tacitly admits that savings and capital will not be forthcoming on the practically non-existent return that he proposes. But then, ah! the State steps in, the magical State, seizes the capital through taxation and does its own “investing.”

Only the long-run result of this, of course, would be to reduce production and to make real capital scarcer than ever.

Keynes goes on: “I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work” (p. 376). This sentence implies the Hegelian-Marxian “stage” theory of history—except that nothing previous in the theory of Keynes explains what the work of the “rentier aspect” actually was. According to his theory, the rentier always demanded a rate of interest that was too high, and for some inscrutable reason was able to get it. As the rentier, in brief, according to Keynesian theory, never had any excuse for existing in the first place, he never did any work except to hold up economic progress and produce unemployment.

And with the disappearance of its rentier aspect [Keynes goes on] much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution (p. 376).

This is all very reassuring. The rentier will be killed off quietly, because he will be unable to offer any resistance, and Britain will enjoy that marvelous prosperity (?) that followed her adoption of the Keynesian remedies. (Although after years of cheap money following the appearance of the General Theory—a. bank rate of 2 per cent in 1937, 1948, 1950, etc.,—the Bank of England was finally forced to tighten up to a discount rate of 7 per cent in September of 1957.)

But what about “the functionless investor”? Here, I think, Keynes’s pen inadvertently slipped. The investor (by his previous definition) has hitherto been his hero, his entrepreneur, exploited by that real villain, the saver. Did not the investor serve a function by earning and saving enough to become an investor? Did he not serve another function by making a choice of which project or firm to invest in and which not to invest in? But Keynes is really waxing eloquent now, and we should not interrupt him by these trivial questions.

[He goes on] Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labor could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward (pp. 376-377).

In reply, it may be pointed out that capital will cease to be “scarce” only when it ceases to have value, so that anybody will be willing to give it away. It will cease to have value only when it either costs nothing to produce, or when its application ceases to reduce the costs (including time) of production of anything, or when the consumer goods that it helps to turn out themselves cease to be “scarce” and to have value—all of which conditions are impossible. The application of capital increases technological progress; and technological progress itself makes old machines and materials obsolete at the expense of new machines and materials. So capital, by aiding progress, automatically increases the need and value and “scarcity” of new capital for new applications.

Keynes’s scheme of “direct taxation” is a scheme to rob the productive in order to reward the unproductive. It tries to exploit the fact that certain entrepreneurs (like certain poets, musicians, artists, scientists) are “fond of their craft.” But the attempt to exploit these, to treat them like draft horses, to pay them just enough to keep them working, would have one flaw. Other entrepreneurs work primarily for the rewards in it, and when these are cut down below a sufficient inducement, they play golf or choose some other alternative—as the results of the expropriatory rates of the existing income tax are proving every day. It is obvious from Keynes’s tone that he had an ill-concealed contempt, as befitted a member of the Bloomsbury circle, for the business entrepreneur.

Keynes concludes this section by writing: “It would remain for separate decision on what scale and by what means it is right and reasonable to call on the living generation to restrict their consumption, so as to establish, in course of time, a state of full investment for their successors” (p. 377). But people have already been deciding this question as individuals and voluntarily, and not by collective compulsion (except through progressive income and inheritance taxes and so-called State “investment”). Having rejected the voluntary solution, Keynes is forced to look for a solution through compulsion, such as that made by totalitarian governments.

Incidentally, “full investment,” as we have seen, is a silly and meaningless phrase. It fails to recognize the illimitable improvements that are always possible in quality, and it is based on purely static assumptions. What becomes of “full investment” in a particular machine, for example, when a new machine or process is invented that makes the old one obsolete?

4. The Socialization of Investment

And now Keynes has a few kind and condescending words to say about a free and voluntary economic system. But beware of Keynes when he brings gifts! “In some other respects,” he begins, “the foregoing theory is moderately conservative in its implications.... There are wide fields of activity which are unaffected” (pp. 377-378). Of course the state will have to increase “the propensity to consume” (i.e., discourage saving), and it must fix (i.e., lower) the rate of interest; and there must be “a somewhat comprehensive socialization of investment,” but “beyond this no obvious case can be made out for a system of State socialism which would embrace most of the economic life of the community” (p. 378).

It is hard to believe that Keynes is as naive as he pretends, and that he is not laughing up his sleeve. The rate of interest—the valuation of time and of all investments—is to be taken out of the market and put completely in the hands of the State. But Keynes ignores the complete interconnectedness of all prices. This especially includes the price of capital loans, any State tinkering with which must necessarily affect and distort all prices and price relationships throughout the economy. Through its socialized investment, moreover, the State would decide which firms or industries to expand and which to freeze or contract. Even though the State did not technically own the instruments of production, this would lead to a de facto socialism.

Keynes continues: “But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as practicable, the classical theory comes into its own again from this point onwards” (p. 378).

Let’s see. The free market system (which is what Keynes means by “the classical theory”) is incapable, according to him, of properly fixing the volume of money and credit, or the proper rate of interest, or the right volume and direction of investment, or the right volume of output, or adequate employment. But outside of that very little can be said against it! Yet Keynesians solemnly cite selected sentences of the sort I have just quoted in order to prove that Keynes was really a conservative, and aside from one or two minor reservations, a disciple of the classical economy!

It is worth noting that though he talks constantly in this chapter as in others of “full employment,” he never mentions excessive wage-rates as a possible cause of unemployment or suggests any government interference with them. These are to be left, as before, to the labor-union leaders, which are to continue to enjoy legal privileges and immunities denied to all other groups.

If we suppose the volume of output to be given, [Keynes continues] i.e., to be determined by forces outside the classical scheme of thought, then... private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them (pp. 378-379).

This passage is an obvious self-contradiction. If the State determines how much will be invested, at what interest rate, and just where, it necessarily determines what in particular is produced and with what factors. Keynes’s scheme would take all of this out of private hands. He merely refuses to recognize the implications of his own proposals.

Keynes continues his patronizing attitude toward personal liberty: “There will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good” (p. 380). I suppose one example of this would be the progressive income tax, so warmly approved by Keynes, which, in the United States, at the time of writing, rises to 91 per cent on the highest brackets. But the individual is still allowed to retain and spend 9 per cent of any additional money he earns (if it is not taken by state taxes) as a wide field for the exercise of his private initiative.

Let us stop for a moment [Keynes goes on] to remind ourselves what these advantages are. They are partly advantages of efficiency—the advantages of decentralization and of the play of self-interest. The advantage to efficiency of the decentralization of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far (p. 380).

Well, after 379 pages talking about all the alleged damage done by individual responsibility and self-interest, it seems a little late, on the fourth page from the end, to begin a retraction. All this is, of course, only another self-contradiction. Government control of the volume of saving, of interest rates, and of investment, centralizes the key decisions, leaving only derivative and much less important decisions to individuals.

“But, above all,” Keynes continues, “individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice” (p. 380). This sententious declaration is mere tautology. Individualism not only “safeguards” personal liberty; it means personal liberty. And personal liberty means, of course, among other things, the freedom to exercise personal choice. The “abuses and defects” of which individualism is to be “purged” are, I presume, all the actions or decisions of which the bureaucrats happen to disapprove.

Keynes then goes on to praise, in a patronizing manner, “the variety of life, which emerges from this extended field of personal choice.”

But this whole passage on page 380—and the whole chapter, in fact—is a series of self-contradictions. In it Keynes tries to get the best of both worlds—to insist on a government-controlled economy and to call it “individualism” and freedom of enterprise. As to his praise of “variety,” why not competition and variety in interest rates, or competition and variety in investments? Why not “the exercise of personal choice” in making one’s own investments with the money one has earned?

Whilst, therefore [Keynes goes on], the enlargement of the functions of government... would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative (p. 380).

In other words, the way to preserve individualism is to reject it, and in a central field. For investment is a key decision in the operation of any economic system. And government investment is a form of socialism. Only confusion of thought, or deliberate duplicity, would deny this. For socialism, as any dictionary would tell the Keynesians, means the ownership and control of the means of production by the government. Under the system proposed by Keynes, the government would control all investment in the means of production and would own the part it had itself directly invested. It is at best mere muddleheadness, therefore, to present the Keynesian nostrums as a free enterprise or “individualistic” alternative to socialism.

There follows a paragraph in which Keynes declares that if effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him.... The players as a whole will lose.... Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough (pp. 380-381).

There is not a sentence in this quotation that is not based on some wrong assumption. Keynes’s concept of “wasted resources,” as W. H. Hutt has shown,¹ will not stand critical examination. There is much less real waste in frankly recognizing past malinvestment, and either scrapping it or allowing it to become periodically idle, than in trying to conceal its existence by a continuing inflation or by throwing good resources after bad. There is also, as Hutt has shown, a great deal of “pseudo-idleness,” as in lawn mowers or phonographs or evening clothes which are used only occasionally, and whose services consist in their availability. Keynes particularly forgets this important “availability” service when he refers to cash balances as “hoarded” money.

Once again, net real “profits,” by concept and definition, can go at best, under “normal” or static conditions, only to the more foresighted, skillful, or fortunate half of all entrepreneurs. The average entrepreneur tends to make just enough “profit” to compensate for the price of his own services if he worked for somebody else. The entrepreneurs with less than average foresight, skill, or luck will find themselves with losses. Only the better-than-average will achieve real profits.²

This general situation is not improved by continuous inflation, but merely concealed. The true situation is revealed again when allowance is made for the average lost purchasing power of money incomes received. Keynes offers no support whatever for his belief that the increment of the world’s wealth has fallen short of the aggregate of positive individual savings. If this contention is true, it tends to show that the rate of interest, instead of being chronically too high, as Keynes never tires of repeating, has been chronically too low to compensate for risks. But the enormous increase in the world’s wealth, and the vast accumulation of capital (say in America alone since the landing of the Pilgrims in 1620) hardly support his contention.

5. The “Economic Causes of War”

Keynes now follows with a section in which he offers his nostrum as a remedy for removing the alleged “economic causes of war.” Strangely enough, he blames “domestic laissez-faire and an international gold standard” as the causes of “the competitive struggle for markets” (p. 382) between nations.

All this, of course, is the exact opposite of the truth. Under an international gold standard and freedom of trade, there was a competition between individuals or between firms for foreign and domestic business, but not between nations as such. Several American firms might bid against each other for a foreign contract, and if German firms were also bidding for it, they would be competing with each other as much as with the American firms. It is nationalism, it is the nonsensical concept of a “balance of trade” that does not take care of itself but can only be obtained by government intervention, that causes the nationalistic “struggle for markets.”

Keynes denounces international trade as of the time that he was writing as “a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases,” whereas, under Keynesian economics, “if nations can learn to provide themselves with full employment by their domestic policy... there need be no important economic forces calculated to set the interest of one country against that of its neighbors” (pp. 382-383).

None of this bears much relation to the truth. Under a system of laissez faire (i.e., free trade at home and free trade abroad) and an international gold standard, individuals buy what they need wherever they can get it cheapest. They sell in the best market. They do not think nationalistically. And so far as the international gold standard is concerned, nations can stay on it only by keeping their interest rates and their obligations in term of gold in equilibrium with those prevailing in the rest of the world. It is precisely the Keynesian system, with its nationalistic fixing of interest rates, with its domestic inflationism and its tricky devaluations of national currencies, that turns the struggle for a “favorable balance of trade” and for “foreign markets” into an international struggle. And it is precisely because this system seeks to maintain “full employment” by domestic-currency, interest-rate, and investment tricks, by disregarding the imbalance of production so brought about, and by disregarding the loss from failure to take full advantage of the international division of labor, that it is also a far less efficient system.

6. The Power of Ideas

We have been forced to be critical, and sometimes harshly so, about every chapter of Keynes’s General Theory and every leading proposition it contains. I am sorry for this for more reasons than one. The present book would have been much shorter, the author would have been saved many dreary hours of analysis, and the reader’s time would also have been economized, if there were fewer propositions and deductions in the General Theory with which one was forced to disagree. So it is with special pleasure that I turn to the final paragraph of the General Theory, for here at last we are able to say that Keynes has written something profoundly true and wise and memorably eloquent:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

And what a crowning irony that the “defunct economist,” and “academic scribbler of a few years back,” whose ideas are being applied by civil servants and politicians and agitators, should now be none other than John Maynard Keynes himself!

¹The Theory of Idle Resources, (London: Johnathan Cape, 1939).

² Cf. Frank H. Knight, Risk, Uncertainty, and Profit (Boston: Houghton Mifflin, 1921).