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Keynes the Great?

August 8, 1998

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The August 17, 1998 issue of Fortune features a paean to John Maynard Keynes by Paul Krugman entitled
"Why Aren't We All Keynesians Yet?"

Here is my response:

Paul Krugman's column of August 17, 1998, "Why Aren't We All Keynesians Yet?" is
silly and discouraging. Under the general heading "No Free Lunch," Krugman celebrates
the 20th century's largest promoter of Free Lunch Economics, J.M. Keynes. It was Keynes,
after all, who claimed that credit expansion "performed the miracle...of turning a stone into
bread." Mr. Krugman's piece features an error in almost every paragraph and cries out for an
informed response.

Krugman's litany of praise begins with a mischaracterization of Keynes's Economic Consequences of
the Peace
, a book forecasting the economic consequences of the Versailles Treaty. French
Economist Etienne Mantoux demonstrated in 1944 that Keynes was wrong in his details as well as his central thesis.

Keynes predicted that, as a result of the Treaty, iron and steel
production in Europe would decline; it rose. He predicted that German pre-war coal output could
not be sustained; it was. He predicted that Germany could not export coal; it did. He predicted
that the German merchant marine would be insufficient for Germany's trade; by 1924 it was the
envy of the world. He predicted that Germany's amount of savings could not recover to its pre-war level; it did. In other words, Keynes was wholly wrong about the strictly economic
consequences of the Versailles Treaty.

It turns out Keynes was not much better in forecasting the political consequences of the Treaty
either. Keynes predicted that the Treaty would lead to "anarchy and famine." Krugman's hindsight is such that, since Hitler rose to power, Keynes was a prophet. In fact, Europe, and Germany in particular, saw neither anarchy nor famine. Mantoux reveals that Hitler's popularity in Germany rose as the treaty reparations demanded of Germany were repeatedly

Regarding Keynes's theorizing about German economic conditions, Krugman fails to point out that Keynes himself recognized that his own policies were more National Socialist than free
market. In the Preface to the 1936 German language edition of his General Theory Keynes told his German readers that his theories were much more suited to a totalitarian state, like the one the Nazis had in place, than to a free market.

The stability of the world economy after World War II, to the extent that it was stable, was
maintained despite the Bretton Woods agreement, not because of it. Such stability proved to be superficial as the inflation of the late sixties and early seventies demonstrated. Richard Nixon's
closing the gold window in 1971 was a direct consequence of the inflationary incentives put in
place under the Bretton Woods agreement.

and what should be done about about them.

process over again.

Such was the integrity of Mr. Keynes.


Finally, Krugman gets it wrong about Keynes's supposedly first "coherent explanation of the hyper-inflations" underway in Europe in the 1920's. Mises's The Theory of Money and Credit had already provided a general explanation for the stages of hyper-inflation experienced by Germany in the 1920s. In 1923, Mises applied his general theory to the case of Germany in a book on monetary stability submitted to the printer more than eight months before the final breakdown of the German Mark. And Mises was able to explain Germany's monetary breakdown without referring to anything like the chimera "too much aggregate demand."

The reason that Keynes is not and should not become a cultural icon is that Keynes was wrong.
The problems that Japan is facing now are not due to consumers and investors suddenly
"spending too little." They are the necessary outcome of massive, state-sponsored credit expansion coming home to roost. For a better understanding of today's economic crises, we should look back
not to Keynes, but to Mises.

Shawn Ritenour
Assistant Professor
College of Business
Southwest Baptist University
1600 University Avenue
Bolivar, Missouri 65613

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