John Maynard Keynes: The General Theory of

Employment, Interest and Money

A Critique by Brett DiDonato (brett.didonato@gmail.com)

This is a six part critique of John Maynard Keynes and his 1936 book The
General Theory of Employment, Interest and Money. This document is a
consolidation of articles originally written for the financial blog So You
Think You Can Invest? found at http://www.soyouthinkyoucaninvest.com.

Introduction
John Maynard Keynes is without a doubt the most influential economist of
the last 100 years. Keynesian economics is taught at every major University
and practiced by every central bank throughout the world. With that being
said how many people in the general population, let alone economists, have
actually sat down and read Keynes’s most famous work, The General Theory
of Employment, Interest and Money? Our guess is not many. That’s why
we decided to take the time to explore this work ourselves and what we
found was quite astonishing.

A brief disclaimer: We are not an economist, though we have read many

economics works. Who and what we are is someone that knows how to
disseminate well thought out arguments from utter nonsense and we are
tired of what passes for economic insight by supposed experts. We feel that
the arguments presented herein can stand on their own merits.

Our critique is divided into six parts, which are as follows:

• Part 1: Keynes Hated Stock Markets

• Part 2: Was John Maynard Keynes a Gold Bug?
• Part 3: Keynes's Guinea Pigs
• Part 4: Keynes Promoted the Destruction of Free Market Capitalism
• Part 5: Keynes on Government Stimulus, Digging Holes (with thoughts
from Paul Krugman and Henry Hazlitt)
• Part 6: Keynes: Let’s Destroy the Value of Your Money

As a point of reference, you can read the full text of The General Theory of
Employment, Interest and Money online for free at
http://www.marxists.org/reference/subject/economics/keynes/general-
theory/

Now that that’s settled, let the criticizing begin…

Part 1: Keynes Hated Stock Markets

Keynes held some very surprising views in regards to stock markets. You are
not likely to see these quotes highlighted by modern economists.

Chapter 12, Section V:

Of the maxims of orthodox finance none, surely, is more anti-social
than the fetish of liquidity, the doctrine that it is a positive virtue on
the part of investment institutions to concentrate their resources
upon the holding of “liquid” securities. It forgets that there is no
such thing as liquidity of investment for the community as a whole.
The social object of skilled investment should be to defeat the dark
forces of time and ignorance which envelop our future.

This battle of wits to anticipate the basis of conventional valuation a

few months hence, rather than the prospective yield of an
investment over a long term of years…For it is, so to speak, a game
of Snap, of Old Maid, of Musical Chairs - a pastime in which he is
victor who says Snap neither too soon or too late, who passes the
Old Maid to his neighbor before the game is over, who secures for
himself when the music stops.

Keynes' words seem even more relevant today than they did in his day.
Stock market yields are now far below their historical average. Dividends, or
the expected increase in dividends, are practically ignored by stock analysts.
Also, when is the last time you heard an economist note the downsides to
liquidity?

Chapter 12, Footnote 5:

It is said that, when Wall Street is active, at least half of the
purchases or sales of investments are entered upon with an
intention on the part of the speculator to reverse them the same
day. This is often true of the commodity exchanges also.

Keynes would surely be appalled by today's market activity. We are now a

world of high frequency trading between computers that hold positions for a
fraction of a second at a time.

Chapter 12, Section VI

Speculators may do no harm as bubbles on a steady stream of
enterprise. But the position is serious when enterprise becomes the
bubble on a whirlpool of speculation. When the capital development
of a country becomes a by-product of the activities of a casino, the
job is likely to be ill-done. The measure of success attained by Wall
Street, regarded as an institution of which the proper social purpose
is to direct new investment into the most profitable channels in
terms of future yield, cannot be claimed as one of the outstanding
triumphs of laisserz-faire capitalism – which is not surprising, if I
am right in thinking that the best brains of Wall Street have been in
fact directed towards a different object. These tendencies are a
scarcely avoidable outcome of our having successfully organized
“liquid” investment markets. It is usually agreed that casinos
should, in the public interest, be inaccessible and expensive...The
introduction of a substantial Government transfer tax on all [stock
market] transactions might prove the most serviceable reform
available, with a view to mitigating the predominance of speculation
over enterprise in the United States.

The spectacle of modern investment markets has sometimes moved

me towards the conclusion that to make the purchase of an
investment permanent and indissoluble, like marriage, except by
reason of death or other grave cause, might be a useful remedy for
our contemporary evils.

Let's start from the beginning of this passage. Keynes asserts that when
Wall Street speculation becomes the driver for the economy, and not the
other way around, the economy will suffer dire consequences. I think this is
a pretty concise way to describe what is happening today and what the
results have been and are likely to be going forward.

Keynes then declares that Wall Street is not a great example of free market
capitalism and that the primary purpose of Wall Street is not, contrary to
popular belief, to allocate capital efficiently. Name me one well known
economist, even amongst the so-called Keynesian economists, who
professes this view.

Finally, Keynes advised an increase in the transaction costs of stock trading

in order to curb trading by the general public and in general, speculation in
favor of investment. Keynes would certainly be against the much lower
transaction costs present today compared to his time. He would also be
appalled by the high level of speculation taking place by the public. The idea
of a 401(k) would probably be absurd to Keynes.

In essence, Keynes was against the workings of the stock markets of his day
and, based on his specific grievances, would be against the workings of
modern stock markets, only more so. For all of the lavish praise heaped
upon Keynes and his most famous work, you would think that maybe one
well known economist would share Keynes' views on stock markets or at
least quote some of the passages mentioned here.

Part II: Was John Maynard Keynes A Gold Bug?

Since gold has been busy making new all time highs, it seems like an
appropriate time to discuss John Maynard Keynes and his thoughts on gold.
Keynes is commonly known as one of history’s biggest gold critics, famously
referring to it as a “barbarous relic.” How accurate is this commonly held
view? You might be surprised by what Keynes actually wrote on the subject.
Dare we ask...was John Maynard Keynes a gold bug?

Chapter 10, Section VI

It is curious how common sense, wriggling for an escape from
absurd conclusions, has been apt to reach a preference for wholly
“wasteful” forms of loan expenditure rather than for partly wasteful
forms, which, because they are not wholly “wasteful” forms of loan
expenditure rather than for partly wasteful forms, which, because
they are not wholly wasteful, tend to be judged on strict “business”
principals. For example, unemployment relief financed by loans is
more readily accepted than the financing of improvements at a
charge below the current rate of interest; whilst the form of digging
holes in the ground known as gold-mining, which not only adds
nothing whatever to the real wealth of the world but involves the
disutility of labour, is the most acceptable of all solutions.
First of all, I have never heard even the most hardcore gold bug suggest
that a solution to unemployment is gold mining. I have not read everything
written by the popular economists of Keynes’s day, of course, so perhaps I
am wrong, but this passage strikes me as the ultimate straw man argument.

Let’s move beyond the nonsensical argument to make one point. Gold
mining does require a large commitment of labor, no doubt, but what of it?
What are the alternatives? Fiat currency is certainly cheaper to produce but
this is also its greatest weakness. The ease of production has ultimately
been the undoing of all fiat currencies, while the difficultly of mining gold
creates its scarcity and has led to its store of value for thousands of years.

As a working man myself, trading my labor for something that is difficult to

produce (gold) makes a lot more sense than trading my labor for something
that has nearly zero cost (fiat currency). If the treasury secretary can simply
hand unlimited amounts of money to his friends who did not know how to
run their businesses, why am I working so hard to obtain these same
dollars? It is not a stupid question.

Chapter 10, Section VI

At periods when gold is available at suitable depths experience
shows that the real wealth of the world increases rapidly; and when
but little of it is so available, our wealth suffers stagnation or
decline. Thus gold-mines are of the greatest value and importance to
civilisation. just as wars have been the only form of large-scale loan
expenditure which statesmen have thought justifiable, so gold-
mining is the only pretext for digging holes in the ground which has
recommended itself to bankers as sound finance; and each of these
activities has played its part in progress-failing something better. To
mention a detail, the tendency in slumps for the price of gold to rise
in terms of labour and materials aids eventual recovery, because it
increases the depth at which gold-digging pays and lowers the
minimum grade of ore which is payable.

There is a lot to digest in this passage so let’s start again at the beginning…

At periods when gold is available at suitable depths experience

shows that the real wealth of the world increases rapidly; and when
but little of it is so available, our wealth suffers stagnation or
decline.

This can only be construed as a positive remark by Keynes on gold. The

more gold there is, the greater the wealth. I own gold and yet I completely
disagree with these sentiments. An increase in the supply of gold does not
increase real wealth whatsoever. An increase in the supply of gold will cause
an increase in prices relative to gold, and may kick start an inflationary cycle
which raises prices, but real wealth is much the same as before. You would
think an economist would know the difference. If we go back to his original
quote in this post, Keynes actually said the exact opposite – "gold-mining,
which not only adds nothing whatever to the real wealth…" Is this
man playing a trick on us or is he just incapable of consistency?

Thus gold-mines are of the greatest value and importance to

civilisation, just as wars have been the only form of large-scale loan
expenditure which statesmen have thought justifiable, so gold-
mining is the only pretext for digging holes in the ground which has
recommended itself to bankers as sound finance; and each of these
activities has played its part in progress-failing something better.

Wow – there is a lot said in just this one passage. First, Keynes claims that
gold mines are of great value to civilization. Does that sound like someone
who detests gold? Certainly not. Next, Keynes equates gold mining to wars
in that both have led to great progress. Perhaps for the victors, whom go the
spoils, war is the road to prosperity. As a whole civilization, however, war is
a net negative. Economics is defined as the social science that studies the
production, distribution, and consumption of goods and services. If nothing
else, the job of an economist is to argue the merits of peace and free trade,
and show how it is a superior form of civilization compared to war and
tyranny. I submit that an economist who espouses the progress of war is not
an economist at all.

To mention a detail, the tendency in slumps for the price of gold to

rise in terms of labour and materials aids eventual recovery,
because it increases the depth at which gold-digging pays and
lowers the minimum grade of ore which is payable.

Keynes overplays the importance of the new profitability of gold mining as a

catalyst for economic recovery. After all, exactly how many people does he
expect to become gold miners? At the same time, in general, he is right.
Economic slumps naturally correct themselves because input costs decrease
in relation to money (deflation) to the point where new production will be
revived. This is in line with what most Austrian economists believe and this
directly contradicts the need for government intervention in markets during
economic slumps. This article is about gold so I will move on from here but I
will discuss this subject more in my next Keynes article.

Chapter 10, Section VI

Ancient Egypt was doubly fortunate, and doubtless owed to this its
fabled wealth, in that it possessed two activities, namely pyramid-
building as well as the search for the precious metals, the fruits of
which, since they could not serve the needs of man by being
consumed, did not stale with abundance.

As in the previously quotes passage, as Keynes praises gold I find myself

shaking my head in disgust. Ancient Egypt had “fabled wealth?” Wealth
for whom? The pharaohs certainly lived a life of abundance. Do you think the
slaves who worked backbreaking labor building pyramids in the scolding
desert heat felt the same way? To them, Ancient Egypt may have been
fabled but it certainly was not wealthy. In Keynes's mind, however, gold and
pyramids were the cause of Egypt’s wealth and certainly not just a
byproduct of other wealth creating mechanisms. What nonsense.

Chapter 23, Section II

The economic history of Spain in the latter part of the fifteenth and
in the sixteenth centuries provides an example of a country whose
foreign trade was destroyed by the effect on the wage-unit of an
excessive abundance of the precious metals.

This directly contradicts the Keynes quote we featured earlier. “At periods
when gold is available at suitable depths experience shows that the
real wealth of the world increases rapidly; and when but little of it is
so available, our wealth suffers stagnation or decline.” I think both
explanations by Keynes are wrong so I will restate my stance. An increase in
the supply of gold does not increase real wealth whatsoever. An increase in
the supply of gold will cause an increase in prices relative to gold, and may
kick start an inflationary cycle which raises prices, but real wealth is much
the same as before. Such an extreme example of a rapid increase of gold
supply is interesting but not that useful in the grand scheme of things, since
the supply of gold has been fairly steady over long periods of time. Compare
the supply of gold over any one hundred year period to any fiat currency
over that same period and I do not suspect that the fiat maintained a more
stable supply over any period in history. Imperfect, yes, but superior to the
alternatives.

Chapter 23, Section II

The history of India at all times has provided an example of a
country impoverished by a preference for liquidity amounting to so
strong a passion that even an enormous and chronic influx of the
precious metals has been insufficient to bring down the rate of
interest to a level which was compatible with the growth of real
wealth.
I think the example of India unfairly blames gold for the economic condition
of that country. Gold has been historically hoarded by Indians because of
their weak economy and financial institutions, and thus is a symptom of
their plight and not the cause. As the Indian economy continues to grow and
prosper over the foreseeable future, we are likely to see a decrease in the
hoarding of gold as better investment alternatives continue to expand. It is
certainly an interesting topic for discussion, however, and I would love to
hear more arguments on this subject, perhaps from someone who
understands the Indian culture better than I do.

So was John Maynard Keynes a gold bug? Hardly. What we have shown,
however, was that Keynes did not have a total disdain for gold as is often
claimed. His constant contradictions on the subject are undoubtedly a source
of confusion, so it is not surprising that the general understanding of his
views on the subject is low. The more I read Keynes, the more I tend to
think that this man was playing a trick on the world. He surely must have
noticed the massive contradictions he presented on many subjects, in this
case gold but I have other examples, and yet he always espoused his views
with the certainty of law. Are half of his passages what he actually believes
while the other half are in simply made in jest? It is hard to say.

Part III: Keynes's Guinea Pigs

Back in January of 2009 we wrote an article for our financial blog titled The
Fed Will Buy All Treasury Bonds in Existence if Necessary. The aim of that
post was to settle an argument over whether the Fed would actually follow
through with its threat at the time to buy long dated treasury bonds. We
argued that Ben Bernanke gave a speech in 2002 that covered the topic, and
he explicitly stated that he believed the Fed could control both short and
long term interest rate by outright purchasing treasury bonds. Sure enough,
on March 28, 2009, the Fed announced its program to buy $300 billion in
treasury bonds over the coming months. Since that time, the Fed has
become the largest purchaser of treasury and agency debt in the world. We
still aren't quite sure why so many were unwilling to believe that the Fed
would do this.

Moving on, in August, President Obama nominated Bernanke for a second

term as Fed Chairman. The word used over and over to describe Bernanke
was "creative." See the following quotes...

• Mr. Bernanke is seen by supporters inside the administration and in

markets as a creative and steady hand.
• He’s been far more aggressive and creative than almost anyone else
would have been in his place.
• He has done a remarkably creative job of dealing with these problems.

How creative has Bernanke been really? After reading John Maynard
Keynes, it becomes obvious that at least one of Bernanke's so called creative
ideas should properly be credited to Keynes.
First, let's examine briefly what Bernanke said in his now famous 2002
speech:

So what then might the Fed do if its target interest rate, the
overnight federal funds rate, fell to zero?

One relatively straightforward extension of current procedures

would be to try to stimulate spending by lowering rates further out
along the Treasury term structure--that is, rates on government
bonds of longer maturities.

[One direct method] would be for the Fed to begin announcing explicit
ceilings for yields on longer-maturity Treasury debt (say, bonds
maturing within the next two years).

The Fed could enforce these interest-rate ceilings by committing to

make unlimited purchases of securities up to two years from
maturity at prices consistent with the targeted yields.

If this program were successful, not only would yields on medium-

term Treasury securities fall, but (because of links operating
through expectations of future interest rates) yields on longer-term
public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private

securities should strengthen aggregate demand in the usual ways
and thus help to end deflation. Of course, if operating in relatively
short-dated Treasury debt proved insufficient, the Fed could also
attempt to cap yields of Treasury securities at still longer maturities,
say three to six years. Yet another option would be for the Fed to
use its existing authority to operate in the markets for agency debt
(for example, mortgage-backed securities issued by Ginnie Mae, the
Government National Mortgage Association).

Bernanke held true to his words from 2002 and enacted these very
programs in 2009.

John Maynard Keynes wrote similar thoughts all the way back in 1936:

Chapter 15, Section III

Perhaps a complex offer by the central bank to buy and sell at stated
prices gilt-edged bonds [English government bonds] of all
maturities, in place of the single bank rate for short-term bills, is the
most important practical improvement which can be made in the
technique of monetary management.

The monetary authority often tends in practice to concentrate upon

short-term debts and to leave the price of long-term debts to be
influenced by belated and imperfect reactions from the price of
short-term debts; — though here again there is no reason why they
need do so.

There is the possibility, for the reasons discussed above, that, after
the rate of interest has fallen to a certain level, liquidity-preference
may become virtually absolute in the sense that almost everyone
prefers cash to holding a debt which yields so low a rate of interest.
In this event the monetary authority would have lost effective
control over the rate of interest. But whilst this limiting case might
become practically important in future, I know of no example of it
hitherto. Indeed, owing to the unwillingness of most monetary
authorities to deal boldly in debts of long term, there has not been
much opportunity for a test. Moreover, if such a situation were to
arise, it would mean that the public authority itself could borrow
through the banking system on an unlimited scale at a nominal rate
of interest.
I am sure Keynes would be thrilled to know that a test of his ideas would
eventually be enacted, with us modern day folks being the guinea pigs of
this experiment. It only seems appropriate to describe the current situation
we are faced with by using a quote from Keynes himself:

Practical men, who believe themselves to be quite exempt from any

intellectual influences, are usually the slaves of some defunct
economist.

Part IV: Keynes Promoted the Destruction of Free

Market Capitalism
All the way back in 1936, Keynes laid out the game plan that government
officials and central bankers have followed until this very day. In part III,
we noted that Keynes was the source of Bernanke's economic stimulus game
plan. In this part, we will show that Keynes's influence goes far beyond
this. His influence is the guiding policy for our entire economic and political
system. To put it bluntly, Keynes promoted the destruction of free market
capitalism. Skeptical? We will provide the proof right here. Let's get to the
quotes and you can be the judge...

Chapter 22, Section III

In conditions of laissez-faire the avoidance of wide fluctuations in
employment may, therefore, prove impossible without a far-
reaching change in the psychology of investment markets such as
there is no reason to expect. I conclude that the duty of ordering the
current volume of investment cannot safely be left in private hands.

Did you get that? Keynes declared that free markets must be removed of
their role of allocating capital, which is the very backbone of capitalism.
Those promoting themselves as Keynesians are in favor of something that is
very different from free market capitalism.

Chapter 24, Section III

The State will have to exercise a guiding influence on the propensity
to consume partly through its scheme of taxation, partly by fixing
the rate of interest, and partly, perhaps, in other ways. Furthermore,
it seems unlikely that the influence of banking policy on the rate of
interest will be sufficient by itself to determine an optimum rate of
investment. I conceive, therefore, that a somewhat comprehensive
socialisation of investment will prove the only means of securing an
approximation to full employment…

I suppose that since Keynes only wanted a "somewhat comprehensive

socialisation of investment" that he was somewhat more in favor of free
market capitalism than Karl Marx. How wonderful. You have to laugh at the
ignorance or gall that it takes for someone to declare themselves both a
Keynesian and a free market capitalist.

Chapter 24, Section III

It is not the ownership of the instruments of production which it is
important for the State to assume. If the State is able to determine
the aggregate amount of resources devoted to augmenting the
instruments and the basic rate of reward to those who own them, it
will have accomplished all that is necessary. Moreover, the
necessary measures of socialisation can be introduced gradually and
without a break in the general traditions of society.

This is perhaps the most prescient quote of the entire 20th century. Keynes
is saying that the government can come to wrestle control from the free
market, not by the forceful confiscation of private property as characterized
by Communism, but by merely determining the rules behind who gets the
property. Today, we call one extreme form of this mechanism a government
bailout.

Further, he noted that if the socialization is done gradually then there is no

need for a violent and abrupt upheaval, as found via a Coup d'état. Does
this not precisely describe what has taken place over the past century? A
slow, steady creep of socialization has conquered the western world.
Passages like those found above are why I do not believe in conspiracy
theories. Who needs them when the great stories of history are laid out for
you in black and white?

I'll leave you with one final thought. When economists speak of Keynesian
economics, the above ideas are what they are promoting. If they do things
and promote ideas that seem antithetical with free market capitalism, now
you know why.

Part V: Keynes on Government Stimulus, Digging

Holes
Let’s discuss government stimulus. John Maynard Keynes is often credited
with originating the ideas for the various government stimulus efforts that
are currently being employed by almost all of the major nations of the
world. But how accurate is this really? As we will see below, it is quite
fascinating to read what Keynes actually said about certain government
stimulus efforts.

Chapter 22, Section III

The right remedy for the trade cycle is not to be found in abolishing
booms and thus keeping us permanently in a semi-slump; but in
abolishing slumps and thus keeping us permanently in a quasi-
boom.

This is the basic game plan employed by Keynesians, or in other words,

every central banker. Booms should not be stifled and busts should be
battled with government stimulus. The opposing view presented by Austrian
Economists is that booms lead to busts and thus booms should be prevented
from getting out of control in the first place.

Chapter 8, Section IV
In the United States, for example, by 1929 the rapid capital
expansion of the previous five years had led cumulatively to the
setting up of sinking funds and depreciation allowances, in respect
of plant which did not need replacement, on so huge a scale that an
enormous volume of entirely new investment was required merely
to absorb these financial provisions; and it became almost hopeless
to find still more new investment on a sufficient scale to provide for
such new saving as a wealthy community in full employment would
be disposed to set aside. This factor alone was probably sufficient to
cause a slump. And, furthermore, since “financial prudence” of this
kind continued to be exercised through the slump by those great
corporations which were still in a position to afford it, it offered a
serious obstacle to early recovery.

Keynes says that the massive excesses created by the boom were enough to
cause an inevitable slump. This inevitable slump became the great
depression. One would think that it would logically follow that we should try
to prevent booms from getting too out of hand (the Austrian argument) but
based on the first quote in this article, Keynes clearly did not feel this way.

Chapter 8, Section IV
…in Great Britain at the present time (1935) the substantial amount
of house-building and of other new investments since the war [since
the end of WWI in 1918] had led to an amount of sinking funds
being set up much in excess of any present requirements for
expenditure on repairs and renewals, a tendency which has been
accentuated, where the investment had been made by local
authorities and public boards, by the principals of “sound” finance
which often require sinking funds sufficient to write off the initial
cost some time before replacement will actually fall due; with the
result that even if private individuals were ready to spend the whole
of their net incomes it would be a severe task to restore full
employment in the face of this heavy volume of statutory provision
by public and semi-public authorities, entirely dissociated from any
corresponding new investment…Yet is not certain that the Ministry
of Health are aware, when they insist on stiff sinking funds by local
authorities, how much they may be aggravating the problem of
unemployment.

A housing boom that led to a massive bust…where have we heard this story
before? Keynes was against the government efforts of his time to spend
money to stimulate the housing market. He said it aggravated
unemployment. Name one central banker who holds this position.

Chapter 10, Section VI

If the Treasury were to fill old bottles with banknotes, bury them at
suitable depths in disused coalmines 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. It would, indeed, be more sensible to build houses
and the like; but if there are political and practical difficulties in the
way of this, the above would be better than nothing.

To the layman (aka those with common sense) the above argument strikes
one as utter insanity. Thankfully, we have prominent economists such as
nobel laureate Paul Krugman who advocates such ideas. Krugman even
featured this passage on a recent blog post. So rest assured, the above
makes total sense. Forget the fact that Henry Hazlitt debunked this theory
in 1946 with his work Economics in One Lesson. Hazlitt called this the
broken window fallacy.

Economics in One Lesson by Henry Hazlitt:

A young hoodlum, say, heaves a brick through the window of a
baker’s shop. The shopkeeper runs out furious, but the boy is gone.
A crowd gathers, and begins to stare with quiet satisfaction at the
gaping hole in the window and the shattered glass over the bread
and pies. After a while the crowd feels the need for philosophic
reflection. And several of its members are almost certain to remind
each other or the baker that, after all, the misfortune has its bright
side. It will make business for some glazier. As they begin to think
of this they elaborate upon it. How much does a new plate glass
window cost? Two hundred and fifty dollars? That will be quite a
sun. After all, if windows were never broken, what would happen to
the glass business? Then, of course, the thing is endless. The glazier
will have $250 more to spend with other merchants, and these in
turn will have $250 more to spend with still other merchants, and so
ad infinitum. The smashed window will go on providing money and
employment in ever-widening circles. The logical conclusion from all
this would be, if the crowd drew it, that the little hoodlum who
threw the brick, far from being a public menace, was a public
benefactor.

Now let us take another look. The crowd is at least right in its first
conclusion. This little act of vandalism will in the first instance mean
more business for some glazier. The glazier will be no more unhappy
to learn of the incident than an undertaker to learn of a death. But
the shopkeeper will be out $250 that he was planning to spend for a
new suit. Because he has had to replace the window, he will have to
go without the suit (or some equivalent need or luxury). Instead of
having a window and $250 he now has merely a window. Or, as he
was planning to buy the suit that very afternoon, instead of having
both a window and a suit he must be content with the window and
no suit. If we think of him as part of the community, the community
has lost a new suit that might otherwise have come into being, and
is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of

business. No new “employment” has been added. The people in the
crowd were thinking only of two parties to the transaction, the
baker and the glazier. They had forgotten the potential third party
involved, the tailor. They forgot him precisely because he will not
now enter the scene. They will see the new window in the next day
or two. They will never see the extra suit, precisely because it will
never be made. They see only what is immediately visible to the eye.

A very basic economic concept known as opportunity cost describes this as

well. How can this possibly be overlooked by anyone that claims to be
economist?

Regardless, people such as Paul Krugman conveniently forget one important

aspect of Keynes's argument:

Chapter 16, Section III

“To dig holes in the ground,” paid for out of savings, will increase,
not only employment, but the real national dividend of useful goods
and services.
"Paid for out of savings" is the crux. A country such as China, with their
massive reserves, may actually benefit from government stimulus. This is
only true because the source of the stimulus is savings. The US has major
deficits and thus stimulus efforts are not coming out of savings but out of
debt. This is a big difference and most central bankers are conveniently
ignoring this fact.

Part VI: Keynes: Let's Destroy the Value of Your

Money

For part six we will discuss how Keynes promoted the destruction of the
value of money. This is commonly referred to by the euphemism inflation
but, as we will see, Keynes went even beyond promoting a modest inflation
target. Keynes supported this despite correctly acknowledging that inflation
and currency destruction in general hurts the poor disproportionately.

Chapter 19, Section II

Except in a socialised community where wage-policy is settled by
decree, there is no means of securing uniform wage reductions for
every class of labour. The result can only be brought about by a
series of gradual, irregular changes, justifiable on no criterion of
social justice or economic expediency, and probably completed only
after wasteful and disastrous struggles, where those in the weakest
bargaining position will suffer relatively to the rest. A change in the
quantity of money, on the other hand, is already within the power of
most governments by open-market policy or analogous measures.
Having regard to human nature and our institutions, it can only be a
foolish person who would prefer a flexible wage policy to a flexible
money policy, unless he can point to advantages from the former
which are not obtainable from the latter. Moreover, other things
being equal, a method which it is comparatively easy to apply should
be deemed preferable to a method which is probably so difficult as
to be impracticable.

The question here is - what is the best method to lower employee wages?
Keynes argues that it is far better to reduce wages through inflation because
it is less understood than a direct reduction in numeric value. If one's goal
is to fool the masses, then quite frankly we agree.

Chapter 19, Section II

In fact, a movement by employers to revise money-wage bargains
downward will be much more strongly resisted than a gradual and
automatic lowering of real wages as a result of rising prices.

Central bankers like Keynes know that from a psychological standpoint,

stealing your money indirectly through inflation is the preferred method.
When someone promotes an inflationary policy, remember that this is what
they are advocating - they want to fool you.

Chapter 20, Section III

For a time at least, rising prices may delude entrepreneurs into
increasing employment beyond the level which maximises their
individual profits measured in terms of the product. For they are so
accustomed to regard rising sale-proceeds in terms of money as a
signal for expanding production, that they may continue to do so
when this policy has in fact ceased to be to their best advantage; i.e.
they may underestimate their marginal user cost in the new price
environment.

Since that part of his profit which the entrepreneur has to hand on
to the rentier is fixed in terms of money, rising prices, even though
unaccompanied by any change in output, will re-distribute incomes
to the advantage of the entrepreneur and to the disadvantage of the
rentier, which may have a reaction on the propensity to consume.

Not only did Keynes hope to fool the masses via inflation, but he hoped to
fool entrepreneurs as well! Fortunately for the entrepreneurs and other
generally wealthy people, Keynes correctly recognized that inflation helps
the rich at the expense of the poor, as Keynes describes here as well. Note
that fooling entrepreneurs by making them think there is more demand than
actually exists, Keynes is promoting the boom and bust cycle that continues
to plague our economic system.

Finally, Keynes went one step beyond promoting an inflationary policy. He

also promoted the use of currency with an expiration date, aka "stamped
money."

Chapter 23, Section VI

He [Silvio Gesell, 1862-1930] argues that the growth of real capital
is held back by the money-rate of interest, and that if this brake
were removed the growth of real capital would be, in the modern
world, so rapid that a zero money-rate of interest would probably be
justified, not indeed forthwith, but within a comparatively short
period of time. Thus the prime necessity is to reduce the money-rate
of interest, and this, he pointed out, can be effected by causing
money to incur carrying-costs just like other stocks of barren goods.
This led him to the famous prescription of “stamped” money, with
which his name is chiefly associated and which has received the
blessing of Professor Irving Fisher. According to this proposal
currency notes (though it would clearly need to apply as well to
some forms at least of bank-money) would only retain their value by
being stamped each month, like an insurance card, with stamps
purchased at a post office. The cost of the stamps could, of course,
be fixed at any appropriate figure. According to my theory it should
be roughly equal to the excess of the money-rate of interest (apart
from the stamps) over the marginal efficiency of capital
corresponding to a rate of new investment compatible with full
employment. The actual charge suggested by Gesell was 1 per mil.
per month, equivalent to 5.4 per cent. per annum. This would be too
high in existing conditions, but the correct figure, which would have
to be changed from time to time, could only be reached by trial and
error.

The idea behind stamped money is sound. It is, indeed, possible that
means might be found to apply it in practice on a modest scale. But
there are many difficulties which Gesell did not face. In particular,
he was unaware that money was not unique in having a liquidity-
premium attached to it, but differed only in degree from many other
articles, deriving its importance from having a greater liquidity-
premium than any other article. Thus if currency notes were to be
deprived of their liquidity-premium by the stamping system, a long
series of substitutes would step into their shoes — bank-money,
debts at call, foreign money, jewellery and the precious metals
generally, and so forth. As I have mentioned above, there have been
times when it was probably the craving for the ownership of land,
independently of its yield, which served to keep up the rate of
interest; — though under Gesell’s system this possibility would have
been eliminated by land nationalisation.

Not only do Keynes and Irving Fisher want to destroy the value of your
money but they want to nationalize your land (aka Communism). The
bottom line is that Keynes and his followers want to stamp out the free
market and steal your land, and thus freedom, because they think they
know better than you. It's all right there in black and white.

Concluding Words

We hope that you have found our critique of John Maynard Keynes and his
most famous work, The General Theory of Employment, Interest and Money
both interesting and informative. We feel that in light of the recent
economic turmoil that economists have a lot to answer for. The fact that
their most famous prognosticator spewed such nonsense on one hand and
outright disagreed with many of the stances that he is now credited with
does not speak highly of the profession. It is high time for economic theory
to evolve, and a great start would be a movement away from Keynes and
Keynesian economics.