By Ludwig von Mises
The
stock-in-trade of all Socialist authors is the idea that there is potential
plenty and that the substitution of socialism for capitalism would make it
possible to give to everybody “according to his needs.” Other authors want to
bring about this paradise by a reform of the monetary and credit system. As
they see it, all that is lacking is more money and credit. They consider that
the rate of interest is a phenomenon artificially created by the man-made
scarcity of the “means of payment.” In hundreds, even thousands, of books and
pamphlets they passionately blame the “orthodox” economists for their
reluctance to admit that inflationist and expansionist doctrines are sound. All
evils, they repeat again and again, are caused by the erroneous teachings of
the “dismal science” of economics and the “credit monopoly” of the bankers and
usurers. To unchain money from the fetters of “restrictionism,” to create free
money (Freigeld, in the terminology of Silvio Gesell) and to grant
cheap or even gratuitous credit, is the main plank in their political platform.
Such ideas appeal to the uninformed masses. And they are very popular with governments committed to a policy of increasing the quantity both of money in circulation and of deposits subject to check. However, the inflationist governments and parties have not been ready to admit openly their endorsement of the tenets of the inflationists. While most countries embarked upon inflation and on a policy of easy money, the literary champions of inflationism were still spurned as “monetary cranks.” Their doctrines were not taught at the universities.
John Maynard Keynes, late economic adviser to the
British government, is the new prophet of inflationism. The “Keynesian
Revolution” consisted in the fact that he openly espoused the doctrines of
Silvio Gesell. As the foremost of the British Gesellians, Lord Keynes adopted
also the peculiar messianic jargon of inflationist literature and introduced it
into official documents. Credit expansion, says the Paper of the
British Expertsof April 8, 1943, performs the “miracle . . . of turning a
stone into bread.”* The author of this
document was, of course, Keynes. Great Britain has indeed traveled a long way
to this statement from Hume’s and Mill’s views on miracles.
II
II
Keynes entered the political scene in 1920 with his
book, The Economic Consequences of the Peace. He tried to
prove that the sums demanded for reparations were far in excess of what Germany
could afford to pay and to “transfer.” The success of the book was
overwhelming. The propaganda machine of the German nationalists, well
entrenched in every country, was busily representing Keynes as the world’s most
eminent economist and Great Britain’s wisest statesman.
Yet it would be a mistake to blame Keynes for the
suicidal foreign policy that Great Britain followed in the interwar period.
Other forces, especially the adoption of the Marxian doctrine of imperialism
and “capitalist warmongering,” were of incomparably greater importance in the
rise of appeasement. With the exception of a small number of keen-sighted men,
all Britons supported the policy which finally made it possible for the Nazis
to start the Second World War.
A highly gifted French economist, Étienne Mantoux, has
analyzed Keynes’s famous book point for point. The result of his very careful
and conscientious study is devastating for Keynes the economist and
statistician, as well as Keynes the statesman. The friends of Keynes are at a
loss to find any substantial rejoinder. The only argument that his friend and
biographer, Professor E. A. G. Robinson, could advance is that this powerful
indictment of Keynes’s position came “as might have been expected, from a
Frenchman.” (Economic Journal, vol. LVII, p. 23.) As if the
disastrous effects of appeasement and defeatism had not affected Great Britain
also!
Étienne Mantoux, son of the famous historian Paul
Mantoux, was the most distinguished of the younger French economists. He had
already made valuable contributions to economic theory—among them a keen
critique of Keynes’s General Theory, published in 1937 in the Revue
d’Économie Politique—before he began his The Carthaginian Peace or
the Economic Consequences of Mr. Keynes (Oxford University Press,
1946). He did not live to see his book published. As an officer in the French
forces he was killed on active service during the last days of the war. His
premature death was a heavy blow to France, which is today badly in need of
sound and courageous economists.
It would be a mistake, also, to blame Keynes for the
faults and failures of contemporary British economic and financial policies.
When he began to write, Britain had long since abandoned the principle of laissez-faire.That
was the achievement of such men as Thomas Carlyle and John Ruskin and,
especially, of the Fabians. Those born in the eighties of the nineteenth
century and later were merely epigones of the university and parlor Socialists
of the late Victorian period. They were no critics of the ruling system, as
their predecessors had been, but apologists of government and pressure group
policies whose inadequacy, futility and perniciousness became more and more
evident.
Professor Seymour E. Harris has just published a stout
volume of collected essays by various academic and bureaucratic authors dealing
with Keynes’s doctrines as developed in his General Theory of
Employment, Interest and Money, published in 1936. The title of the
volume is The New Economics, Keynes’ Influence on Theory and Public
Policy (Alfred A. Knopf, New York, 1947). Whether Keynesianism has a
fair claim to the appellation “new economics” or whether it is
not, rather, a rehash of often-refuted Mercantilist fallacies and of the
syllogisms of the innumerable authors who wanted to make everybody prosperous
by fiat money, is unimportant. What matters is not whether a doctrine is new,
but whether it is sound.
The remarkable thing about this symposium is that it
does not even attempt to refute the substantiated objections
raised against Keynes by serious economists. The editor seems to be unable to
conceive that any honest and uncorrupted man could disagree with Keynes. As he
sees it, opposition to Keynes comes from “the vested interests of scholars in
the older theory” and “the preponderant influence of press, radio, finance and
subsidized research.” In his eyes, non-Keynesians are just a bunch of bribed
sycophants, unworthy of attention. Professor Harris thus adopts the methods of
the Marxians and the Nazis, who preferred to smear their critics and to
question their motives instead of refuting their theses.
A few of the contributions are written in dignified
language and are reserved, even critical, in their appraisal of Keynes’s
achievements. Others are simply dithyrambic outbursts. Thus Professor Paul A.
Samuelson tells us: “To have been born as an economist before 1936 was a
boon—yes. But not to have been born too long before!” And he proceeds to quote
Wordsworth:
·
Bliss was it in that dawn to be alive,
·
But to be young was very heaven!
Descending from
the lofty heights of Parnassus into the prosaic valleys of quantitative
science, Professor Samuelson provides us with exact information about the
susceptibility of economists to the Keynesian gospel of 1936. Those under the
age of 35 fully grasped its meaning after some time; those beyond 50 turned out
to be quite immune, while economists in-between were divided. After thus
serving us a warmed-over version of Mussolini’s giovanezza theme,
he offers more of the outworn slogans of fascism, e.g., the “wave of the
future.” However, on this point another contributor, Mr. Paul M. Sweezy,
disagrees. In his eyes Keynes, tainted by “the shortcomings of bourgeois
thought” as he was, is not the savior of mankind, but only the forerunner whose
historical mission it is to prepare the British mind for the acceptance of pure
Marxism and to make Great Britain ideologically ripe for full socialism.
In resorting to the method of innuendo and trying to
make their adversaries suspect by referring to them in ambiguous terms allowing
of various interpretations, the camp-followers of Lord Keynes are imitating
their idol’s own procedures. For what many people have admiringly called
Keynes’s “brilliance of style” and “mastery of language” were, in fact, cheap
rhetorical tricks.
Ricardo, says Keynes, “conquered England as completely
as the Holy Inquisition conquered Spain.” This is as vicious as any comparison
could be. The Inquisition, aided by armed constables and executioners, beat the
Spanish people into submission. Ricardo’s theories were accepted as correct by
British intellectuals without any pressure or compulsion being exercised in
their favor. But in comparing the two entirely different things, Keynes
obliquely hints that there was something shameful in the success of Ricardo’s
teachings and that those who disapprove of them are as heroic, noble and
fearless champions of freedom as were those who fought the horrors of the
Inquisition.
The most famous of Keynes’s aperçus is:
“Two pyramids, two masses for the dead, are twice as good as one; but not so
two railways from London to York.” It is obvious that this sally, worthy of a
character in a play by Oscar Wilde or Bernard Shaw, does not in any way prove
the thesis that digging holes in the ground and paying for them out of savings
“will increase the real national dividend of useful goods and services.” But it
puts the adversary in the awkard position of either leaving an apparent
argument unanswered or of employing the tools of logic and discursive reasoning
against sparkling wit.
Another instance of Keynes’s technique is provided by his
malicious description of the Paris Peace Conference. Keynes disagreed with
Clemenceau’s ideas. Thus, he tried to ridicule his adversary by broadly
expatiating upon his clothing and appearance which, it seems, did not meet with
the standard set by London outfitters. It is hard to discover any connection
with the German reparations problem in the fact that Clemenceau’s boots “were
of thick black leather, very good, but of a country style, and sometimes
fastened in front, curiously, by a buckle instead of laces.” After 15 million
human beings had perished in the war, the foremost statesmen of the world were
assembled to give mankind a new international order and lasting peace—and the
British Empire’s financial expert was amused by the rustic style of the French
prime minister’s footwear.
Fourteen years later there was another international
conference. This time Keynes was not a subordinate adviser, as in 1919, but one
of the main figures. Concerning this London World Economic Conference of 1933,
Professor Robinson observes: “Many economists the world over will remember . .
. the performance in 1933 at Covent Garden in honour of the Delegates of the
World Economic Conference, which owed its conception and organization very much
to Maynard Keynes.”
Those economists who were not in the service of one of
the lamentably inept governments of 1933 and therefore were not delegates and
did not attend the delightful ballet evening will remember the London
Conference for other reasons. It marked the most spectacular failure in the
history of international affairs of those policies of neo-Mercantilism which
Keynes backed. Compared with this fiasco of 1933, the Paris Conference of 1919
appears to have been a highly successful affair. But Keynes did not publish any
sarcastic comments on the coats, boots and gloves of the delegates of 1933.
Although Keynes looked upon “the strange, unduly
neglected prophet Silvio Gesell” as a forerunner, his own teachings differ
considerably from those of Gesell. What Keynes borrowed from Gesell as well as
from the host of other pro-inflation propagandists was not the content of their
doctrine, but their practical conclusions and the tactics they applied to
undermine their opponents’ prestige. These stratagems are:
(a) All adversaries, that is, all those who do not
consider credit expansion as the panacea, are lumped together and called orthodox. It
is implied that there are no differences between them.
(b) It is assumed that the evolution of economic
science culminated in Alfred Marshall and ended with him. The findings of
modern subjective economics are disregarded.
(c) All that economists from David Hume on down to our
time have done to clarify the results of changes in the quantity of money and
money substitutes is simply ignored. Keynes never embarked upon the hopeless
task of refuting these teachings by ratiocination.
In all these respects the contributors to the
symposium adopt their master’s technique. Their critique aims at a body of
doctrine created by their own illusions, which has no resemblance to the
theories expounded by serious economists. They pass over in silence all that
economists have said about the inevitable outcome of credit expansion. It seems
as if they have never heard anything about the monetary theory of the trade cycle.
For a correct appraisal of the success which Keynes’s General
Theory found in academic circles, one must consider the conditions
prevailing in university economics during the period between the two world
wars.
Among the men who occupied chairs of economics in the
last few decades, there have been only a few genuine economists, i.e., men
fully conversant with the theories developed by modern subjective economics.
The ideas of the old classical economists, as well as those of the modern
economists, were caricatured in the textbooks and in the classrooms; they were
called such names as old-fashioned, orthodox, reactionary, bourgeois or Wall
Street economics. The teachers prided themselves on having refuted for all time
the abstract doctrines of Manchesterism and laissez-faire.
The antagonism between the two schools of thought had
its practical focus in the treatment of the labor union problem. Those
economists disparaged as orthodox taught that a permanent rise in wage rates
for all people eager to earn wages is possible only to the extent that the per
capita quota of capital invested and the productivity of labor increases. If—
whether by government decree or by labor union pressure—minimum wage rates are
fixed at a higher level than that at which the unhampered market would have
fixed them, unemployment results as a permanent mass phenomenon.
Almost all professors of the fashionable universities
sharply attacked this theory. As these self-styled “unorthodox” doctrinaires
interpreted the economic history of the last two hundred years, the
unprecedented rise in real wage rates and standards of living was caused by
labor unionism and government pro-labor legislation. Labor unionism was, in
their opinion, highly beneficial to the true interests of all wage-earners and
of the whole nation. Only dishonest apologists of the manifestly unfair
interests of callous exploiters could find fault with the violent acts of the
unions, they maintained. The foremost concern of popular government, they said,
should be to encourage the unions as much as possible and to give them all the
assistance they needed to combat the intrigues of the employers and to fix wage
rates higher and higher.
But as soon as the governments and legislatures had
vested the unions with all the powers they needed to enforce their minimum wage
rates, the consequences appeared which the “orthodox” economists had predicted;
unemployment of a considerable part of the potential labor force was prolonged
year after year.
The “unorthodox” doctrinaires were perplexed. The only
argument they had advanced against the “orthodox” theory was the appeal to
their own fallacious interpretation of experience. But now events developed
precisely as the “abstract school” had predicted. There was confusion among the
“unorthodox.”
It was at this moment that Keynes published his General
Theory. What a comfort for the embarrassed “progressives”! Here, at
last, they had something to oppose to the “orthodox” view. The cause of
unemployment was not the inappropriate labor policies, but the shortcomings of
the monetary and credit system. No need to worry any longer about the
insufficiency of savings and capital accumulation and about deficits in the
public household. On the contrary. The only method to do away with unemployment
was to increase “effective demand” through public spending financed by credit
expansion and inflation.
The policies which the General Theory recommended
were precisely those which the “monetary cranks” had advanced long before and
which most governments had espoused in the depression of 1929 and the following
years. Some people believe that Keynes’s earlier writings played an important
part in the process which converted the world’s most powerful governments to
the doctrines of reckless spending, credit expansion and inflation. We may
leave this minor issue undecided. At any rate it cannot be denied that the
governments and peoples did not wait for the General Theory to
embark upon these “Keynesian”—or more correctly, Gesellian policies.
Keynes’s General Theory of 1936 did
not inaugurate a new age of economic policies; rather, it marked the end of a
period. The policies which Keynes recommended were already then very close to
the time when their inevitable consequences would be apparent and their
continuation would be impossible. Even the most fanatical Keynesians do not
dare to say that present-day England’s distress is an effect of too much saving
and insufficient spending. The essence of the much glorified “progressive”
economic policies of the last decades was to expropriate ever-increasing parts
of the higher incomes and to employ the funds thus raised for financing public
waste and for subsidizing the members of the most powerful pressure groups. In
the eyes of the “unorthodox,” every kind of policy, however manifest its
inadequacy may have been, was justified as a means of bringing about more
equality. Now this process has reached its end. With the present tax rates and
the methods applied in the control of prices, profits and interest rates, the
system has liquidated itself. Even the confiscation of every penny earned above
1,000 pounds a year will not provide any perceptible increase to Great
Britain’s public revenue. The most bigoted Fabians cannot fail to realize that
henceforth funds for public spending must be taken from the same people who are
supposed to profit from it. Great Britain has reached the limit both of
monetary expansionism and of spending.
Conditions in this country are not essentially
different. The Keynesian recipe to make wage rates soar no longer works. Credit
expansion, on an unprecedented scale engineered by the New Deal, for a short
time delayed the consequences of inappropriate labor policies. During this
interval the Administration and the union bosses could boast of the “social
gains” they had secured for the “common man.” But now the inevitable
consequences of the increase in the quantity of money and deposits has become
visible; prices are rising higher and higher. What is going on today in the
United States is the final failure of Keynesianism.
There is no doubt that the American public is moving
away from the Keynesian notions and slogans. Their prestige is dwindling. Only
a few years ago politicians were naively discussing the extent of national
income in dollars without taking into account the changes which government-made
inflation had brought about in the dollar’s purchasing power. Demagogues
specified the level to which they wanted to bring the national (dollar) income.
Today this form of reasoning is no longer popular. At last the “common man” has
learned that increasing the quantity of dollars does not make America richer.
Professor Harris still praises the Roosevelt Administration for having raised
dollar incomes. But such Keynesian consistency is found today only in classrooms.
There are still teachers who tell their students that
“an economy can lift itself by its own bootstraps” and that “we can spend our
way into prosperity.” But the Keynesian miracle fails to materialize; the
stones do not turn into bread. The panegyrics of the learned authors who
cooperated in the production of the present volume merely confirm the editor’s
introductory statement that “Keynes could awaken in his disciples an almost
religious fervor for his economics, which could be effectively harnessed for
the dissemination of the new economics.” And Professor Harris goes on to say,
“Keynes indeed had the Revelation.”
There is no use in arguing with people who are driven
by “an almost religious fervor” and believe that their master “had the
Revelation.” It is one of the tasks of economics to analyze carefully each of
the inflation-ist plans, those of Keynes and Gesell no less than those of their
innumerable predecessors from John Law down to Major Douglas. Yet no one should
expect that any logical argument or any experience could ever shake the almost
religious fervor of those who believe in salvation through spending and credit
expansion.
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