Monday, September 13, 2010

Keynes' Real Sin

Many negative things have been said about John Maynard Keynes, most of them with regard to the school of economic thought that bears his name but little resemblance to his actual work: Keynesianism.  Most recently, people have laid the blame for Nixon closing the gold window at Keynes' feet (in spite of the fact that it was Chicago School monetarists Milton Friedman and Paul Volcker who championed that move) as well as the blame for the ongoing financial crisis (in spite of the fact that it was brought on by financial deregulation urged by Chicago School economists like Milton Friedman). 

In spite of all the breathless accusations of Keynes' evil influence over Washington elites, remarkably little of Keynes' work remains publicly available or accessible.  Only a couple of his books remain in print, although biographies by people like Hyman Minsky provide some sense of what these lost works say.  The fact is that Washington D.C. abandoned Keynesianism in 1980 to embrace the neoliberal Washington Consensus, which is informed by Chicago School economic thought (what I call "ponzinomics").

So why has Keynes become a political pinata, his legacy taking a beating for something he had no hand in?

The answer most likely found in Chapter 24 of The General Theory, in which he wrote: 
Now, though this state of affairs 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. Interest today 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 are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But 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.
Many economists before Keynes had deplored the rentiers and financial speculators, including Adam Smith, but no mainstream economist had taken aim at euthanizing them for fear of being euthanized.  Economists before and since Keyenes studiously ignore the rentier class and its deliterious effect on the real economy, pretending instead that there is only labor and capital, only supply and demand, only two parties who barter, in the "free market."

Keynes' real sin was naming the monster that caused the Great Depression, the same monster that caused the current depression.