By Ralph Raico
Keynes and Neomercantilism
It is now common practice to rank John Maynard Keynes as one of modern history's outstanding liberals, perhaps the most recent "great" in the tradition of John Locke, Adam Smith, and Thomas Jefferson.
Like these men, it is generally held, Keynes was a sincere – indeed, exemplary – believer in the free society. If he differed from the "classical" liberals in a few obvious and important ways, it was simply because he tried to update the essential liberal idea to suit the economic conditions of a new age.
There is no doubt that throughout his life Keynes endorsed various broad cultural values, such as tolerance and rationality, that are often referred to as "liberal," and, of course, he always called himself a liberal (as well as a Liberal – that is, a supporter of the British Liberal Party). But none of this carries great weight when it comes to classifying Keynes's political thought.
Prima facie, Keynes as model liberal is already paradoxical on account of his embrace of mercantilist doctrine. When The General Theory of Employment, Interest, and Money (Keynes 1973b) appeared in 1936, W.H. Hutt was about to send his Economists and the Public (1936) to press. In later years, Hutt would subject Keynes's system to detailed and withering criticism (Hutt 1963, 1979), but at this point he could only hurriedly insert some initial observations. What struck him most of all was that this renowned economist "would have us believe that the Mercantilists were right and their Classical critics were wrong" (a position expounded in chapter 23 of the General Theory) (Hutt 1936, p. 245).
Hutt was writing from the standpoint of economic science. Here we are dealing with the integrity of liberalism as a social philosophy. If, as I have argued elsewhere (Raico 1989, 1992, 1999, pp. 1–22), the liberal doctrine is characterized historically by a repudiation of the paternalism of the absolutist welfare state, it is characterized even more so by its rejection of the mercantilist component in 18th-century absolutism. How, then, can a writer who tried to rehabilitate mercantilism be counted among the liberal greats?
In defense of Keynes, Maurice Cranston contends that no one would deny John Locke inclusion in the liberal ranks in spite of his adherence to mercantilism (1978, p. 111). Whether Locke espoused mercantilism is debatable; Karen Vaughn (1980) has furnished grounds for believing otherwise. But even if he had been a mercantilist, that fact would lend no support to Cranston's argument. Locke is rightly viewed as a liberal great not because of his views on economic theory and policy, whatever they may have been, but by virtue of his libertarian account of natural rights and what he believed followed from that account.
The Keynesian System
According to his supporters and himself, Keynes's turn to neomercantilism was necessitated by his discovery of fundamental flaws in classic economics. The classical theory, the claim goes, proved impotent to explain the causes of either Britain's chronic high unemployment in the 1920s or the Great Depression, whereas in The General Theory Keynes did both. He accomplished this feat by exposing the inherent gross defects of the undirected market economy, thereby effecting a "revolution" in economic thought.
Yet the particular crises to which Keynes reacted were themselves the products of misguided government policies. The persistence of high unemployment in Great Britain is traceable in part to Winston Churchill's decision as chancellor of the exchequer to return to gold at the unrealistic prewar parity and in part to the high unemployment benefits (relative to wages) available after 1920. The Great Depression resulted primarily from government monetary management, in particular by the Federal Reserve System in the United States. Both of these crises are amenable to explanation by means of "orthodox" economic analysis, requiring no theoretical "revolution" (Rothbard 1963; Johnson 1975, pp. 109–12; Benjamin and Kochin 1979; Buchanan, Wagner, and Burton 1991).
As Hutt noted, Keynes in The General Theory turned his back on all the recognized authorities, from Hume and Smith to Menger, Jevons, and Marshall, and on to Wicksell and Wicksteed. Those thinkers, whatever the degree of their adherence to strict laissez-faire, at least held that the market economy contained self-correcting forces that rendered business depressions temporary. Keynes, discarding his "orthodox" predecessors (and contemporaries), aligned himself with what he himself dubbed that "brave army of heretics," Silvio Gesell, J.A. Hobson, and other social-reformist and socialist critics of capitalism whom mainstream economists had dismissed as crackpots (Friedman 1997, p. 7).
In a popular essay in 1934, Keynes had already ranged himself on the side of these "heretics," the writers "who reject the idea that the existing economic system is, in any significant sense, self-adjusting…. The system is not self-adjusting, and, without purposive direction, it is incapable of translating our actual poverty into our potential plenty" (1973a, pp. 487, 489, 491). The General Theory was intended to provide the analytical framework to justify this position.
Changes in prices, wages, and interest rates, according to Keynes, do not fulfill the function ascribed to them in standard economic theory – tending to generate a full-employment equilibrium. The level of wages has no substantial effect on the volume of employment; the interest rate does not serve to equilibrate saving and investment; aggregate demand is normally insufficient to produce full employment; and so on. The false assumptions, conceptual incoherencies, and non sequiturs that vitiate these extravagant claims have been frequently exposed (for example, in Hazlitt 1959,  1995; Rothbard 1962, p. 2;: passim; Reisman 1998, pp. 862–94). As James Buchanan sums up the issue, "There is simply no evidence to suggest that market economies are inherently unstable" (Buchanan, Wagner, and Burton 1991, p. 109).
In any case, not every system that retains elements of the private-property market order can reasonably be considered liberal. In modern history, there was, famously, a system that included private property and permitted markets to operate in a restricted and limited way. Its overseers insisted, however, on the state's overriding role, without which, they believed, economic life would collapse into anarchy. Economic liberalism arose as a reaction against this system, which is called mercantilism.
Equally crucial to the question at issue are the ways in which Keynes's errors undermined confidence in the free-market order and opened the way for the colossal growth of state power.
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