Friday, August 16, 2013

John Maynard Keynes: Where's The Genius?! (Part 1)

By Ilana Mercer

The following is the first part of my conversation with Benn Steil. Dr. Steil is senior fellow and director of international economics at the Council on Foreign Relations. His latest book is “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order.”

ILANA MERCER: Congratulations on a beautifully written book, so carefully researched, with both archival and secondary material. Followers of the Austrian School of economics, as I believe we both are, have a reflexive disdain for John Maynard Keynes. Nevertheless, the portrait you drew of him was powerful and persuasive. For example, it is easy to sympathize with Keynes’ frustration with the American mind—so prosaic and anti-intellectual—during the critical Bretton-Woods negotiations. There is much to admire too about Keynes’ “unrelenting nationalism.” I had never before thought of Keynes as an English patriot, first. You, a Hayekian thinker, managed to humanize J. M. Keynes. How did that happen?

BENN STEIL:Thanks Ilana. I’m a great admirer of Hayek’s writing, as you know, but I’ve never been one to wear the Austrian (or any other) label. More importantly, “The Battle of Bretton Woods” is in large measure a parallel biography of Keynes and Harry Dexter White, and no biographer succeeds in engaging readers of any stripe without empathy towards his subjects. In the case of Keynes, I may not sympathize with his economics in the way that his greatest biographer, Robert Skidelsky, does, but I found it not in the least bit difficult to admire him as a gifted public intellectual and to warm to him as a human being, with all his obvious flaws and foibles. One aspect of Keynes that I tried to bring out is how fundamental his English upbringing and nationalism were to shaping both his economic and political thinking. He was a defective diplomat, no doubt, but he took to the role with ease and enthusiasm.

MERCER: My mistake. You were awarded the 2010 Hayek Book Prize, so I presumed you favored Austrian economics. But back to Keynes. As you reveal, he “never bothered with a [doctorate]; he hadn’t even a degree in economics,” and “he formally studied economics for a brief period” only. (page 61) His election to “a life fellowship at Kings College, Cambridge, at twenty-six” seemed to rely on familial membership in Britain’s intellectual peerage. Yet, as you contend, he amalgamated the qualities of “mathematician, historian, statesman, philosopher” “with a genius that no economist has ever matched.” (page 62) Guide the perplexed, please.

It’s important to understand that in Keynes’s day, and particularly in the “Oxbridge” environment in which he was schooled, it was not abnormal to become an economics “don” without a PhD. Also, there was and still is a powerful element of “nature over nurture” in Oxbridge thinking about a person’s capacity, and the combination of Keynes’s natural polymorphic intelligence and lineage (his father was a Cambridge economist) no doubt influenced his tutor and patron, the great economist Alfred Marshall. Hayek was critical of what he felt was Keynes’s lack of knowledge of important elements of classical economics, which was – in Hayek’s view – partly due to the fact that Keynes did not read German, which was still an important language for economics theorizing in the late 19th century.

MERCER: By extension, I didn’t see in “The Battle of Bretton Woods” evidence for Keynes’ asserted brilliance. Clearly, John Maynard Keynes possessed an “effortless facility with words.” There were, moreover, a few wonderfully enjoyable quips that showed Keynes to be likeably bourgeoisie. Those of us on the Old Right can identify with what you call Keynes’ “Burkean conservatism.” Namely, his view that “society should never be forced to bend itself to abstract economic principles.” But public works, economic protectionism, cheap money, “deficit-financed government spending,” and “the animal spirits of the spendthrift in the service of boosting “consumption demand”: Where’s the genius in these? Doesn’t Keynesianism simply appeal to the worst in human nature?

Keynes, I should emphasize, was not a redistributionist. He wrote, for example, that “the immense accumulations of fixed capital which, to the great benefits of mankind, were built up during the half century before the [first world] war, could never have come about in a Society where wealth was divided equally.” Keynes’s aim was to save capitalism, which we must understand was under great intellectual assault after WWI and the Russian revolution, and particularly during the Great Depression.

MERCER: Twice do you compare Keynes to Albert Einstein, writing that Keynes had “assaulted the intellectual orthodoxy of the economics profession the way Einstein had done with physics two decades earlier.” (pages 3, 89) However, for good or ill, Einstein unearthed laws of nature. Keynes’ theories perverted the natural laws of economics, did they not?

I argue in the book that Keynes was transparently mimicking Einstein, whom he greatly admired, in titling his opus magnum “The General Theory” (of Employment, Interest and Money) – as in “The General Theory” of Relativity. Here’s the crux of the problem you touch on (somewhat brutally, in your second batch of questions) – Einstein’s induced laws of physics were falsifiable, whereas Keynes’s laws of economics were not. This is why economists can argue with such passion about the same phenomena decade after decade without the matters ever getting “settled.” I explain in my book economist Jacques Rueff’s critique of Keynes’s critical concept of “liquidity preference,” which underlies the whole intellectual structure of “The General Theory” as a universal theory. It matters who is right – if Keynes is right, then a depression can literally go on forever unless government steps in to substitute for fallen aggregate demand, whereas if Rueff is right, and depressions are manifestations of remediable policy failures (say, inappropriate monetary policy) or institutional blockages, then massive Keynesian fiscal interventions will cause new problems.

MERCER: You omitted another option derived deductively: the Austrian Business Cycle theory of Mises and Hayek, which is most assuredly correct. In any event, let us return to the character of Keynes. In your book you remark that, “What is striking is that Keynes did not support his position with economic theory. It was purely a matter of political viability.” (page 83) In 1917, British Prime Minister David Lloyd George captured the essence of Maynard’s “mercurial” mind, referring to him as an impulsive man who “dashed at conclusions with acrobatic ease,” and “rushed into opposite conclusions with the same agility.” (page 70) Again: Where’s the genius?

Well, regarding the first quote you do cut out the middle of the sentence, which said “at this point in time.” The context was 1931, when, as I explain, Keynes’s stimulus ideas were a political nonstarter. So he publicly backed import tariffs as, what he considered, a second-best policy alternative to revive the British economy in the face of internationally uncompetitive but sticky wages. Keynes, as a scholar, pundit, and government adviser, did dash back and forth during his career between positions he believed were fundamentally right and those he believed were better than the most likely alternative policy stance. As for Lloyd George’s comments, they are spot on. Despite fundamental shifts and reversals through time in Keynes’s thinking on matters such as the virtues of free trade and price and currency stability, his writing sustained one supreme constant: biting disdain toward those who remained wedded to either old heresies, as he saw them, or old orthodoxies. If consistency were a mark of genius, then Keynes was surely not one. But he was right about much in his career – important stuff, like deriving the grave economic and political consequences of British war debts, or of the Versailles treaty – and, when he was wrong, he was typically wrong with sparkling flair.

Visit Economic Policy Journal next week for the conclusion of the Steil-Mercer conversation about Keynes.

ILANA Mercer is a classical liberal writer, based in the United States. She pens WND's longest-standing paleolibertarian column.  ILANA is a fellow at the Jerusalem Institute for Market Studies. She is the author of "Into the Cannibal's Pot: Lessons For America From Post-Apartheid South Africa."  ILANA's website is . She blogs at

Copyright 2013 Ilana Mercer


  1. It sounds like Hayek in 1977:

    Mr. Buckley: Well, how would you account for the almost unanimous opinion of liberal Democrats that in order to reduce unemployment it is necessary for the government to pursue vast spending projects? Since you speak of this as being almost manifestly ill-advised, the question arises why such superstitions should survive?

    Mr. Hayek: Well, it’s almost entirely the work of one man – in a way a genius, Lord Keynes – who is much more concerned about influencing current policies than about advancing the right sort of theories and he was operating then in a very peculiar situation. Now in Great Britain, a successful attempt was made after World War I – which brought a good deal of inflation – to bring prices down to the pre-war level. Prices came down but wages did not, so you had in the 1920s a position in Great Britain where wages were internationally too high and Britain had become noncompetitive on the world market. The problem in Great Britain was to make Britain competitive again and it was clear that this required a reduction of real wages. Notice these real wages had been artificially increased by increasing the value of the pound. So because the pound was par to its former level, people receiving the same wartime salary and wages, or inflated wages, could buy much more. Wages had not come down.

    Now, his first argument was wages must come down. Then he found that was politically impossible, so he must find another way. Instead of getting money wages down, we must depreciate the pound so that given money wages should correspond to a lower level of real wages and then by a curious intellectual somersault I would almost say he led himself to believe that even bringing down money wages was not of any use. It involves a complex economic argument and all he concluded was that – well, we must inflate, in short.

    Now notice several things. Keynes was a genius, but a genius who spent only a fraction of his time on economics – one of the busiest men I ever knew. But he knew very little economics except particularly the Cambridge tradition, and he was much more concerned to influence policy at a particular moment than develop a true theory. In fact, the last time I talked to him was after the war. I knew him very well. When I asked him wasn’t he getting alarmed about what his pupils who swallowed all this theory were doing after the war when the danger was clearly inflation, his answer was:

    “Oh, don’t mind. My theory was frightfully important in the 1930s. Then, we needed an expansion to correct a situation. Do trust me. If this theory becomes dangerous, I’m going to turn public opinion around like this”.

    Six month later, he was dead. And as usual, what happened is that the very doctrine – pupils of this man did apply to completely different situation a theory which was designed to influence policy in a particular situation. The only thing I blamed Keynes for is to making his theory more attractive and effective, he called it THE general theory. In fact, he knew precisely that it was not a general theory, but it was an argument to persuade government in the 1930s to do particular things.

    Mr. Buckley: It was an ad hoc?

    Mr. Hayek: It was entirely ad hoc. He was one of the most fascinating men I knew, but the personal magnetism of this man not only persuaded the younger generation of economists. And if I had been a much younger man and a student, I probably would have been swept off my feet as were most of the people.

    Mr. Buckley: Like Nixon.

    Mr. Hayek: No, no. (laughter).

    1. BENN STEIL: "...I’ve never been one to wear the Austrian (or any other) label."

      Guys like that give me ...concern (for lack of a better word). There are many like him. Are they 'fence straddlers' waiting to come down when opportunity gives them an advantage? Or, ???

      The people in positions of 'thought' give me pause, more-so than the little guy on the street. But they are one and the same.

      I often think of pop singer Ricky Martin when I encounter positions such as this, i.e. when Ben Steil said he didn't wear labels, a.k.a. follow politics.

      I laughed.

      Everyone follows politics in their lives, it's how they live life that shows what their politics are.

      Ben Steil is like Ricky Martin. Only I don't know how Ben Steil lives his life. Or manages his money. I suppose how Ben Steil manages his money would determine what economic persuasion he follows more than his own words do.

      That's just my perspective.

      Does Ben Steil own bonds or gold, or what? That's a 'tell' he can't hide. Imho.

      - IndividualAudienceMember

  2. Terrific interview, more Ilana is better!