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Monetary Central Planning and the State, Part 15: John Maynard Keynes and the “New Liberalism”

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In 1925, English economist John Maynard Keynes delivered a lecture at Cambridge entitled “Am I a Liberal?” He rejected any thought of considering himself a conservative because conservatism “leads nowhere; it satisfies no ideal; it conforms to no intellectual standard; it is not even safe, or calculated to preserve from spoilers that degree of civilization which we have already attained.”

Keynes then asked whether he should consider joining the Labour Party. He admitted that “superficially that is more attractive” but rejected it as well. “To begin with, it is a class party, and the class is not my class,” Keynes argued. “When it comes to the class struggle as such, my local and personal patriotism, like those of every one else, except certain unpleasant zealous ones, are attached to my own surroundings…. The class war will find me on the side of the educated bourgeoisie.” Furthermore, he doubted the intellectual ability of those controlling the Labour Party, believing that it was dominated by “those who do not know at all what they are talking about.”

This led Keynes to conclude that all things considered, “The Liberal Party is still the best instrument of future progress — if only it has strong leadership and the right programme.” But the Liberal Party of Great Britain could serve a positive role in society only if it gave up “old-fashioned individualism and laissez-faire,” which he considered “the dead-wood of the past.” Instead, what was needed was a “New Liberalism” that would involve “new wisdom for a new age.” What this entailed, in Keynes’s view, was “the transition from economic anarchy to a regime which deliberately aims at controlling and directing economic forces in the interests of social justice and social stability.”

In 1926, Keynes published a lecture entitled “The End of Laissez-Faire,” in which he argued, “It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire.” Nor could it be presumed that private individuals pursuing their enlightened self-interest would always serve the common good.

In a period in which industry was becoming concentrated and controlled by handfuls of industrial managers, Keynes proposed “a return, it may be said, towards mediaeval conceptions of separate [corporate] autonomies.” But instead of these corporate entities’ being left to their own profit-making purposes, Keynes proposed semi-monopolistic structures that would operate under government approval and with government supervision.

In a world of “uncertainty and ignorance” that sometimes resulted in periods of unemployment for members of the work force in society, Keynes suggested “the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution.” It also required the government’s centralized collection of statistics and data about “the business situation” so the government could exercise “directive intelligence through some appropriate organ of action over many of the inner intricacies of private business.” And he believed that “some coordinated act of intelligent judgement” by the government was required to determine the amount of savings in the society; how much of the nation’s savings should be permitted to be invested in foreign markets; and the relative distribution of that domestic savings among “the most nationally productive channels.”

Finally, Keynes argued that government had to undertake a “national policy” concerning the most appropriate size of the country’s population, “and having settled this policy, we must take steps to carry it into operation.” Furthermore, Keynes proposed serious consideration for adopting a policy of eugenics: “The time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members.”

This did not make Keynes a socialist or a communist in any strict sense of these words. Indeed, after a visit to Soviet Russia, he published an essay in 1925 strongly critical of the Bolshevik regime.

“For me, brought up in a free air undarkened by the horrors of religion, with nothing to be afraid of, Red Russia holds too much which is detestable…. I am not ready for a creed which does not care how much it destroys the liberty and security of daily life, which uses deliberately the weapons of persecution, destruction, and international strife. It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here.”

But where Soviet Russia had an advantage over the West, Keynes argued, was in its almost religious revolutionary fervor, in its romanticism of the common working man, and its condemnation of money making. Indeed, the Soviet attempt to stamp out the “money-making mentality” was, in Keynes’s mind, “a tremendous innovation.” Capitalist society too, in Keynes view, had to find a moral foundation above self-interested “love of money.” What Keynes considered Soviet Russia’s superiority over capitalist society, therefore, was its moral high ground in opposition to capitalist individualism. And he also believed that “any piece of useful economic technique” developed in Soviet Russia could easily be grafted onto a Western economy following his model of a New Liberalism “with equal or greater success” compared with that found in the Soviet Union.

By the time Keynes wrote these essays in the mid 1920s, he was already one of the most acclaimed economists in the world. His international notoriety had been established in 1919, when he published his criticism of the Treaty of Versailles, The Economic Consequences of the Peace . In 1924, Keynes published A Tract on Monetary Reform, in which he called for an abandonment of the traditional gold standard and the establishment of a government-managed currency.

The gold standard meant that the value of a country’s money was determined by international market forces to which each country had to conform in terms of appropriate adjustments in its domestic structure of prices and wages. If trade unions were strong and would not conform their wage demands to market conditions, then adherence to a market-guided gold standard could result in unemployment if the money wages that trade unions insisted upon were above what the global market determined those wages should be.

Instead, Keynes advocated abandonment of a fixed exchange rate between gold and the British pound; the foreign exchange value of the British pound should be raised or lowered by the central bank to maintain domestic prices and wages at the politically determined desired level. Or as Keynes expressed it, “When stability of the internal price level and stability of the external exchanges are incompatible, the former is generally preferable.” As far as Keynes was concerned, “There is no escape from a ‘managed’ currency, whether we wish it or not. In truth, the gold standard is already a barbaric relic.”

In 1930, Keynes published a massive two-volume work entitled A Treatise on Money that he hoped would establish his reputation as one of the great economists of the 20th century. But over the next two years, many of the leading economists in Europe and North America wrote reviews of it that demonstrated fundamental flaws in both the assumptions and the logic of his arguments. The most devastating criticisms were made by a young Austrian economist, Friedrich A. Hayek, in a two-part review essay that appeared in 1931-32. (See the review of The Collected Works of F. A. Hayek, Volume 9: Contra Keynes and Cambridge in Freedom Daily, September 1995.) Hayek showed that Keynes understood neither the nature of a market economy in general nor the significance and role of the rate of interest in maintaining a proper balance between savings and investment for economic stability.

With the coming of the Great Depression, Keynes once again rejected the idea of a free-market solution to overcome the rising unemployment and idled industry that began to intensify following the crash of 1929. His own remedy was outlined in two “open letters” that he addressed to Franklin D. Roosevelt in December 1933 and June 1934 as well as in some addresses and speeches he delivered in England evaluating the possibilities and results of the New Deal.

Keynes considered FDR “the trustee for those in every country who seek to mend the evils of our conditions by reasoned experiment within the framework of the existing social system.” FDR was the world leader for whom Keynes was “the most sympathetic in the world.” In Keynes’s view, the New Deal contained two elements: “recovery and reform.” The National Recovery Administration (NRA) represented one of the reform aspects of the New Deal. While considering this a desirable shift in American industrial policy for the long run, Keynes was critical of it as a short-run policy to assist in recovery. First, the forced cartelization of American industry would “upset the confidence of the business world and weaken its existing motives to action before you have had time to put other motives in their place,” and it might “overtask your bureaucratic machine.” Second, by coercively restricting production and pushing up industrial prices and wages by decree it was decreasing the demand for labor and thus doing nothing to stimulate more employment.

Instead, Keynes recommended monetary expansion and federal deficit spending as the avenues for overcoming the mass unemployment of the Great Depression:

“Public authority must … create additional current incomes through the expenditure of borrowed or printed money…. When more purchasing power is spent, one expects rising output at rising prices. Since there cannot be rising output without rising prices, it is essential to insure that the recovery shall not be held back by the insufficiency of the supply of money to support the increased monetary turnover…. The increased stimulation of output by increased aggregate purchasing power is the right way to get prices up. I put in the forefront, for the reasons given above, a large volume of loan expenditure under government auspices. Preference should be given to those which can be made to mature quickly on a large scale. The object is to get the ball rolling. I put in the second place the maintenance of cheap and abundant credit, in particular the reduction of the long-term rate of interest.”

In Keynes’s writings of the 1920s and early 1930s, advocating a “New Liberalism” and a deficit-spending government to “solve” the Great Depression were all the premises for the Keynesian revolution that would be officially inaugurated with the publication of Keynes’s General Theory of Employment, Interest and Money in 1936. And with those ideas, Keynes produced one of the greatest challenges to a free-market economy in the 20th century.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).