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Monetary Central Planning and the State, Part 20: Keynesian Economics and the Hubris of the Social Engineer

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In September 1936, John Maynard Keynes prepared a preface for the German translation of The General Theory of Employment, Interest and Money. Addressing himself to a readership of German economists, Keynes hoped that his theory would “meet with less resistance on the part of German readers than from English” because the German economists had long before rejected the teachings of both the classical economists and the more recent Austrian school of economics. And, said Keynes, “If I can contribute a single morsel to the full meal prepared by German economists, particularly adjusted to German conditions, I will be satisfied.”

What were the particular “German conditions” to which Keynes referred?

For more than three years, Germany had been under the rule of Hitler’s National Socialist regime. And in 1936, the Nazis had instituted their own version of four-year central planning.

Towards the end of his preface, Keynes pointed out to his Nazi economist readers:

“The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state, than … under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory. Although I have, after all, worked it out with a view to the conditions prevailing in the Anglo-Saxon countries where a large degree of laissez-faire still prevails, nevertheless it remains applicable to situations in which state management is more pronounced.”

It would be historically inaccurate to accuse Keynes of explicitly being either a Nazi sympathizer or an advocate of Soviet or fascist-type totalitarianism. But Keynes clearly understood that the greater the degree of state control over any economy, the easier it would be for the government to manage the levers of monetary and fiscal policy to manipulate macroeconomic aggregates of “total output,” “total employment,” and “the general price and wage levels” for purposes of moving the overall economy into directions more to the economic policy analyst’s liking.

On what moral or philosophical basis did Keynes believe that policy advocates such as himself had either the right or the ability to manage or direct the economic interactions of multitudes of peoples in the marketplace? Keynes explained his own moral foundations in Two Memoirs, published in 1949, three years after his death. One of them, written in 1938, was on the formation of his “early beliefs” as a young man in his 20s at Cambridge University in the first decade of the 20th century.

He and many of the other young intellectuals at Cambridge had been influenced by the writings of philosopher G.E. Moore. Separate from the actual arguments made by Moore, what is of interest are the conclusions reached by Keynes from reading Moore’s work. Keynes said:

“Indeed, in our opinion, one of the greatest advantages of his [Moore's] religion was that it made morals unnecessary. Nothing mattered except states of mind, our own and other people’s of course, but chiefly our own. These states of mind were not associated with action or achievement or consequences. They consisted of timeless, passionate states of contemplation and communion, largely unattached to ‘before’ and ‘after.’”

In this setting, traditional or established ethical or moral codes of conduct meant nothing. Said Keynes:

“We entirely repudiated a personal liability on us to obey general rules. We claimed the right to judge every individual case on its own merits, and the wisdom, experience and self-control to do so successfully. This was a very important part of our faith, violently and aggressively held. We repudiated entirely customary morals, conventions and traditional wisdoms. We were, that is to say, in the strict sense of the term immoralists. We recognized no moral obligation upon us, no inner sanction to conform or obey. Before heaven we claimed to be our own judge in our own case.”

Keynes declared that he and those like him were “left, from now onwards, to their own sensible devices, pure motives and reliable intuitions of the good.” Now in his mid 50s, Keynes declared in 1938, “Yet so far as I am concerned, it is too late to change. I remain, and always will remain, an immoralist.” As for the social order in which he still claimed the right to act in such unrestrained ways, Keynes said that “civilization was a thin and precarious crust erected by the personality and the will of a very few, and only maintained by rules and conventions skillfully put across and guilely preserved.”

On matters of social and economic policy, two assumptions guided Keynes, and they also dated from his Cambridge years as a student near the beginning of the century; they are stated clearly in a 1904 paper entitled “The Political Doctrines of Edmund Burke”:

“Our power of prediction is so slight, our knowledge of remote consequences so uncertain that it is seldom wise to sacrifice a present benefit for a doubtful advantage in the future. We can never know enough to make the chance worth taking.

“What we ought to do is a matter of circumstances…. While the good is changeless and apart, the ought shifts and fades and grows new shapes and forms.”

Classical liberalism and the economics of the classical economists had been founded on two insights about man and society. First, that there is an invariant quality to human nature that makes him what he is; and if society is to be harmonious, peaceful, and prosperous, men must reform their social institutions in a way that sees to it that the inevitable self-interests of individual men are directed into those avenues of action that benefit not only themselves but others in society as well. They therefore advocated the institutions of private property, voluntary exchange, and open, peaceful competition. Then, as Adam Smith had concisely expressed it, men would live in a system of natural liberty in which each individual would be free to pursue his own ends but would be guided as if by an invisible hand to serve the interests of others in society as the means to his own self-improvement. The second insight was that it is insufficient in any judgment concerning the desirability of a social or economic policy to focus only upon its seemingly short-run benefits. The laws of the market always bring about certain inevitable effects in the long run from any shift in supply and demand or from any intervention by the government in the market order. Thus, as the French economist Frédéric Bastiat had emphasized, it behooves us to always try to determine not merely “what is seen” from a government policy in the short run but also to discern as best we can “what is unseen,” i.e., the longer-run consequences from our actions and policies.

The reason it is desirable to take the less immediate consequences into consideration is that the longer-run effects may not only not improve the ill the policy was meant to cure but instead make the social situation even worse than if it had been merely left alone. Even though the specific details of the future always remain beyond our knowledge to fully predict, one of the uses of economics is to assist us to at least qualitatively anticipate the likely contours and shape of that future with the aid of an understanding of the laws of the market.

Keynes’s assumptions deny the wisdom and the insights of the classical liberals and the classical economists. The biased emphasis is towards the benefits and pleasures of the moment, the short run, with an almost total disregard of the consequences that will only be fully felt tomorrow. It led F.A. Hayek in 1941 to refer to Keynes’s short-run myopia “as a betrayal of the main duty of the economist and a grave menace to our civilization.”

But if every action and policy decision is to be decided in the context of shifting circumstances, as Keynes insisted, on what basis shall decisions be made and by whom? Such decisions are to be made on the basis of the self-centered “state of mind” of the policymakers, with total disregard for traditions, customs, moral codes, rules, or the long-run laws of the market. Its rightness or wrongness was not bound by any independent standard of “achievement and consequence.” Instead it was to be guided by “timeless, passionate states of contemplation and communion, largely unattached to ‘before’ and ‘after.’” The decision-maker’s own “intuitions of the good,” for himself and for others, were to serve as his compass. And let no ordinary man claim to criticize such actions or their results. “Before heaven,” said Keynes, “we claimed to be our own judge in our own case.”

Here was an elitist ideology of nihilism. The members of this elite were self-appointed and shown to belong to this elect precisely through mutual self-congratulations of having broken out of the straightjacket of conformity, custom, and law. For Keynes in his 50s, civilization was a thin, precarious crust overlying the animal spirits and irrationality of ordinary men. Its existence, for whatever it was worth, was the product of “the personality and the will of a very few,” like himself, naturally, and maintained through “rules and conventions skillfully put across and guilely preserved.”

Society’s shape and changing form were to be left in the hands of “the chosen” who stood above the passive conventions of the masses. Here was the hubris of the social engineer, the self-selected philosopher-king, who through manipulative skill and guile directed and experimented on society and its multitudes of individual human residents. It is what made Keynes feel comfortable in recommending his “general theory” to a Nazi readership. His conception of a society maintained by “the personality and the will of a very few,” after all, had its family resemblance to the Fuehrer principle of the unrestrained “one” who would command the Volk.

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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).