Is Keynes Misunderstood, Maligned By Critics?

In a September 11 Bloomberg article, economist Noah Smith claims that John Maynard Keynes, the architect of today’s government economic policies around the world, wasn’t a “socialist” or even a “progressive.” He did not favor “a command economy.”

Yes, he “was in favor of some amount of wealth redistribution and government intervention into the economy.” But “Keynesian policies are fundamentally… about economic stability… about smoothing out the fluctuations in the economy, reducing risk for everyone concerned.”

“Stabilization theory says that you can smooth out the wrinkles of the business cycle without messing with the deep structure of how the economy works. The expectation is that if the government does just that — just that one small, minor intervention — then recessions won’t be a big problem…” To accomplish this, among other things, the government will raise interest rates when the economy is too hot and lower them when it is too cool.

So who is misrepresenting Keynes? His critics or Smith? In the first place, Keynes himself did not recommend raising interest rates to cool off an economy. He wrote that “The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last.” [General Theory p. 322]. He even recommended eventually bringing interest rates down to zero and keeping them there [General Theory, pges 220-21 and 336].

Nor are Keynesian attempts to stabilize the economy through interest rates a “small, minor intervention.” They represent a price control of one of the economy’s biggest prices, the cost of credit. Today they are also accompanied by many other managed prices–most notably in world currency markets, but also in large domestic markets such as healthcare.

A market economy depends above all on free prices. All the Keynesian price controls, manipulations, and nudges just lead to boom, bust, and economic destruction, the opposite of stabilization.

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Hunter Lewis is co-founder of againstcronycapitalism.org, co-founder and former CEO of Cambridge Associates, a global investment firm, and author of nine books on economics and related subjects.