The Rothbard Reader

In The General Theory, Keynes set forth a unique politico-economic sociology, dividing the population of each country into several rigidly separated economic classes, each with its own behavioral laws and characteristics, each carrying its own implicit moral evaluation. First, there is the mass of consumers: dumb, robotic, their behavior fixed and totally determined by external forces. In Keynes’s assertion, the main force is a rigid proportion of their total income, namely, their determined “consumption function.”

Second, there is a subset of consumers, an eternal problem for mankind: the insufferably bourgeois savers, those who practice the solid puritan virtues of thrift and farsightedness, those whom Keynes, the would-be aristocrat, despised all of his life. All previous economists, certainly including Keynes’s forbears Smith, Ricardo, and Marshall, had lauded thrifty savers as building up long-term capital and therefore as responsible for enormous long-term improvements in consumers’ standard of living. But Keynes, in a feat of prestidigitation, severed the evident link between savings and investment, claiming instead that the two are unrelated.

In fact, he wrote, savings are a drag on the system; they “leak out” of the spending stream, thereby causing recession and unemployment. Hence Keynes, like Mandeville in the early eighteenth century, was able to condemn thrift and savings; he had finally gotten his revenge on the bourgeoisie.

By also severing interest returns from the price of time or from the real economy and by making it only a monetary phenomenon, Keynes was able to advocate, as a linchpin of his basic political program, the “euthanasia of the rentier” class: that is, the state’s expanding the quantity of money enough so as to drive down the rate of interest to zero, thereby at last wiping out the hated creditors. It should be noted that Keynes did not want to wipe out investment: on the contrary, he maintained that savings and investment were separate phenomena. Thus, he could advocate driving down the rate of the interest to zero as a means of maximizing investment while minimizing (if not eradicating) savings.

Since he claimed that interest was purely a monetary phenomenon, Keynes could then also sever the existence of an interest rate from the scarcity of capital. Indeed, he believed that capital is not really scarce at all. Thus, Keynes stated that his preferred society “would mean the euthanasia of the rentier, and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.”

But capital is not really scarce: “Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.” Therefore, “we might aim in practice … at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor [the rentier] will no longer receive a bonus.” Keynes made it clear that he looked forward to a gradual annihilation of the “functionless” rentier, rather than to any sort of sudden upheaval.1

Keynes then came to the third economic class, to whom he was somewhat better disposed: the investors. In contrast to the passive and robotic consumers, investors are not determined by an external mathematical function. On the contrary, they are brimful of free will and active dynamism. They are also not an evil drag on the economic machinery, as are the savers. They are important contributors to everyone’s welfare.

But, alas, there is a hitch. Even though dynamic and full of free will, investors are erratic creatures of their own moods and whims. They are, in short, productive but irrational. They are driven by psychological moods and “animal spirits.” When investors are feeling their oats and their animal spirits are high, they invest heavily, but too much; overly optimistic, they spend too much and bring about inflation. But Keynes, especially in The General Theory, was not really interested in inflation; he was concerned about unemployment and recession, caused, in his starkly superficial view, by pessimistic moods, loss of animal spirits, and hence underinvestment.

The capitalist system is, accordingly, in a state of inherent macroinstability. Perhaps the market economy does well enough on the micro-, supply-and-demand level. But in the macro world, it is afloat with no rudder; there is no internal mechanism to keep its aggregate spending from being either too low or too high, hence causing recession and unemployment or inflation.

Interestingly enough, Keynes came to this interpretation of the business cycle as a good Marshallian. Ricardo and his followers of the Currency school correctly believed that business cycles are generated by expansions and contractions of bank credit and the money supply, as generated by a central bank, whereas their opponents in the Banking school believed that expansions of bank money and credit were merely passive effects of booms and busts and that the real cause of business cycles was fluctuation in business speculation and expectations of profit—an explanation very close to Pigou’s later theory of psychological mood swings and to Keynes’s focus on animal spirits.

John Stuart Mill had been a faithful Ricardian except in this one crucial area. Following his father, Mill had adopted the Banking school’s causal theory of business cycles, which was then adopted by Marshall.2

To develop a way out, Keynes presented a fourth class of society. Unlike the robotic and ignorant consumers, this group is described as full of free will, activism, and knowledge of economic affairs. And unlike the hapless investors, they are not irrational folk, subject to mood swings and animal spirits; on the contrary, they are supremely rational as well as knowledgeable, able to plan best for society in the present as well as in the future.

This class, this deus ex machina external to the market, is of course the state apparatus, as headed by its natural ruling elite and guided by the modern, scientific version of Platonic philosopher kings. In short, government leaders, guided firmly and wisely by Keynesian economists and social scientists (naturally headed by the great man himself), would save the day. In the politics and sociology of The General Theory, all the threads of Keynes’s life and thought are neatly tied up.

And so the state, led by its Keynesian mentors, is to run the economy, to control the consumers by adjusting taxes and lowering the rate of interest toward zero, and, in particular, to engage in “a somewhat comprehensive socialisation of investment.” Keynes contended that this would not mean total state Socialism, pointing out that

it is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary.3

Yes, let the state control investment completely, its amount and rate of return in addition to the rate of interest; then Keynes would allow private individuals to retain formal ownership so that, within the overall matrix of state control and dominion, they could still retain “a wide field for the exercise of private initiative and responsibility.” As Hazlitt puts it,

Investment is a key decision in the operation of any economic system. And government investment is a form of socialism. Only confusion of thought, or deliberate duplicity, would deny this. For socialism, as any dictionary would tell the Keynesians, means the ownership and control of the means of production by government. Under the system proposed by Keynes, the government would control all investment in the means of production and would own the part it had itself directly invested. It is at best mere muddleheadedness, therefore, to present the Keynesian nostrums as a free enterprise or “individualistic” alternative to socialism.4

There was a system that had become prominent and fashionable in Europe during the 1920s and 1930s that was precisely marked by this desired Keynesian feature: private ownership, subject to comprehensive government control and planning. This was, of course, fascism.

Where did Keynes stand on overt fascism? From the scattered information now available, it should come as no surprise that Keynes was an enthusiastic advocate of the “enterprising spirit” of Sir Oswald Mosley, the founder and leader of British fascism, in calling for a comprehensive “national economic plan” in late 1930. By 1933, Virginia Woolf was writing to a close friend that she feared Keynes was in the process of converting her to “a form of fascism.” In the same year, in calling for national self-sufficiency through state control, Keynes opined that “Mussolini, perhaps, is acquiring wisdom teeth.”5 But the most convincing evidence of Keynes’s strong fascist bent was the special foreword he prepared for the German edition of The General Theory. This German translation, published in late 1936, included a special introduction for the benefit of Keynes’s German readers and for the Nazi regime under which it was published. Not surprisingly, Harrod’s idolatrous Life of Keynes makes no mention of this introduction, although it was included two decades later in volume seven of the Collected Writings along with forewords to the Japanese and French editions.

The German introduction, which has scarcely received the benefit of extensive commentary by Keynesian exegetes, includes the following statements by Keynes:

Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire.6

[Reprinted from Dissent on Keynes: A Critical Appraisal of Keynesian Economics, Mark Skousen, ed. (New York: Praeger, 1992), chap. 11; reprinted as Keynes, the Man (Auburn, Ala.: Mises Institute, 2010), pp. 47–52.]

• 1John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936), pp. 375–76, and Henry Hazlitt, The Failure of the “New Economics,” 2nd ed. (New Rochelle, N.Y.: Arlington House, [1959] 1973), pp. 379–84. See also the illuminating article by Andrew Rutten (1989). I am indebted to Dr. Rutten for calling this article to my attention.
• 2Paul Trescott, “J.M. Keynes as a Marshallian: Comment,” Journal of Economic Issues 21 (1987): 452–57.   
• 3Keynes, The General Theory, p. 378.
• 4Hazlitt, Failure of the “New Economics,” p. 388, and Karl Brunner “The Sociopolitical Vision of Keynes,” in The Legacy of Keynes, David A. Reese, ed. (San Francisco: Harper and Row, 1987), pp. 30, 38.
• 5John Maynard Keynes, “Sir Oswald Mosely’s Manifesto,” National and Atheneum 13 (December 1930): 766; and Elizabeth Johnson and Harry G. Johnson, The Shadow of Keynes (Oxford: Basil Blackwell, 1978), p. 22. On the relationship between Keynes and Mosely, see Robert Skidelsky, Oswald Mosely (New York: Holt, Rinehart and Winston, 1975), pp. 241, 305–06; Oswald Mosely, My Life (New Rochelle, N.Y.: Arlington House, 1968), pp. 178, 207, 237–38, 253; Colin Cross, The Fascists in Britain (New York: St. Martin’s Press, 1963), pp. 35–36.   
• 6John Maynard Keynes, The General Theory of Empolyment, Interest and Money. The Collected Writings of John Maynard Keynes (London: Macmillan and Cambridge University Press, 1973), vol. 7, p. xxvi; Hazlitt, Failure of the “New Economics,” p. 277; Brunner, “The Sociopolitical Vision of Keynes,” pp. 38ff.; F.A. Hayek, Studies in Philosophy, Politics and Economics (Chicago: University Chicago Press, 1967), p. 346.