So, what is wrong with Keynesianism?

Recently, someone left a comment on a post here along the lines of: “What’s your problem with Keynes?” One of the replies mentioned Hazlitt’s The Failure of the New Economics which is a critique of Keynes’s General Theory.

As that very book had been gathering dust on my bookshelves for a number of years I thought it was about time I actually read it.  So, I did.

And, what did I learn?  Sadly, not much.  I learnt that Hazlitt writes well but I knew that already. Economics in One Lesson is a masterpiece.  And he is on form here too.  His put downs of Keynes are tremendous fun:

I have been unable to find in it a single important doctrine that is both true and original.  What is original in the book is not true; and what is true is not original. (p6)

So I have found in Keynes’s General Theory an incredible number of fallacies, inconsistencies, vaguenesses, shifting definitions and usages of words, and plain errors of fact. (p7)

One reason Keynes’s thought is so often difficult to follow…, is that he writes so badly…. And one reason he writes so badly… is that he is constantly introducing technical terms that are not only unnecessary but inappropriate and misleading. (p16)

One begins to suspect that Keynes’ reputation, like Shaw’s, rests in large part on sheer impudence. (p346)

Keynes’s trick in this chapter is to mix plausible statements with implausible statements (p173)

The theory embodied in this paragraph is that the public is irrational, that it can be easily gulled, and that the object of government is to be the chief party to the swindle. (p245)

And so on.

But I was left with a problem.  Hazlitt’s criticisms may be witty and elegant but are they true?  I didn’t have the time to go through the whole of Keynes’s General Theory to check but I could at least have a stab at one chapter and see if it Hazlitt’s criticisms stand up.  Does Keynes say what Hazlitt says he says?  And is Hazlitt’s analysis correct?  I took as the sample chapter the one on the Multiplier.

Sadly, this experiment didn’t work.  Keynes is so opaque – even arch-Keynesian Paul Krugman admits it’s “tough meat” – that, try as I might, I couldn’t understand it. All I can say is that Hazlitt’s description appears to be correct. The idea that there is a causal relationship between current marginal investment and current marginal incomes appears to be absurd. To say that this relationship can be used to increase incomes seems doubly absurd.

At this point some wise words from Brian Micklethwait kicked in: if you can’t understand it that’s their problem, not yours.  It is up to Keynes (or his supporters) (and for that matter Mises and his) to make me understand what they are on about.  I will make moderate efforts and no more.

Of course, we are assuming that there is such a thing as “Keynesianism” to understand.  One of Hazlitt’s complaints is that he is constantly changing his definitions and contradicting himself.  I, myself, am aware that having described gold as a “barbarous relic”, Keynes went on to support its being part of the monetary system, before condemning it in the General theory and then supporting it again as part of Bretton Woods.

Now, people do change their minds over time.  I am sure there are differences in Mises’s thinking between The Theory of Money and Credit and Human Action but I suspect they are not that great – certainly nothing like as great as Keynes’s.

Still, I feel obliged to give Keynes one last chance.  If the theory can’t help us what about the practice?   I grew up in Britain at a time when Keynesian policies were being practised red in tooth and claw.  They didn’t work.  On two occasions – the early 1980s and the early 1990s – semi-Austrian policies were followed.  They did work.  I am not aware of any time or any place where Keynesian policies have worked and I am not aware of any time or any place where freedom (to give Austrianism its real name) – even in a watered-down form – did not.

As an aside I’ll allow Paul Krugman to have the final word.  This is what he had to say in an introduction to the General Theory in 2006:

One can identify a number of occasions, most notably Japan in the 1990s, where depression-like conditions might well have returned without the guidance of Keynesian economics.

Words fail me.

More from Patrick Crozier
Cobden Centre Radio: Douglas Carswell MP on The End of Politics and the Birth of iDemocracy
Are democracy and sound money incompatible?  Many people think they are but...
Read More
13 replies on “So, what is wrong with Keynesianism?”
  1. says: Chris Hulme

    I would have thought that Detlev’s brilliant piece yesterday was all that was needed to debunk keynesianism.

  2. says: Robert Sadler

    Also, Robert Murphy has a ongoing debate with Paul Krugman about Keynesian.

    That said, you don’t need a book by Hazlitt to see why Keynesianism is nonsense – on its face its ridiculous. When your conclusions appear to be absurd its usually because a) they are and b) you have invalid or contradictory premises. In the case of Keynesianism, this is true and it was obvious to me when I was first exposed to these ideas at 19 years old.

    The only reason people believe in this stuff is because state appointed “experts” tell them to. Anyone brave enough to rely on their own critical reasoning skills will see through the chicanery with ease.

  3. Keynes’s style of writing is ridiculously convoluted. Even Keynsians accept that, I think.

    That apart, Patrick Crozier’s article does not tell us what is wrong with the central idea of Keynsianism, namely that in a recession, government / central bank need to boost demand to compensate for the lack of demand coming from the private sector.

    1. Concisely put, the Central Bank/Govt (same thing) boost demand for goods/services people already decided they dont want/need/cant afford. To loan them money to undo this means over consumption i.e. obesity/too big a house & mortgage/garage full of junk/no money in bank account and then holding out of hand to Central/Govt to repeat the vicious cycle whilst latter makes billions/millions.

  4. Come to think of it, it doesn’t really matter. The point is that recessions are not caused by a lack of demand. They are caused by people making the wrong things (i.e. destroying wealth). We know they are because enterprises make losses and sometimes go bust. Recessions end when people start making the right things. All that money printing does is keep people making the wrong things. All that state spending does is encourage people to make even wronger things.

  5. says: Paul Marks

    The idea that more government spending (funded by creating more money from NOTHING) is absurd. If someone can not see it is absurd – they are not worth talking to. They basically believe in “hair of the dog” economics – a credit money bubble caused the boom-bust, so we should deal with it with another credit-money bubble……

    It is like Lou Dobbs (I just heard) “the American economy is going to come back this year”.


    “Because the housing market is comming back” – i.e. treating a Federal Reserve created “effective demand” bubble as if was a GOOD THING.

    As for Krugman – how does he explain 1921, a massive bust (the bursting of the World War credit money bubble), the government responded to the crash by CUTTING governemnt spending (by some 25%).

    The economy, according to Keynesian ideology, the economy should have crashed further – instead (after the cut in government spending had gone into effect) the economy recovered.

    The Keynesians are not really “empirical” because they ignore such empirical evidence (because it contradicts their big government religion).

    And they DISHONESTLY ask for arguments against Keynesiuan doctrine – when they will not even read works such as “The Failure of the New Economics”, or “The Critics of Keynes” or “Where Keynes Went Wrong”.

    Keynesians are just TROLLS – they pretend they want to debate, but they ignore the evidence and they will not read any work that contradicts their ideology. Therefore Keynesians should be treated with the utter contempt they deserve.

  6. I struggled through the General Theory a few years ago, and wrote up some of my thoughts on it at (“The Algebra of John Maynard Keynes” and “Say’s Law”). I would hesitate to say that there is a “central idea” of Keynesianism, and perhaps even to talk about Keynesianism as if it were a theoretical system. In contrast to Marx, whose economic ideas seem to reflect taking David Ricardo’s analysis with an iron consistency Ricardo never attempted, Keynes seems to have had a consistent set of policy preferences and a bunch of ad hoc theoretical rationalizations for them, coupled with misrepresentations of other economists (his one-line summary of Say’s Law bears no resemblance to what Jean-Baptiste Say actually said).

  7. says: Paul Marks

    Yes Mr Stoddard.

    Keynes deliberatly mistates Say’s law and then “refutes” his own mis-statement.

    By the way – Keynes is not (as is sometimes claimed) always a “convoluted” writer, he could write very clearly when he wanted to.

    When he starts getting convoluted it is with the intention to deceive.

  8. Loking at the history of Central banks in America it is easy to see that bakers where purposely mislending/over-investing in order to create wars/instability IN ORDER TO bring about a Central Bank and introduce progressive taxes and ‘public good’ policies when they were regressive and against the interests of everyone but themselves.
    Keynes etc where commissioned to write their nonsense supporting this, whilst media/politicians etc gave it fill support in order to achieve the above. Its all in the economic history with freedom as the yardstick.

  9. says: Paul Marks

    I do not believe that either faction of bankers partly responsible for the creation of the Federal Reserve in 1913 created wars or any other bad thing on purpose.

    But the basic idea they were operating on in their business (that they could lend out more “money” than had ever been really saved) was FUNDEMENALLY unsound.

    The National Banking Acts (back in the 1860s) made it even worse – by forbidding the “discounting” of the credit paper of the big New York “National” banks (by other banks).

    It really was not a plot – it (lending out more “money” than was ever really saved) just does not work – not in the long term (and we are NOT “all dead” in the long term).

    Bankers desperatly try to make the idea work – but the Federal Reserve (and on and on), in the end, make the situation WORSE.

    Of course the bankers could have given up on the whole idea of lending out more “money” than was ever really saved, but that would have been the same as saying “my life was a mistake”.

    People are not in the habit of doing that.

    Besides (as Mises was fond of pointing out) government policy (in all nations) has been dominated (for centures) by the desire for “lower interest rates”.

    Governments were not pushed into this policy by evil bankers – on the contrary, they were MORE committed to it than the bankers were themselves.

    Indeed governments were pushing this policy before “banks” (as we now understand the term) even existed.

    And for an obvious reason – they (the govenrments) wanted to borrow money at lower rates of interest than REAL SAVERS would demand for their money.

    As for Lord Keynes.

    Yes ablishtheincometax he did use the bankers…. (NOT the other way round).

    Major Douglas (and other “Monetary Cranks”) would have just printed money and handed it out.

    That is obviously absurd.

    So Keynes supported the deception of making the process (the process of monetary expansion) so complicated that most people could not understand it.

    If they could not understand it, most people might not be able to see that there was something wrong (just print money and “throw it from helecopters” and anyone, bar an “intellectual”, will be able to see that the policy is insane).

    Keynes was able to count on some (not all) bankers supporting his policy – because they would profit from it (at least at first……).

    But Lord Keynes the hireling of the bankers?


    The boot was very much on the other foot.

    Cambridge University “Apostles Club” collectivists do not tend to have very nice opinions about “capitalists” (including bankers).

    But some bankers (now as well as then) tend to be short sighted – and tend to follow anyone who offers them money.

    Not understanding that the trail of food leads (in the end) to the Slaughter House.


    Those bankers who supported Barack Obama to be President of the United States were not just greedy (although they were greedy) they were also “clever fools” – very intelligent, but also very UNWISE.

    They have doomed themselves – and their families.

  10. says: Peter Small

    As I pointed out in my response to the post ” A conversation with John Llewellyn” on January 10th 2013, very few economists seem to understand Keynes’ conceptual framework.
    He specifically describes this at the beginning of chapter 3.

    This is what he writes:

    “Now if for a given value of N the expected proceeds are greater than the aggregate supply price, i.e. if D is greater than Z, there will be an incentive to entrepreneurs to increase employment beyond N and, if necessary, to raise costs by competing with one another for the factors of production, up to the value of N for which Z has become equal to D. Thus the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function; for it is at this point that the entrepreneurs’ expectation of profits will be maximised. The value of D at the point of the aggregate demand function, where it is intersected by the aggregate supply function, will be called the effective demand…

    …this is the substance of the General Theory of Employment”

    Although written in a highly technical language, this is a brilliantly simple concept with which it is possible to look at the problems in the economy from a new and edifying aspect.

    A translation ( into everyday language) of this technical explanation of Keynes’ conceptual framework can be found on my web site at:

    Understanding his underlying paradigm, throws a completely different light on much of his statements. It allows his view of entrepreneurial activity to be viewed in the context of game theory.

Comments are closed.