This year marks the 90th anniversary of the beginning of modern macroeconomics with the publication of John Maynard Keynes’s The General Theory of Employment, Interest, and Money on February 4, 1936. Few books have left such a mark on economic theory and, most certainly, on economic policy in so short a period of time.Ninety years after the appearance of The General Theory, many practical men of affairs and politicians in authority remain the slaves of defunct economists and academic scribblers.
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After the publication of Adam Smith’s The Wealth of Nations in March 1776, it was not until nearly 50 years later, in the early decades of the 19th century, that his ideas on free trade and free markets in general began to have their full impact on economic thinking and policy matters in Great Britain. But Keynes’s ideas transformed the way economists and policy makers viewed monetary and fiscal policy and the role of government in general all within the 10 years between when Keynes’s book appeared in 1936 and when he died (80 years ago) on April 21, 1946, from a heart attack at the age of 62. Indeed, the direction of global fiscal and monetary policy for the entire post–World War II period has been dominated by the general Keynesian framework or variations of that framework.
Keynesian economics drowned out other ideas
Not long after Keynes died, Paul Samuelson, who became one of the most famous expositors of “the new economics,” referred to The General Theory as “the new gospel” of economics, implying an almost faith-like confidence that the “truth” had been uncovered on how to ensure full employment and economy-wide stability. Samuelson’s own textbook, which was first published in 1948 and went through numerous revised editions over the decades, popularized Keynes’s ideas for several generations of undergraduate economics students. Samuelson’s textbook was the one assigned in the first economics class I took in college in 1968, with hardly a hint that there was any type of economics other than Keynes’s for understanding the causes of and cures for depressions, recessions, and unemployment.
Indeed, my undergraduate economics professors at California State University, Sacramento — all of whom were either textbook Keynesians, Stalinist Marxists, or Veblen-like Institutionalists — rarely ever gave a reference or a good word to any of the market-oriented economists of that “dark age” before Keynes provided the light of hope that enlightened government could reduce the wants and worries of the world through macroeconomic stabilization policies (though my Marxist professors told us that Keynes was really a rear-guard apologist for “capitalism” to stave off its inevitable demise and the inescapable triumph of socialism).
Keynes as critic of the peace treaty and the gold standard
John Maynard Keynes was born on June 5, 1883. His father, John Neville Keynes, was a respected professor of political economy at Cambridge University, and his mother was a one-time mayor of the town of Cambridge. His first major publication, which gained him international notoriety, was The Economic Consequences of the Peace (1919). Keynes worked in the British Treasury Department during the First World War and was a member of the delegation that went to Paris to work out the Treaty of Versailles that formally ended the Allied war with Germany. He was persuaded that the peace terms imposed on Germany were excessively and unjustly harsh and might set the stage for a later war of revenge in which Germany might attempt to throw off the oppressive shackles of defeat.
Before and immediately following the World War I, Keynes was still an advocate of free trade and a (managed) gold standard. But in the 1920s, especially after Great Britain returned to the gold standard in 1925 at the prewar gold parity that required a monetary contraction accompanied by price deflation, he increasingly came to consider gold to be a “barbarous relic” that hindered an appropriate government monetary management to ensure full employment, including manipulation of the British pound’s foreign-exchange rate to better stimulate exports and limit imports.
Keynes’s paternalistic preferences for a new liberalism
In the 1920s and early 1930s, Keynes’s drift in a “leftward” and more political paternalistic direction became increasingly pronounced. In 1925, for instance, he contrasted, with rhetorical flair, a far more regulated wage system to ensure “fairness” between the social “classes” with free-market-established wages, which he portrayed as an “economic juggernaut”:
The truth is that we stand midway between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is “fair” and “reasonable” as between classes. The other theory — the theory of the economic juggernaut — is that wages should be settled by economic pressure, otherwise called “hard facts,” and that our vast machine should crash along, with regard only to the equilibrium as a whole, and without attention to the change in consequences of the journey to individual groups.
In that same year, Keynes delivered a lecture in which he asked, “Am I a Liberal?” He rejected viewing himself as 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.” He also rejected the Labor Party, firstly because “it is a class party, and the class is not my class…. The class war will find me on the side of the educated bourgeoisie.” And secondly, Keynes said the British Labor Party was dominated by “those who do not know at all what they are talking about.”
That left the Liberal Party, if it had “strong leadership and the right program” requiring the end of “old-fashioned individualism and laissez-faire.” Instead there needed to be a “new liberalism” that advocated “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.”
An end to laissez-faire and a move to economic fascism and eugenics
This was followed a year later by Keynes’s famous lecture on “The End of Laissez-faire,” delivered at the University of Berlin in 1926. He insisted, “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 individuals pursuing their own interests in the free market will also harmoniously benefit society as a whole.
Instead, Keynes proposed a “return, it may be said, toward mediaeval conceptions of separate [corporate] autonomies,” or semi-monopolistic structures operating under government approval and oversight. Government also had to organize the necessary centralized statistical data so to exercise “directive intelligence through some appropriate organ of action over many of the inner intricacies of private business.” This included government influence over the amount of savings in the society, with this savings being directed into “the most nationally productive channels.”
It is noteworthy that besides advocating a fascist-like planned economy of government overseeing and channeling and directing private businesses into the avenues those in political authority considered best for the society, Keynes also thought that government needed to take responsibility for determining not only the appropriate size of the national population but the quality of its makeup. That is, 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.”
Around the same time, Keynes travelled to the Soviet Union and wrote an essay highly critical of much that he observed under the communist regime. He said, “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 what he did admire about the communist experiment in Russia was the Soviet attempt to stamp out the “money-making mentality,” which was “a tremendous innovation” over self-interested “love of money.” For all the rest, “any piece of useful economic technique” developed in Soviet Russia could easily be grafted onto a Western economy that followed his model for a “new liberalism” of government paternalism and planning.
Keynes’s General Theory and its critics
Just as the Great Depression was developing following the stock-market crash of October 1929, Keynes published in 1930 a two-volume work, A Treatise on Money. He thought that it would establish his reputation as one of the leading monetary theorists of his time. Instead, over the next two years, review articles and essays by many of the leading economists of that time offered a wide variety of criticism that challenged the assumptions, the logic, and the practical realism of Keynes’s analysis and policy suggestions. But the coup de grâce was delivered by a young Austrian economist, Friedrich A. Hayek, who penned a lengthy two-part review essay in the pages of Economica that critically evaluated almost every aspect of Keynes’s analysis.
Keynes had to retreat to Cambridge and rethink his entire approach, the end result of which was his new book, The General Theory of Employment, Interest, and Money, which ended up making him the most influential economist for the remainder of the 20th century. Indeed, nearly 20 years after his death, Keynes appeared on the cover of Time magazine (December 31, 1965), which highlighted, “The Keynesian Influence on the Expansionist Economy.”
This was not a forgone conclusion in 1936. Over the next two or three years following the publication of The General Theory, again there appeared articles and review essays by many of the leading economists of that time who, once more, made insightful and penetrating criticisms of many aspects of Keynes’s analysis and policy prescriptions. If one adds up the criticisms by such notable economists as Frank Knight, Jacob Viner, Arthur C. Pigou, Dennis Robertson, Wassily Leontief, Gustav Cassel, Joseph A. Schumpeter, Gottfried Haberler, and others, there was little left standing of the fundamental premises and presumptions in Keynes’s framework.
Indeed, Alvin Hansen, who later became one of the leading American proselytizers for Keynesian economics at Harvard University, said in his October 1936 review in the Journal of Political Economy, “The book under review is not a landmark in the sense that it lays a foundation for a ‘new economics’…. The book is more a symptom of economic trends than a foundation stone upon which a science can be built.”
Keynes’s caricatures and rhetorical tricks
Arthur C. Pigou, the noted Cambridge University economist colleague of Keynes’s, in his review in Economica (May 1936), ridiculed Keynes’s way of lumping all theoretical opponents together and accusing all of some error or mistake found in any one of them. “The group of persons whom, on this occasion, he parades as a foil, are the ‘classical economists’…. The device of lumping all these persons together is an ingenious one; for it enables the shortcoming of one to be attributed to all…. Moreover, when one of the arraigned persons has palpably not made a particular mistake, the method of lumping enables Mr. Keynes to say that he ought to have made it, and that, in not making it, he has been false to the ‘logic’ of his own school…. Finally, this device has, for anyone adopting it, the great advantage that it renders any complete reply impossible. When a man goes on a sniping expedition in a large village, nobody will have the patience to track down the course of his every bullet.”
Much harsher and more polemical was University of Chicago economist Henry Simons, who said, “The author attacks, not the bad applications of traditional [economic] theory, but the theory itself — with results which will impress only the incompetent…. Attempting mischievous and salutary irritation of his peers, he may only succeed in becoming the academic idol of our worst cranks and charlatans — not to mention the possibilities of the book as the economic bible of a fascist movement.”
William H. Hutt inserted a short appendix to a chapter of his book Economists and the Public (1936) shortly before its publication in which he said, “Mr. Keynes’s attitude towards the Classical [pre-Keynesian] tradition … may easily prove to be the source of the most serious single blow that the authority of orthodox economics has yet suffered…. He may be an inspired missionary who is to rescue us from idolatry. But he may be a false prophet who can lead us to damnation.”
But perhaps the most hostile review was by Joseph A. Schumpeter in the pages of Journal of the American Statistical Association (December 1936), which concluded with this condemnation of Keynes’s rationales for unending government deficit spending:
The less said about the last book the better. Let him who accepts the message there expounded rewrite the history of the French ancien regime in some terms as these: Louis XV was a most enlightened monarch. Feeling the necessity of stimulating expenditure he secured the services of such expert spenders as Madame de Pompadour and Madame du Barry. They went to work with unsurpassable efficiency. Full employment, a maximum of resulting output, and general well-being ought to have been the consequence. It is true that instead we find misery, shame and, at the end of it all, a stream of blood. But that was a chance coincidence.
Yet, in one of the most interesting instances in the history of the sociology of ideas, in just a handful of years, Keynes’s “new economists” swept the economics profession. Indeed, in the 1990s, one historian of economic ideas referred to it as the “Keynesian avalanche” that swept away all the alternative and competing sets of ideas and schools of thought that were prominent and influential in the interwar years of the 1920s and 1930s. Keynes was the master of the lucid imagery, the sarcastic phrase, the contemptuous presumption. As economist Leland Yeager observed at the time of the fiftieth anniversary of the appearance of The General Theory in 1986, “Keynes saw and provided what would gain attention — harsh polemics, sardonic passages, bits of esoteric and shocking doctrine.”
Keynes’s peculiar presumptions about investors and workers
Keynes built up his case for government intervention by arguing that a market economy cannot be trusted to maintain or restore full employment and output once a major economic downturn had set in. The instabilities of “capitalism” were embedded in investment and financial markets due to what he referred to as “animal spirits.” Investors were susceptible to irrational and unpredictable waves of optimism and pessimism that generated unexpected waves in investment spending leading to fluctuations in economy-wide output and employment.
The future is uncertain, he said, and that uncertainty brings about the psychological erratic changes in investment demand and its effects on the overall economy. It was as if decades of economic analysis of monetary causes behind the business cycle barely existed, or that the very role of the entrepreneur in changing and uncertain markets is to adapt and adjust supplies and investments to shifts in demands to restore market balance was quickly forgotten.
Besides, once an economic downturn had set in, with discovered imbalances between supplies and demands, and between savings and investment, is it not the role of a competitive market price system to assist in bringing about the required rebalancing and recoordination through appropriate changes in the structure of relative prices and wages?
Money illusion and downwardly rigid wages
In Keynes’s hands, this became difficult, if not impossible. Why? Because workers, he asserted, suffer from “money illusion.” Workers focus on their money wages and far less on their real wages. That is, even if in an economic downturn the prices of goods and services were to generally decrease by, say, 10 percent, while at the same time a 10 percent cut in their money wages might keep workers employed with no loss in terms of the real purchasing power of their lower money wages, they would still rather be unemployed than take such a cut in their money wages. So there could be persistent economy-wide unemployment due to downwardly rigid money wages in the face of generally falling prices for final goods and services.
It would be far easier, Keynes said, to reduce the real cost of maintaining or reemploying members of the labor force at the prevailing level of money wages by bringing about a price inflation that reduced workers’ real wages. Or as Keynes expressed it in The General Theory: “A movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices.”
This assumed, of course, that in fact workers would not pay attention to the value of what their money incomes can buy in the marketplace and would passively acquiesce in diminished standards of living without insisting upon higher money wages to compensate for the falling purchasing power of their money earnings. This theory was challenged already by Jacob Viner in his review of The General Theory in the Quarterly Journal of Economics (November 1936):
Keynes’s reasoning points obviously to the superiority of inflationary remedies for unemployment over money-wage reductions. In a world organized in accordance with Keynes’s specifications there would be a constant race between the printing press and the business agents of the trade unions, with the problem of unemployment largely solved if the printing press could maintain a constant lead and if only the volume of employment, irrespective of quality, is considered important.
But no doubt, the fundamental flaw in Keynes’s entire approach was his focus on macroeconomic aggregates — aggregate demand and aggregate supply for the economy as a whole to derive total output and total employment at any given general “level” of prices and wages. Hayek had already criticized this aspect of Keynes’s approach when in his review of the Treatise of Money he said, “Mr. Keynes’s aggregates conceal the most fundamental mechanisms of change.”
As Austrian economist Hans Mayer argued in his critical essay “Keynes’s ‘New Foundation’ for Economic Theory” (1952), this resulted from Keynes’s “uncritical use of ‘global (macroeconomic) concepts’ which, because they combine dissimilar and therefore non-summable elements into a total sum cannot be meaningfully applied.”
Rather than attempting to understand how economy-wide fluctuations in output and employment might arise from distortions and imbalances between supplies and demands at the microeconomic level created by misplaced monetary policy, Mayer said that Keynes, instead, offered “a theoretical structure that attempts to build not from the bottom up, from a [microeconomic] foundation, but from the top down, from secondary [macroeconomic] phenomena.”
Keynes’s short-run policies versus the principles of a free society
All of Keynes’s arguments ran counter to much of the generally accepted economic wisdom of a free society as understood before the Keynesian Revolution. What Keynes succeeded in doing was providing a rationale for what governments always like to do: spend money and pander to special interests. In the process, Keynes helped undermine what had been three of the essential institutional ingredients of a free-market economy: the gold standard, balanced government budgets, and open competitive markets. In their place, Keynes’s legacy has given us paper-money inflation, government deficit spending, and more political intervention throughout the market.
It would, of course, be an exaggeration to claim that without Keynes and the Keynesian Revolution inflation, deficit spending, and interventionism would not have occurred. For decades before the appearance of Keynes’s book, the political and ideological climate had been shifting toward ever-greater government involvement in social and economic affairs, due to the growing influence of collectivist ideas among intellectuals and policy makers. But before the appearance of The General Theory, many of the advocates of such collectivist policies had to get around the main body of economic thinking, which still argued that in general, the best course was for government to keep its hands off the market, maintain a stable currency backed by gold, and restrain its own taxing and spending policies.
The classical economists of the eighteenth and nineteenth centuries had persuasively demonstrated that government intervention prevented the smooth functioning of the market. They constructed a body of economic theory that clearly showed that governments have neither the knowledge nor the ability to direct economic affairs. Freedom and prosperity are best ensured when government is generally limited to protecting people’s lives and property, with the competitive forces of supply and demand bringing about the necessary incentives and coordination of people’s activities.
During the Napoleonic wars of the early 19th century, many European countries experienced serious inflations as governments resorted to the printing press to fund their war expenditures. The lesson the classical economists learned was that the government’s hand had to be removed from the handle of that printing press if monetary stability was to be maintained. The best way of doing this was to link a nation’s currency to a commodity like gold, require banks to redeem their notes for gold on demand at a fixed rate of exchange, and limit any increases in the amount of such bank notes in circulation to additional deposits of gold left in the banks by their depositors.
They also concluded that deficit spending was a dangerous means of funding government programs. It enabled governments to create the illusion that they could spend without imposing a cost on society in the form of higher taxes; they could borrow and spend today and defer the tax cost until some tomorrow when the loans would have to be repaid. The classical economists called for annually balanced budgets, enabling the electorate to see more clearly the cost of government spending in the here and now. If a national emergency, such as a war, were to force the government to borrow, then after the crisis had passed, the government should run budget surpluses to pay off the debt.
These were considered the tried and true policies for a healthy society. And these were the policies that Keynes did his best to try to overthrow in the pages of The General Theory. Having argued that a market economy was inherently unstable, open to swings of irrational investor optimism and pessimism, which resulted in unpredictable and wide fluctuations in output, employment, and prices, only government, he believed, could take the long view and rationally keep the economy on an even keel by running deficits to stimulate the economy during depressions and surpluses to rein it in during inflationary booms. He therefore attacked the notion of annual balanced budgets; instead, government should balance its budget over the “business cycle.”
To do this job, Keynes said, governments could not be hamstrung by the “barbarous relic” of the gold standard. Wise politicians, guided by brilliant economists like himself, had to have the flexibility to increase the money supply, manipulate interest rates, and change the foreign-exchange rates at which currencies traded for each other. They required this power so they could generate any amount of spending needed to put people back to work through public-works projects and government-stimulated private investments. Limiting increases in the money supply to the quantity of gold would only get in the way, Keynes insisted.
Keynes believed not only that the market economy could not keep itself on an even keel, but he also believed that it would be undesirable to allow the market to work. He said, we saw, that to have the market determine prices and wages to balance supply and demand was to submit society to a cruel and unjust “economic juggernaut.” Instead, he wanted wages and prices to be politically fixed on the basis of “what is ‘fair’ and ‘reasonable’ as between the [social] classes.”
The level of wages imposed by trade unions, for example, was to be viewed as sacrosanct, even if many workers were priced out of the market because the level was higher than potential employers thought those workers were worth. The government, instead, was to print money, run deficits, and push up prices to any level needed to make it again profitable for employers to hire workers. In other words, perpetual price inflation was to be the means to assure “full employment” in the face of aggressive trade unions.
The longer-run consequences of short-run policies
In addition, when the balanced-budget rule was over-thrown, there was no longer any check on government spending. As James M. Buchanan and Richard E. Wagner pointed out in Democracy in Deficit (1977), once government is freed from the restraint of making taxpayers directly and immediately pay for what it spends, every conceivable special-interest group can appeal to the politicians to feed their wants. The politicians, desiring votes and campaign contributions, happily offer to satisfy the gluttony of favored groups. At the same time, the taxpayers easily fall prey to the delusion that government can give something for nothing to virtually everyone at little or no cost to them in the form of current taxes.
Indeed, politicians can now play the game of offering more and more dollars to special interests, while lowering taxes. The government simply fills the gap by borrowing, imposing a greater debt burden on future generations. Either taxes will have to go up in the years ahead or the government will turn to the printing press to pay what it owes, all the while claiming that it’s being done to generate “national prosperity” and fund the “socially necessary” programs of the welfare state.
These deleterious longer-run effects from his proposed short-run policies never really bothered Keynes. He had famously once said, “In the long run we are all dead.” No doubt a true statement, but one that gave insufficient thought to the fact that some people cannot avoid being alive when the longer-run consequences of such short-run policies start to come due. Keynes’s policy perspective led Hayek, to lament in 1941, near the end of his own work on The Pure Theory of Capital:
I cannot help regarding the increasing concentration on short-run effects … not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization…. It used, however, to be regarded as the duty and the privilege of the economist to study and to stress the long run effects which are apt to be hidden to the untrained eye, and to leave the concern about the more immediate effects to the practical man, who in any event would see only the latter and nothing else…. Are we not even told that, “since in the long run we all are dead,” policy should be guided entirely by short-run considerations? I fear that these believers in the principle of après nous le deluge [after us the flood] may get what they have bargained for sooner than they wish.
Are we not now living in some of those longer-run consequences of Keynes’s own policy prescriptions? A national debt in the United States of over $38.6 trillion, and climbing; annual budget deficits in the trillions of dollars adding to that debt; paper-money standards with no anchors other than the arbitrary policy decisions of central bankers appointed by politicians who see no further in time than the next election cycle; intrenched special-interest groups feeding at the troughs of government money funded by current taxes and borrowed sums; and unending price inflations, sometimes more and sometimes less severe, as those central banks create paper and virtual money in the attempt to keep the short-run “benefits” outrunning the long-run effects from overtaking them? Do we not see those in high political office who declare that the only thing that limits what they can do at any time is their own personal sense of right and wrong, good and bad, with, seemingly, no external checks on their conduct such as constitutions or the rule of law?
In one of the most famous passages in The General Theory, Keynes said that
the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.
Ninety years after the appearance of The General Theory, many practical men of affairs and politicians in authority remain the slaves of defunct economists and academic scribblers. The tragedy for our times is that among the voices they still hear in the air as they corruptly mismanage everything they touch is that of John Maynard Keynes.
This article was originally published in the April 2026 issue of Future of Freedom.
