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Source link: http://archive.mises.org/17787/ascendancy-of-the-general-theory/

Ascendancy of The General Theory

July 21, 2011 by

During Robert Murphy’s Keynes, Krugman, and the Crisis lecture, yesterday evening, one of the attendees asked what about John Maynard Keynes’ General Theory made it so popular amongst academics.  Similarly, another student asks in ‘questions for the professor’ why there was not as large of a recoil against Keynes’ book as one might have expected.  These are fairly popular questions, although finding a convincing answer is difficult.  Here is my attempt at one.

The most compelling theory that I have come across is Peter Boettke’s, in “What Went Wrong with Economics” (Critical Review 11, no. 1 [1997]).  We have to understand the historical context of Keynes’ work.  Keynes’ General Theory was an attack on classical economics, as espoused by Alfred Marshall (the creator of the economics tradition Keynes was trained in), Arthur Pigou, et alii.  In this tradition we see the evolution of a progression towards scientific formalism in economics, in spirit of the work done by marginalist Léon Walras and other predecessors (for a more general discussion see Hayek’s The Counter-Revolution of Science).  From this drive towards formalism we see its greatest manifestation in the post-Keynes monetarist school, in the works of the likes of Milton Friedman, Ronald Coase, George Stigler, and others (see my article “The Implications of an Imperfect World”).

Marshall’s tradition, unfortunately, pushed aside the much more accurate and realistic framework of the Austrian school, inaugurated by Menger and continued, at the time, in the works of Ludwig von Mises and Friedrich Hayek.  Boettke argues that neither Mises nor Hayek truly understood the differences between them and the neoclassical school until after Keynes’ ascendancy — both considered themselves part of the mainstream.  However, these differences became all too apparent during the Keynesian revolution and with Oscar Lange’s and Abba Lerner’s responses to Mises’ socialist calculation problem (which used the general equilibrium construct to show that central planners could allocate resources just as effectively as the market — it was this argument which prompted Hayek to develop his “knowledge problem”).

There were various responses contra Keynes after the publication of The General Theory.  For instance, both Pigou and Frank Knight published scathing reviews.  Some of these criticisms are republished in the Mises Institute’s The Critics of Keynesian Economics, edited by Henry Hazlitt.  In a 1996 journal article (“Keynes’ General Theory: A Look at the Criss-Cross of Reviews”, Journal of Post Keynesian Economics 18, no. 4), Kurt Rothschild takes a look at the different (well known) reviews and how judgment of Keynes’ book changed over time.  Evidence shows that criticism of Keynes was harshest earlier on, and the true acceptance of his work took place over time (although, just as well, one could argue that what was accepted was the neoclassical-Keynesian synthesis of Hicks, Samuelson, et alii, not The General Theory, per sé).

But, Keynes’ book was a persuasive attack on the Marshallian tradition.  Writes Boettke, “Certainly Keynes made fundamental errors in economic reasoning, but in many other respects, he had penetrated classical British economics deeply and had left it in tatters.” This statement gives away a lot regarding the question of why Keynes’ economics became so popular.  The Austrians had not put in sufficient work in distinguishing themselves from the neoclassicals, possibly because they saw these relatively minor differences as a much smaller battle than the broader differences between the mainstream and the socialist and Keynesian doctrines (not to lump the two together, mind you).  In effect, there was not a persuasive and understood doctrine to oppose Keynes; the only well known one, Marshall’s, was effectively sunk by Keynes’ criticisms.

Another important aspect of the issue is the question of why Hayek did not review The General Theory.  I think most people have rejected Hayek’s excuse (made during an interview with Keynesian [dis]coordination economist Axel Leijonhufvud) that he believed Keynes would have soon changed his mind.  Bruce Caldwell’s explanation seems more plausible (see Caldwell’s introduction to Hayek’s Contra Keynes and Cambridge).  Hayek was focused on finishing his work on The Pure Theory of Capital, which was a refinement and defense of what he had written in Prices and Production and related journal articles.  Also, perhaps Hayek was tired of the academic debate, especially after having taken part in extensive debates with Piero Sraffa, Keynes (notably, Hayek’s review of Pure Theory of Money), Knight, and others.  I believe Robert Murphy suggested that Hayek may have thought that Keynes’ popularity was merely a fad, thanks to the environment into which the book was published (the Great Depression).

Clearly though, there is more to Keynes’ ascendancy than the question of legitimizing interventionism.  There may have been some of this going on, but it does not explain why Keynes received such widespread academic support.

(Cross-posted at the Mises Academy blog.)

* * *

There has been some disagreement on how Austrians should re-assert the supremacy of their doctrine in the academic community.  Should we integrate into the mainstream?  Or, should we differentiate ourselves from the mainstream?  I think that telling from the experience of 1920–40, the evidence seems to support differentiation over integration.  Distinguishing between the very important differences is paramount to highlighting the principle strengths of the Austrian School, as compared to the major weaknesses of the neoclassical mainstream (which are more profound today than those which characterized it during the 1920s and 1930s).

Alternatively, perhaps the best solution is a “division of labor”, if you will, where those who are more interested in integrating with the mainstream can do so, leading those who they persuade to the more radical and stricter economics of those Austrians intent on (in my opinion, rightly) distancing themselves as much as possible from the errors of the mainstream.

{ 32 comments }

Chalmert July 21, 2011 at 1:02 pm

["The most compelling theory that I have come across is Peter Boettke’s, in “What Went Wrong with Economics” (Critical Review 11, no. 1 [1997]).” ]

Please summarize that theory here. What is so compelling about it ?

Also, you offer no apparent, direct answer to the primary questions raised:

1) WHY is “John Maynard Keynes’ General Theory… so popular amongst academics” (?)

2) “why there was not as large of a recoil against Keynes’ book as one might have expected” (?)

Jonathan M.F. Catalán July 21, 2011 at 1:28 pm

Chalmert,

Paragraphs 2-4 are basically a restatement of what Boettke writes. There were two conflicting paradigms: the Marshallian tradition and the new Keynesian vision. The new Keynesian vision, in many ways, was superior to the Marshallian tradition (British classical school) it was attacking, and so it won the support of academics who recognized the deficiency in the mainstream.

This is the direct answer to why TGT became popular amongst academics. My answer to the second question you pose is that there was a lot of criticism of Keynes at the time TGT was published, but TGT slowly won over the academia with the Samuelsonian synthesis.

Jeffrey Tucker July 21, 2011 at 1:15 pm

The problem with this theory is that it imagines a world of ideas that exists independently from the actual world of politics and real events – and the real events in this case are the two most explosive of the 20th century: the Great Depression and the Second World War. It makes sense, I would think, to consider the ways in which these events contributed to an embrace of the Keynesian idea. I can’t imagine that any theory of the ascendancy of this book could really offer a full explanation without given these events some part in the story. We absolutely know that there is no wall of separation between the real world and the academic world in our own times, and we can also know that there was no Valhalla of pure thought alive in the 1930s through the 1950s either. As many people wrote in the 1950s about the General Theory, this was a resurrection of old fallacies under a new guise, made compelling mainly because the movers and shakers need an apparatus. IN any case, this is the view of Murray Rothbard, thoroughly laid out in his monograph on Keynes the Man, which is one of the most wonderful but overlooked essays on the topic. This was also Mises’s own view of the situation.

Jonathan M.F. Catalán July 21, 2011 at 1:32 pm

Regarding the Great Depression and the Second World War, I agree (for some reason this didn’t coming to mind when I was typing up the post). TGT seemed persuasive within the context of the time, because it was an era characterized by high unemployment and what one could call “idle resources” if one didn’t have the “economization” background of the Austrians. Many economists may have been led astray by the correlation of high spending and low unemployment during the Second World War, as well (a drawback of the generally positivist methodology which had begun to permeate the science at the time).

It would be interesting to research what economists were involved in influencing policy at the time and seeing their reaction and/or use of TGT (use of the TGT to theoretically justify their policy recommendations).

Jeffrey Tucker July 21, 2011 at 2:01 pm

I should add that its hardly the first time that the world fell for the ideas of a charlatan. I don’t mean to dismiss theoretical issues, but really politics has as least as much influence on the world of ideas as the reverse. I mean, as much or more a mystery than the one you name is the incredible persistence of Keynes today! He has been refuted, refuted, and refuted again, not only in theory but also by events – again and again. How to account for the continued popularity of his ideas? It would be impossible to answer that question without reference to politics and power interests. If that makes sense now, surely it makes sense in the 30s-50s.

Joe Esty July 21, 2011 at 2:48 pm

I think Peter Klein provides a good explanation in his 2006 post: “Why Intellectuals Still Support Socialism:”

“Beyond university life, academics also compete for prestigious posts within government agencies. Consider my own field, economics. The US federal government employs at least 3,000 economists — about 15% of all members of the American Economic Association. The Federal Reserve System itself employs several hundred. There are also advisory posts, affiliations with important government agencies, memberships of federally appointed commissions, and other career-enhancing activities.

These benefits are not simply financial. They are also psychological. As Dwight Lee puts it:

Like every other group, academics like to exert influence and feel important. Few scholars in
the social sciences and humanities are content just to observe, describe, and explain society;
most want to improve society and are naive enough to believe that they could do so if only
they had sufficient influence. The existence of a huge government offers academics the real
possibility of living out their reformist fantasies.

It’s clear, then, that there are many benefits, for academics, to living in a highly interventionist society. It should be no wonder, then, that academics tend to support those interventions. Economists, in particular, play active roles as government advisers, creating and sustaining the welfare state that now surrounds us. Naturally, when government funds their research, economists in applied fields such as agricultural economics and monetary economics are unlikely to call for serious regulatory reform in their specialty areas.”

Doesn’t Keynes’ theory simply enable people to feel important without being overtly socialist? Academia would naturally prefer a prescriptivist Keynes to a descriptive Mises.

61north July 21, 2011 at 3:01 pm

This is the answer. The Austrian approach is to simply get out of the way of the economy and let the market take its natural course. However, most people want a feeling of control and want to “do something.” Keynes’ theories provide something to do. They may not be correct, but they “do something.”

And this is not just true of academics. You could just as easily substitute “politician” everywhere you wrote “academic” and your comment would still be valid. And politicians are elected by the voting public, which would also be a valid substitution for “academics.”

Jonathan M.F. Catalán July 21, 2011 at 4:22 pm

Joe,

This explanation doesn’t really convince me. Most academia today are not really Keynesian. Most academia is “pro-market” monetarist or part of the Rational Expectations school. Even the “New Keynesian” school is hardly really “Keynesian”, and to me this sect seems to heterogeneous that even such a classification seems misleading (e.g. I think Mankiw is less “Keynesian” than Krugman; the two share a belief in sticky prices, but beyond that they diverge widely on their policy prescriptions and the underlying theory). Keynes is making a comeback, and largely for the same reasons as it became popular in the 30s and 40s — it’s intellectual opponents were even less accurate.

As for 61North’s comment, a large chunk of the mainstream academia believe in near market perfection. So, while his theory explains why interventionism is politically successful (to a degree), it doesn’t explain why Keynes and similar theories persuaded theoreticians so decisively.

Joe Esty July 21, 2011 at 4:52 pm

J.M.F.C.,

How about a little Occam’s razor? Where’s the glory: telling people what to do or explaining why they do it? Mankiw, Krugman, Binder, Stiglitz inflate themselves with the putative “answer” to the problem they cause.

Most economists are pro-market until they think they have a better solution.

Jonathan M.F. Catalán July 21, 2011 at 5:27 pm

It might be naivety on my part, but I’m just not convinced by any answer that accuses the other person of being intellectually dishonest. In other words, without real evidence, I can’t buy the rationale that the reason some economists adopt interventionist economic points of view is to “score points” or to satisfy their preference for central planning. I think that most of them genuinely believe what they preach.

You have to remember that many of these economics are also of an older generation. They didn’t enjoy widely distributed Austrian literature. These economists were trained in a mainstream educational program built around the concepts of perfect competition and equilibrium modelling. Some economists realized that these were false concepts, but trained in formalism they don’t realize the difference between an ideal type and a reality-representative model, so Keynesian provides them a theory that doesn’t assume equilibrium nor perfect competition. The pro-market opponents were trained within the same framework, and their response to was to “prove” how these models do represent reality.

I have hope for the future, because I think the resurgence in Austrian popularity will makes its impact on a younger generation of economists. It will, at the very least, lead new economists to question the validity of this formalism and modelling, and it may push economics back on track (or, in that direction).

But, I don’t think the majority of Keynesians (academic economists) are being intellectually dishonest — although this doesn’t mean they really understand their opponents’ arguments.

Joe Esty July 21, 2011 at 5:30 pm

I said nothing about intellectual dishonesty. The economists I mentioned might very well believe he has the answer, and each might honestly belief that. Motivation can distort perception.

Jonathan M.F. Catalán July 21, 2011 at 5:42 pm

Well, you mentioned “glory”. “Seeking glory” suggests an ulterior motive, other than theorizing for the sake of the truth. Even if that motivation existed, I don’t think an economist bases his premises on his motivations. That motivation, instead, might be caused by the premises (if markets are unstable, then I have a motivation to find a solution). But, this latter motivation would be no different from the motivation of an Austrian who seeks to explain why a certain interventionist policy cannot end with the intended result.

In other words, it doesn’t explain why they adopt a certain framework. It just means that they adopt a framework and then work from there.

Zack A July 25, 2011 at 9:34 pm

Jonathan, with my experience with academic economists in college, it seemed that many of them reject the Austrian school and embrace forms of post monetarism or Keynesianism because they believe economics has evolved over time which somehow makes their new way of thinking superior to the older methods. They seemed to believe that the positivist approach to economics using models is superior to using the allegedly primitive method that Classicals and Austrians used that many referred to as a “religion” or an “ideology.” Because of course, being a “scientist” is superior and more professional than being an “ideologue” or a “religious zealot.”

In other words, the new scientific positivist approach to economics has improved economic thinking overtime rendering older ways obsolete and by accepting the Austrian approach they would be somehow undermining all these alleged advancements, and improvements in economic thinking that have occurred overtime. They seemed unwilling to do this. For them, the new way was the best way and they did not want to threaten the status quo under any circumstances. Because according to them, new was better, and there was a reason why the Austrians had become obsolete. Get with the times. According to them, at least.

Basically, they seem unwilling to threaten most of the prevailing economic literature that is dominated by forms of post Keynesianism and monetarism by accepting Austrian views. Economics has come to far to throw it all away now by going back to earlier non scientific ways of economic thinking.

Daniel July 21, 2011 at 3:54 pm

I’m not surprised. Ancel Keyes was able to ruin nutritional science with with “fat is bad” quackery once government got behind it (McGovern Report) and today we have an entire class of intelectuals devoted to spreading and enforcing the mantra.

Captain Anarchy July 22, 2011 at 11:23 am

I was going to use this same example. Politics and science do not mix.

Ivan Georgiev July 21, 2011 at 4:08 pm

Mr. Catalan, I read what you have written and I fail to understand what you mean. In what way does your text answer the question “1) WHY is “John Maynard Keynes’ General Theory… so popular amongst academics” (?)”

Jonathan M.F. Catalán July 21, 2011 at 4:19 pm

Ivan,

In essence, because it was a persuasive and convincing attack on the just-as-erroneous Marshallian framework. Despite it being wrong, in many ways it was more believable than its predecessor, and the Austrian framework was not well enough established or understood to act as an alternative to either.

Joe Esty July 21, 2011 at 6:04 pm

How in the world do you separate motives, ulterior or otherwise?

Jonathan M.F. Catalán July 21, 2011 at 6:12 pm

Joe,

We’re not talking about why economists suggest certain policy prescriptions or why they come to certain conclusions, rather we’re discussing why economists adopted an entire framework (i.e. Keynesianism). So, to say that economists support interventionism doesn’t say anything useful regarding why these economists chose to start from the premises they did. Another way of putting it is that the motivations behind certain conclusions are not the same as the motivations behind choosing a framework and the relevant premises.

Rob Mandel July 21, 2011 at 7:14 pm

I think people look too deeply into the reasons why “Lord” Keynes became so popular. I think it’s rather simple.

1) He gave politicians a license to engage in the welfare/warfare state and hide behind the intellectual facade. In other words, he was simply a lame excuse for the dreams of statists.

2) There was real and great fear of communism. We have to be honest here, and yes, there was an active comintern and much worker unrest in the 20′s and 30′s. In fact, it is the main reason for the rise of fascism in Europe, not just within the fascist countries but the western response. Germany and Italy would be as much a bulwark against bolshevism spreading to France and England , so the thinking went.

As for the Cold War, read Gaddis and we find that the Soviets were so horribly behind and a non-threat, and that the Kennedy administration knew it. JFK basically called out Kruschev and brought on the Cuban missile crisis as well as almost WW3. But, nonetheless, Keynesianism offered a contra to communism without the dreaded label of socialism.

So it was politically viable, and even more, valuable. It gave them justification to spend on defense as an economic matter.

Keynes just happened to validate all the worst of economic fallacies: fiat currency, central banking, deficits, interventionism, et al. And there was a ready contingent of academics and politicians who would find good use for his work. (Think the German Historical School for another example of awful ideas used to justify awful actions.)

Joe Esty July 21, 2011 at 8:05 pm

Jonathan, I basically agree with you, except you are moving into turning mole hills into mountains. I don’t know how granular you want to get. I also agree with Rob Mandel, whose opinion is close to mine. And I agree with Klein, my original post.

Jonathan M.F. Catalán July 22, 2011 at 1:46 am

If you agree with Peter Klein and Rob then I’m afraid we still disagree with each other (and, I don’t get your metaphor). I don’t buy that academia are effectively paid off by government, because it doesn’t explain how the majority of modern academia are not Keynesians and are actually broadly “pro-market” (monetarists, et cetera). As far as Rob’s point #1 goes, we’re talking about Keynes’ academic success (his political success is also suspect, because his policies have never really be adapted full force — for example, his monetary reform package was rejected in favor of something more “middle-of-the-road”). Regarding #2, fear of Communism has nothing to do with anything related to this topic.

Rob Mandel July 22, 2011 at 2:32 pm

I would love to think the majority of academia ( at least economists) are pro-market, but I’ve not seen much evidence of that. Universities are not home to liberty and pro-market ideas. Keynes gained fame during the Versailles treaty talks, being opposed to the reparations part (even taking an almost pro-German tone) and much of the treaty, then following, promoting the inflationist policies, so his fame matched his status in academia. So he was famous as well as having stature, which made him even more useful to pols. (cf. Ferguson’s “Pity of War”)

As for the Cold War, my point was that Keynesian economics would support massive defense spending as stimulative or at least increasing good for the economy. So, he was again, a ready excuse for the so-called conservatives to latch onto Keynes. I recall during the base closure hearings following the fall of the SU how much economic impact it would have on local communities.

I think that he had great appeal to the wrong type of person, and given who he was, he gave those people a legitimacy and cover they otherwise wouldn’t have had. And as he was so appealing to both the left and right (for different reasons though) it just became the accepted mode of thinking.

Jonathan M.F. Catalán July 22, 2011 at 2:52 pm

I’m sorry Rob, but then you aren’t really familiar with American academia. Did you know that the head of the Harvard undergrad economics department is a libertarian (Jeffrey Miron)? The University of Chicago is known as a bastion for rational expectations and similar concepts (efficient market hypothesis, for example). Surely, not all academia are broadly pro-market; many are not. But, the evidence overwhelmingly disproves any thesis that government funding biases academic selection towards Keynesians and other “anti-market” economists.

As for the Cold War, my point was that Keynesian economics would support massive defense spending as stimulative or at least increasing good for the economy.

Actually, Keynesian theory argues for budget surpluses during boom years. Deficit spending is a countercyclical policy.

Joe Esty July 22, 2011 at 5:35 pm

Please stop reading what’s not there. I’m not saying academia is paid off, and neither is Klein. You are caught up in defending your position and I think you’re not paying attention to what others are saying. I never said “fear” of communism, Mandel did, but wasn’t there a fear back then? Keynesian is a soft-soap approach to interventionism without being so overt.

Another thing: Are you giving Marshall too much credit?

Jonathan M.F. Catalán July 22, 2011 at 5:42 pm

Regarding communism, right, that’s why I attributed that to Rob.

And yes, you did effectively say that academia was being paid off. You originally wrote,

It’s clear, then, that there are many benefits, for academics, to living in a highly interventionist society. It should be no wonder, then, that academics tend to support those interventions.

Any difference between what you wrote and “being paid off” is a matter of subtlety.

Finally, I don’t think I am giving Marshall too much credit. Keynes was trained within the Marshallian tradition, which itself was a continuation of Walras’ simultaneous equations general equilibrium. By the time Keynes published TGT, this tradition had been firmly implanted in British economics. There was little market process theorizing.

j_in_mesa July 22, 2011 at 1:38 am

I think it’s due to the mathematization of the subject . Students/professors/journalists see a PDE* and go ‘oooh, look, we can be like a real hard science now!’. Hence one gets mathematical economics and econometrics. Unfortunately, there are no consequences when these types are wrong. The area where mathematics in regards to human action actually works or is at least practical and accountable is in actuarial science.

*partial differential equation

Jonathan M.F. Catalán July 22, 2011 at 1:43 am

Yes, mathematics is one form of formalism. Samuelson played a large role in pushing mathematics into economic science, because he saw it as a stricter form of logic. Straight mathematical logic, I don’t think, played as big of a role for Keynes as it would later economists (most of Keynes’ theories are elucidated verbally, of course), but like I suggest in the post the general and partial equilibrium constructs of the British classical school (and Léon Walras) certainly set it up for Keynes. Keynes was disequilibrium economist without a coordination or market process background.

david nh July 22, 2011 at 4:37 pm

Hi Jonathan.

There’s no doubt lots to say but here are a few of my thoughts. Sorry for the long comment but I think this is crucially important.

1) I think the historical context played a big part. At a time in which monetary policy had been too loose and then inadvertently too tight, coupled with government-inspired massive regime uncertainty, Keynes’ prescriptions appeared to some as having “worked” or accurately described the problem. In fact, they were in effect simply a means to offset excess demand for money inspired by very bad policy and had no general applicability.

Also, it is perhaps hard to appreciate how much academia in the English-speaking world was dominated by the relatively far left. There was a strong predisposition to think that central planning was the future and that the free market had had its day. I am not saying there was a conspiracy – none was/is required. All that’s necessary is a predisposition (to quote, probably only semi-accurately, the Canadian columnist David Warren – “there was no conspiracy among Pavlov’s dogs”).

2) Most humans are collectivist by instinct and social conditioning. Most academics are human (we think).

3) Economics, at least in the US, grew out of the progressive movement. If I recall correctly, the founder of the AEA was a progressive. In other words, the purpose from the outset was tinkering.

4) While most economists say (and probably actually believe) they are supporters of the free markets, there is some pretty limiting fine print. Notably, most believe that markets should be permitted to remain free only when they are perfectly competitive or close to it. In reality, contrary to what we tell ourselves and others, economics is largely an interventionist science. It’s not an accident that the rise of big government and the rise of economics as an academic discipline coincided. We support free markets except when there’s market failure (and did we forget to mention, there’s an awful lot of market failure?).

5) In terms of macro and monetary theory being dominated by pro-market thinkers, I am not sure anymore what that really means. I know that it is a reference to the fact means that they favour the assumptions of market clearing and rationality, don’t rely on market failure and recognize the limited role that government can play in guiding the economy. The problem is that in the market in which they are specialists, i.e., the market for money, they favour a government monopoly and central planning! Added to which, as libertarians recognize, this is the one original (government) sin that enables all the subsequent government sins.

6) I have been a professional advocate for 27 years. I know a lot about the nature and strategy of debate and argument. It’s always amazed me how people are convinced that they are being objective even though they always seem to support the position that is favourable to their professional or financial interests or political biases. Just good luck, I guess, that somehow everyone can magically and simultaneously be on the right side of the debate. It’s usually not intellectual dishonesty but rather a failure to be sufficiently self-critical.

7) Even as a hardened professional advocate, a mercenary, I have been shocked by the naked bias of the op-eds/blogs of many mainstream academic economists. Given my background, I am well aware that people can have different views and that often good arguments exist on both sides. But it was the obviousness and the sloppiness of the bias that surprised me – the inconsistencies and willful blindness either of the facts or the real case to be answered. Make no mistake, there are people out there driven not by the pursuit of economic truth but by ideology.

8) We’ve observed science distorted by bias in the hard sciences, in the form most notably of the global warming debate. Why would we think that the softer sciences would be above this, particularly when, in economics, there is debate not only about what is true but what the test for truth should be and even the econometricians (who agree on their favourite test for truth) can’t establish a consistent version of truth. It is thus much harder in economics for bias to be exposed than in the hard sciences. A priori, we should expect more of it.

9) In the early 1980s, I got two degrees from good economics schools in Canada and was taught by then prominent monetarists, amongst others. Not once do I recall a professor saying, “gee, in economics we generally exalt the free market and competitive processes as a means to organize economic activity and establish prices, so how do we reconcile that with, in effect, the profession’s acquiescence to a government monopoly in currency production and their influence of interest rates via money production?” It’s not that there may not be good arguments in favour of central banking, but what I find astonishing in retrospect, particularly given the magnitude of the intervention, is that not only was the existence of the central bank never really questioned, the apparent inconsistency of its existence with the implications of other aspects of economic theory was never even raised. Keep in mind that that was in Canada, where there was no central bank until 1935, there were no bank failures during the Depression and which is often cited (in its pre-1935 incarnation) approvingly as an example of how well free banking works.

10) Here’s what (respected monetarist and history of economic thought scholar) David Laidler had to say in a piece about free banking he did for the Bank of Canada (“Free Banking and the Bank of Canada”):

“By the 1950s, developments in economics had created something close to an intellectual consensus, … according to which, rather than have a monetary system designed to limit the actions of government, its configuration should be such as to help the government pursue a wide range of undoubtedly worthy goals that electorates set for it. No policy apparatus that lacked a central bank, preferably working in close co-operation with other branches of government, seemed complete, and those who questioned this seemed to be either hopelessly unenlightened representatives of conservative political interests, or otherworldly intellectuals.”

In other words, flushing free banking (and any discussion of it in the mainstream) down the memory hole was explicitly ideological – no economic “science” there. That certainly sounds to me like the presence of motives other than the pristine search for economic truth.

Ned Netterville July 22, 2011 at 9:53 pm

Sorry fellas, you are (mostly) all wrong. Ludwig von Mises got it right and explained the popularity phenomenon of the GT among politicians and government economist in an article published in THE FREEMAN edition of October 30, 1950. Henry Hazlitt reprinted it in his 1960 book, THE CRITICS OF KEYNESIAN ECONOMICS (http://mises.org/books/critics.pdf):

“It was different with the “new economics” of Lord Keynes. The policies he advocated were precisely those which almost all governments, including the British, had already adopted many years before his “General Theory” was published. Keynes was not an innovator and champion of new methods of managing economic affairs. His contribution consisted rather in providing an apparent justification for the policies which were popular with those in power in spite of the fact that all economists viewed them as disastrous. His achievement was a rationalization of the policies already practiced. He was not a “revolutionary,” as some of his adepts called him. The “Keynesian revolution” took place long before Keynes approved of it and fabricated a pseudo-scientific justification for it. What he really did was to write an apology for the prevailing policies of governments.
“This explains the quick success of his book. It was greeted enthusiastically by the governments and the ruling political parties. Especially enraptured were a new type of intellectuals, the “government economists.” They had had a bad conscience. They were aware of the fact that they were carrying out policies which all economists condemned as contrary to purpose and disastrous. Now they felt relieved. The “new economics” re- established their moral equilibrium. Today they are no longer ashamed of being the handymen of bad policies. They glorify themselves. They are the prophets of the new creed.”–p. 319

While Mises addressed himself to explaining why Keynes was able to enthrall “government” economists, Me. Catalan’s blog post asks how the GT was able to enrapture so many “academic” economists.

Here is my take on that: First take a look at Keynes’ vitae: http://www.maynardkeynes.org/keynes-career-timeline.html. By virtue of his extravagant personality and other providential factors, Keynes by 1930 was the only economist in the world with movie-star-like fame. It is doubtful that his stardom has subsequently ever been equaled. His popularity surpassed and was the envy of his humble peers in their academic ivory towers. When his GT was published his fame exploded like starburst fireworks on the Fourth of July, and those anonymous academic economists hopped on his coattails like Tennessee ticks on a bare leg in tall grass. They became Keynesian desperately hoping that some of his glamorous luster would fall upon them. (No offense meant to those Misian economists laboring in academia. Not *all* academic economists are so shallow.)

Vanmind July 26, 2011 at 9:08 pm

Interesting, thanks. Can you turn it into a rap? Ha.

baltimore cruises October 26, 2011 at 9:52 pm

I do not even know how I ended up here, but I thought this post was great. I do not know who you are but definitely you are going to a famous blogger if you are not already ;) Cheers!

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