John Maynard Keynes Knew What Occupy Wall Street Tells Us Today: "Banks and bankers are by nature blind."
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Friedrich August von Hayek was a charming and gracious man who accepted my invitation to lunch in Salzburg when I was 23 years old. But even Milton Friedman called his price theory “very flawed” and his capital theory “unreadable.” He was denied a post in economics at the University of Chicago, and his reputation today rests largely on The Road to Serfdom, a warning against Soviet-style central planning with which Keynes felt free to declare “deeply moved agreement.”
On policy matters Hayek was no extremist and often aligned with Keynes. As Professor Walter Block points out in the Journal of Libertarian Studies, he agreed that central banks should fight unemployment, he favored fair labor standards and “an extensive system of social services;” also antitrust and policing against fraud and deception and state-sponsored health insurance; what we might call a “public option.” All of this drove Professor Block to declare in despair that Bill and Hillary Clinton should have cited him in their campaign for health care reforms. None of this came from Hayek's own economics: as Block wrote, the Hayek of 1944 “stands condemned by the Hayek of 1931 and 1933.” The contrast between Hayek's economic ideas and his policy views is for our friends on the other side to explain if they can.
Unlike Hayek, John Maynard Keynes was a policy man: fully engaged from the Great War and Treaty of Versailles through the Depression and World War II to Bretton Woods. His theories and his policy views developed side by side.
Thus Keynes favored deficit spending – “loan-expenditure” -- to fight unemployment, and he denounced the pernicious doctrine of the natural rate of unemployment in 1929, almost forty years before our friend Professor Edmund Phelps is credited with inventing it:
“The Conservative belief that there is some law of nature ...that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his brain fuddled with nonsense for years and years...”
The 1929 liberal program was to rebuild Britain: trunk roads, railways, telephone lines, conservation projects, housing. Keynes called for tearing down South London from Westminster to Greenwich and rebuilding it. “Would that employ men? Why of course it would!” Plain common sense, and when Mr. Baldwin said no, “it not only is nonsense that he talks, but it seems like nonsense to any simple-minded person who considers it with a fresh, unprejudiced mind.” Time was wasting: “Every puff of Mr. Baldwin’s pipe is costing us thousands of pounds.”
Keynes favored doing sensible things. He did not actually want to “fill bottles with old banknotes, bury them in disused coal mines... filled up... with town rubbish” so that they could be dug up again. But if useful projects were blocked by bankers, then such spending was better than nothing. “Paint the Black Forest white!” as Joan Robinson said. It was too bad that modern minds recoiled from ancient practices, to which “Ancient Egypt... doubtless owed... its fabled wealth,” “Two pyramids ...are twice as good as one, but not so two railways from London to York.”
Keynes in 1930 knew what Occupy Wall Street tells us today: the Great Depression was produced by banks. He wrote “Banks and bankers are by nature blind. They have not seen what was coming...” Even when faced with their own destruction they get it wrong: “In the United States,” he wrote “some of them employ so-called ‘economists’ who tell us even today that our troubles are due to the fact that prices have not fallen enough...” [Shades of Inside Job.] “A sound banker, alas! is not one who foresees danger and avoids it, but one who when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” Sic Transit Gloria Charles Prince and Richard Fuld.
But Keynes’s greatest policy polemic was his first, The immortal Economic Consequences of the Peace. His message was that debts that cannot be paid will not be paid, and the attempt to squeeze blood from stones brings disaster. As Nicholas Wapshott tells, Keynes was a hero to Hayek and his friends in 1919 Vienna for this. “Europe is solid with herself,” he wrote. “If the European Civil War is to end with France and Italy abusing their momentary victorious power to destroy Germany and Austria-Hungary now prostrate, they invite their own destruction also, being so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds.” So it is today with Germany and France and Holland and Finland on one side and Greece, Portugal, Ireland, Spain and Italy on the other.
In each of these areas: jobs, banks, and international debt, we can read Keynes with direct relevance to our present miseries. Against this, today’s followers of Hayek tell us to accept those miseries and not to relieve them.
You need a lot of faith in the resilience of markets to buy that line, three years into the Great Financial Crisis, with nine million Americans unemployed, with twenty-five million who would work if there were jobs, with Europe hanging on the brink, and with no end in sight.
*Galbraith delivered these opening remarks in New York on November 8, 2011, at the Keynes-Hayek Debate, sponsored by ThomsonReuters. Professor E.S. Phelps of Columbia led the Hayek team. The full debate is onlinehere.