Here’s a letter that I sent yesterday to the New Republic:
Richard Posner courageously opens up shop in the highly competitive seventy-three year-old industry of telling the world what John Maynard Keynes meant in his 1936 book The General Theory (“How I Became a Keynesian,” Sept. 23). That this industry still thrives and attracts new and prominent suppliers speaks volumes.
Judge Posner, alas, misses some vital points of economic history. For instance, it’s untrue that “a general fall in the price level – deflation – imperils economic stability.” In the U.S. the price-level fell pretty steadily from 1865 through 1898 – a period of rapid economic growth unmarred by any unusual instability. Deflation is desirable if it is caused by rising productivity (as was the case in the late 19th century) and not by contractions of the money supply (as happened in the early 1930s).
Judge Posner also gives undue credit to Keynes for two insights that are not original to Keynes. First, Adam Smith beat Keynes to the punch in emphasizing that the ultimate goal of economic activity is not production, but consumption. Second, the importance of uncertainty was brought to economists’ attention, not by Keynes, but by Frank Knight. In 1921 Knight argued that profit is entrepreneurs’ reward for dealing with uncertainty. Unlike Keynes, Knight understood that uncertainty poses no special threat to free markets operating with sound money.
Donald J. Boudreaux