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Keynesian Splenetics

Jon Murphy commented somewhere recently (I cannot now find the source) that he doesn’t recall J.M. Keynes’s call, in The General Theory, for the “socialisation of investment.”  Jon’s comment prompted me to remember a paper that I’d not thought about in years but which still ranks as being among my very favorites on Keynes’s economics: Roger Garrison’s 1993 article in Critical Review entitled “Keynesian Splenetics.”  Here’s the abstract:

Underlying the analytical framework of Keynes’s General Theory is a comparison of capitalism and socialism in terms of risks and consequent rates of interest, rates of investment and capital accumulation, and levels of employment and output. Keynes’s social philosophy and corresponding vision of macroeconomic reality biases his comparison in favor of socialism, or, more precisely, in favor of “a comprehensive socialisation of investment.” Recognizing the significant influence of Keynes’s early social philosophy on his subsequent macroeconomics – which is firmly established by Allan Meltzer’s “different” interpretation of Keynes – refocuses criticism of Keynes’s analytics, provides a basis for assessing other interpretations of the General Theory, and helps account for the absence of reconciliation among the modern recastings of Keynesian macroeconomics.

And here’s a relevant paragraph from page 475 of the text of Roger’s paper (footnote deleted):

Standing at the open bar, Keynes [in chapter 24 of The General Theory] lets down his guard and tells the reader what he has in mind for our future. He looks forward to a more equitable and less arbitrary world, achievable, in his judgment, within one or two generations. This imagined world is one in which capital yields no return apart from compensation for supervising it and bearing the associated risks. Interest, which “rewards no genuine sacrifice,” would be nil. Its elimination would mean “the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.” Once the “high stakes” of the capitalist system are eliminated, “the State will have to exercise a guiding influence.” In Keynes’s reflective judgment,”a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment.”

Keynes’s understanding of the essence and logic of market capitalism cannot have been more different from that of his contemporaries Mises, Schumpeter, and Hayek – and from that of later stellar economists such as Armen Alchian, Harold Demsetz, Jim Buchanan, Gordon Tullock, Julian Simon, and Deirdre McCloskey.

First, Keynes was naive regarding both the incentives facing politicians and the knowledge-gathering and knowledge-using capacities of such officials.  Such naiveté (which continues to this day to mark the scholarly work and the punditry of large numbers of economists) is the intellectual equivalent in economics of a physicist who, seeking to prove that Mars is habitable for humans, simply assumes that the Martian atmosphere is identical to that of earth.  Such an unrealistic Martian atmosphere is imaginable, but imagining such an unreality – and repeatedly insisting, against all evidence and reason, that it is so – does nothing to transform that unreality into reality.  (In the natural sciences, such stubborn refusal to come to grips with an essential feature of physical reality gets the scientist immediately and properly labeled a quack.  In the social sciences, such stubborn refusal to come to grips with an essential feature of social reality – namely, the actual, rather than the assumed, incentives and constraints operating in the political realm – gets the scientist applause and a reputation for being ‘progressive.’)

Second, Keynes (at least by the time he wrote his General Theory) utterly failed to appreciate the incomprehensibly vast-in-number, nuanced, and ever-changing market details each of which must be accounted for and adjusted to in order for even a non-innovative economy to operate well enough to supply a sustained stream of useable goods and services to millions of people.  Risk and uncertainty cannot be eliminated from any such real-world economy.  No market economy is ever remotely like some machine that, once it’s up and running and all its kinks have been worked out and all changes to it have been exhausted, chugs along period after period doing its thing and needing only a supervisor to ensure that it remains well-oiled and that its fuel supply isn’t interrupted.

A market economy becomes magnitudes more complex when it is innovative. The greater prosperity that ordinary denizens of capitalist societies today regularly enjoy is not chiefly the result of pumping more fuel into the capitalist machine so that its pistons fire faster and its gears spin more rapidly causing it to churn out more of the same output as before but at a faster rate.  A marked feature of modern capitalism is what Schumpeter famously identified as “gale[s] of creative destruction.”

A never-ending torrent of new products, new methods of production, new ways of financing, new means of distribution – these entrepreneurial innovations, introduced and tested in competitive markets, are the main source of our prosperity.  Only someone, such as Keynes, who completely misses this entrepreneurial aspect of capitalist reality would entertain the notion that capitalist enterprises could be run exclusively by competent supervisory managers.  Only someone, such as Keynes, who saw the economic problem as being largely confined to ensuring that the economy-as-machine steadily produces a sufficiently abundant stream of output of familiar goods and services would write that interest rewards no genuine sacrifice.  Only a monumental failure, such as Keynes’s, to understand the essence of capitalism can explain why he and others (such as, today, Thomas Piketty) miss the central role of the creative, innovative entrepreneur.

At the risk of summarizing too broadly, we have, on one hand, people such as Keynes and Piketty who see the economy as a relatively simple machine that might grow in size but which remains largely unchanged in essence.  This machine can and should be supervised by wise and good managers – public servants who have the intellectual power and the correct incentives not only to ensure that the machine stays well-oiled and full of fuel, but also to decide how the stuff that the machine spits out rather automatically is distributed.

On the other hand are people who understand the innovative market economy to be an emergent order whose all-important details are unfathomably complex and ever-changing; it’s an order the logic of which can be grasped but the concrete details of which remain out-of-reach to any single mind or committee of minds.  This economy can be superintended successfully by no one, and interfering in its operation entails the unleashing of unintended and impossible-to-trace negative consequences.

To summarize even more succinctly: the simplistic fantasies of Keynes contrast with the serious science of Hayek.