The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes
by Zachary D. Carter
Random House, 2021 
xxii + 628 pages
For many people, though not, to be sure, readers of The Austrian, John Maynard Keynes ranks as the greatest economist of the twentieth century; but for Zachary D. Carter, this is a restrained understatement. Carter, a writer on economics at the HuffPost, says this about Keynes:
No European mind since Newton had impressed himself so profoundly on both the political and intellectual development of the world. When the [London] Times wrote Keynes’ obituary, it declared him ”the greatest economist since Adam Smith.” But even praise so high as this sold Keynes short, for Keynes was to Smith as Copernicus was to Ptolemy—a thinker who replaced one paradigm with another. In his economic work he fused psychology, history, political theory, and observed financial experience like no economist before or since. (p. 368)
Those who make their way through this long book will likely come away puzzled with Carter’s enthusiasm. Keynes held bizarre beliefs, far stranger than the familiar underconsumptionist fallacy that the government needs to bolster insufficient aggregate demand. Though he wrote his most famous book about economic theory in the midst of the Great Depression, he thought that scarcity was no longer a problem. The potential for abundance was at hand, or soon would be; the real economic problem was to distribute this abundance so that selfish speculators would not take it all for themselves, leaving the masses in poverty.
This sounds unbelievable, but Keynes really did claim this. Summarizing Keynes’s position, Carter says,
Prior to The General Theory, economics was almost exclusively concerned with scarcity and efficiency. The very word for the productive output of society—economy—was a metaphor for making do with less. The root cause of human suffering was understood to be a shortage of resources to meet human needs…. This was the worldview of what Keynes called the “classical economists.”… But the sheer productive power of modern capitalism and the “miracle of compound interest” had rendered the portrait obsolete. Technological advances now allowed people to produce so much more with so much less effort than they had in the past that scarcity was no longer the overriding problem of humanity. (pp. 258–59)
What stands in the way of abundance for all? In essence, the problem is money. People hoard money because they fear an uncertain future, and if they hoard money, businessmen will be reluctant to invest. Attempts to cut costs by reducing wages exacerbate the problem, since this lessens consumers’ spending. The classical economists wrongly assumed that adjustments in relative prices suffice to take care of shortages and surpluses. “Say’s law” ensured that there could not be a “general glut” or depression. Keynes rejects Say’s law, arguing that it ignores the cumulative power of pessimistic expectations. It does not help matters that Keynes misstates the law: “For Keynes, the soft underbelly of the classical theory was Say’s Law, which he summarized as the maxim that ‘supply creates its own demand.’” (p. 261) The law in fact says that the supply of a commodity is demand for other commodities.
The technical difficulties of Keynesian theory have been covered amply and in depth by, among others, Henry Hazlitt, W.H. Hutt, and Murray Rothbard, and I do not propose to deal with them at further length here. What is important for our purposes is the mindset with which Keynes addresses the problems he alleges exist for the free market. For him the underlying problem is that an elite of official experts is not in control of money and investment. If only our betters, quintessentially Keynes himself, were in charge, then money creation and governmentally controlled investment would generate prosperity for all.
Money does not arise, as the classical economists, here followed by the Austrian school, thought, as a way to overcome the difficulties of barter. It is a creation of the state, and Keynes developed a peculiar theory of history according to which the continued expansion of the money supply drives historical progress.
In The Wealth of Nations, Smith had presented markets for trade as a primordial force that came into being long before the development of the political state…. The market was natural, while the state was a relatively recent artifice that intervened in or distorted the independent rhythms of trade … Keynes concluded that this history was all wrong. Capitalism itself was an ancient creation of government, dating back at least as far as the Babylonian Empire of the third millennium B.C.…. Inflation—viewed by orthodox economists of the 1920s as an underhanded sovereign’s subversion of the natural order—had instead been a near-constant condition ”throughout all periods of recorded history.” (pp. 167–69)
In his Treatise on Money, Keynes argued that government expansion of the money supply would by itself lead to abundance, but he changed his mind. Government control of investment is needed as well. In The General Theory, he calls for a “somewhat comprehensive socialization of investment,” and in an article for the Quarterly Journal of Economics in February 1937, Keynes speculated on what would happen after a European war. He hoped that a program of government control of investment would enable most fluctuations in employment to be eliminated. “Keynes thought that the government would need to control about two-thirds of all investment in the economy for his idea to work” (p. 402).
Readers of Ludwig von Mises will recognize a familiar pattern. Government control of the economy, while preserving the outward forms of private ownership of the means of production, exactly describes the economic system of Nazi Germany. Carter calls to our attention many critical remarks by Keynes about Hitler, but he nowhere mentions Keynes’s notorious foreword to the German translation of The General Theory. In it he says,
The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory. Since it is based on fewer hypotheses than the orthodox theory, it can accommodate itself all the easier to a wider field of varying conditions.
Keynes in his recommendations suffers from an odd blindness. He starts from a genuine insight, the uncertainty of the future. He here is on the same side as Mises, and against the neoclassicals, who fail to recognize the distinction between risk and uncertainty, though the consequences he draws from this for the economy are diametrically opposed to Mises’s policy conclusions. But he takes for granted that the experts who run the state somehow can with precision foretell the future. Would not the problems of free market entrepreneurs be magnified, not solved, by this desperate remedy?
Keynes fails to see this because of his invincible conviction of his own superiority to the common lot. Plebian businessmen may be baffled by the future; not so him and his ilk. If they control money and guide investment, all will be well. And it is this same failing that resolves another quandary. How can Keynes have thought that scarcity no longer posed a problem? Don’t people continue to want more and more material goods, no matter how much technology develops? Yes, in this sense “scarcity” remains, but Keynes thought that people ought to abandon such crudities. They should instead cultivate the refined pleasures afforded by certain states of mind. Like his fellow members of the Bloomsbury Set, he thought that the “profound truths were pure ‘states of mind’ achieved in moments of mutual understanding between lovers or afternoons spent contemplating great works of art” (p. 26). In the happy world of abundance on the horizon, people would come to share these tastes, and the expertly controlled government would guide us to this attenuated vision of abundance. In fact, the Bloomsbury Set, far from being an elite, looking down from above at the rest of us, were a sorry lot, (though the set included people of genuine artistic achievement) preoccupied with their epicene practices and the description and disclosure to the world of their own thoughts and feelings.
It is not surprising that Keynes looks at the economy from the perspective of a government bureaucrat; this is exactly what, for a significant part of his life, he was. Carter brings out very well that during World War II, Keynes was the main planner of the British war economy, and it was for this reason, not his theoretical achievements, that he was elevated to the peerage.
Though we cannot share Carter’s opinion of Keynes, the author has done a useful job in presenting his views, though Keynes’s strong interest in eugenics is veiled in silence. Perhaps Carter surmises we would think less of his master if the topic were frankly discussed. Unfortunately, the author does not confine himself to Keynes and comments on others as well, and in doing so he turns a useful, if flawed, book into a near disaster. He absurdly underrates Hayek, treating him as an economist of little consequence whom Keynes barely deigned to notice. In fact, Hayek’s review of the Treatise on Money destroyed the theoretical framework of the book, greatly to Keynes’s embarrassment, though he tried to shrug it off. The Road to Serfdom is not an “attack on the political implications of Keynesian economics” (p. 341); that book does not discuss Keynesian economics at all. He bears for Herbert Luhnow of the William Volker Fund an inexplicable animus, describing him as addled and insinuating that he sympathized with Hitler ([p. 386] that page contains another item of interest, though I shall leave this for readers to discover).
I could go on at much further length, but I have had all of Zachary Carter that I can take.