Book Review: Where Keynes Went Wrong

When I was a grad student, I always felt weird about Keynes.  I grew up in a home that was not explicitly “free market” but was implicitly so.  My Dad was a small businessman and my Mom was a retail investor (as well as home manager).  My Dad’s business did well, but it had its share of hard times, including the depression of 1979-1982 in the Rust Belt, where many of his competitors did not survive.  He had to be a member of the local union and run a closed shop, but as an owner, he had no vote in union matters.

I worked for my Dad for two summers.  During one of them, when we went to get parts, the parts dealer said to me,”I’ve heard good things about you.  Even the union steward has heard about you.”  My face and my Dad’s face went white. I was not in the union. After an uncomfortable pause, he said, “Eeeaaah! Got you!” and he laughed.  Dad and I looked at each other, embarrassed but relieved.

My Mom, like Keynes, and like me, has beaten the stock market for most of her life.  There are excess profits available for wise investors, some of which stem from the foolishness of other investors.

Keynes was a fascinating man who understood asset markets well, but when trying to consider the economy in general, looked to what would work in the short run.  The author of Where Keynes Went Wrong points out repeatedly from Keynes’ writings his view that interest rates are almost always too high, and that interest rates should only rise when inflation is rising quickly.  Can lowering short term rates juice the economy.  Yes, in the short run, but in the longer run it fuels inflation and bubbles.

The strength of Where Keynes Went Wrong is that it spends a lot of time on what Keynes actually said, rather than the way Keynesianism developed into a branch of Macroeconomics, eventually becoming part of the dominant macroeconomic paradigm — the Neoclassical Synthesis.  I admit to being surrprised by many of the statements Keynes made — granted, the author is trying to prove Keynes wrong so he goes after what is least defensible.

The author dissects the errors of Keynes into a few main headings:

  • Lower interest rates are almost always better.
  • Growth comes through promoting consumption.
  • You can’t trust businessmen to do the right thing when it comes to capital allocation.
  • Government planning is superior to decentralized planning, because experts in government can allocate capital better than businessmen.
  • Crashes require government intervention.  Using the balance sheet of the government will have no long run negative impacts.
  • Markets do not self-correct.
  • Globalization is good, and the nations of the world can cooperate on creating a standard of value independent of gold.

For the most part, those are my words summarizing the author.  After going through what Keynes said, he then takes it apart point-by-point.  The author generally follows the Austrian school of economics, citing Mises, von Hayek, and Hazlitt.

After that, the book continues by taking on the rhetoric of Keynes, both oral and written.  He was one sharp man in being able to express himself — orally, there were few that could match him in debate.  In writing, where time is not so much of the esssence, there is more time for readers to take apart his arguments, and point out the fallacies.  The author points out much of the fallacies in how Keynes would argue his points.

The book finishes by pointing out the paradoxes involved in Keynesianism, e.g., in order to reflate a debt-ridden system, the government must lower rates and borrow yet more.  Also shows how beginning with manipulating the money supply leads to greater intervention in credit, banking, currency, and other economic policies over time, and why the politicians love the increase in power, even if they realize that the policies don’t work.

One surprise for me was how many ways Keynes suggested to intervene in a slump, and how many of them are being used today.

  • Rates down to zero.
  • Direct lending by the Fed.
  • Directing banks to make certain loans.
  • Bailouts.
  • Nationalizing critical companies.
  • Inflating the currency.

The idea of letting the economy contract in any way was foreign to Keynes.  He felt that a seemingly endless prosperity could be achieved through low interest rates.  Well, now we have low rates, and a mountain of debt — public and private, individual and corporate.  Welcome to the liquidity trap created by Keynesian meddling, together with the way our tax code encourages debt rather than equity finance.

I recommend the book; it is an eye-opener.  It makes me want to get some of Hazlitt’s books, and, read the whole of Keynes General Theory for myself.  The book that my professors once praised as a tour de force has holes in it, but better to read it all in context.


The book could have used a better editor.  Too many things get repeated too often.  The book also has two sets of endnotes, one for reference purposes, and one for expanded discussions.  The endnotes that were expanded discussions probably belonged in small type at the bottom of the page rather than as endnotes.  Many of the endnotes are quite good, and it is inconvenient to have to flip to the back to see them.

Also, on page 274, the author errs.  The risk to a business owner is higher after he borrows money.  The total risk of the business is not higher, but the risk to the equity owner is higher.  Whether that risk is double or not is another question.

There’s another error on page 328.  When I buy stock in the secondary market, I am putting my capital to work, but someone else is withdrawing capital from the market.  There is no net investment.  When I buy an IPO, not only do I put my money to work, but there is more investment in the economy (leaving aside the venture capitalists that are cashing out).  It is hard to say when investment in the economy is increased on net.

The table on page 330 is confusing.  The first row should have been set apart to show that GDP is not a government obligation.

Finally, I don’t think that Say’s Law (“Supply creates its own Demand.” Or in the modern parlance, “If you build it, they will come.”) is true, but neither is its converse (“Demand creates its own Supply”).  The two are interconnected, and either one can cause the other.  Markets are complex chaotic systems, and entrepreneurs sometimes produce goods that no one wants.  Similarly, when consumers discover a new product or service, that demand can help create a whole new industry.  Supply and demand go back and forth — the causality doesn’t go only one way.

Who would benefit from this book: Send it to your Congressman, send it to your Senator.  Make sure every member of the Fed gets one, and the fine folks at the Treasury as well.  Beyond that, think of your liberal friends who think of Keynes as a hero, and give them one.  After reading this, I want to add Keynes’ General Theory to the list of books the everyone cites, and no one reads.  (That list: The Bible, Origin of the Species, The Communist Manifesto)

If you want to buy it you can get it here: Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts.

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