British economist John Maynard Keynes (1883-1946) is all the rage these days. Time magazine rated him the number 1 economist of the 20th century, and he seems to be number 1 in the 21st century too. A few years ago, I gave a lecture at West Point and asked my free-market host why they used the William Baumol-Alan Blinder textbook, which is strongly pro-Keynesian. His answer: “We need to use the economic model that is most popular in Washington DC.”
Recently I had dinner with Keynes’ biographer, Lord Robert Skidelsky, who until a few months ago lived in Keynes’ country estate, Tilton House. It was a magical night at Delmonico’s (Wall Street’s oldest restaurant) with Jeremy Siegel, the Wizard of Wharton, and my wife Jo Ann. We spent the entire night in high theory. Keynes would have been pleased, although Jo Ann was a bit bored by it all.
The biggest debate was over Keynes, and the Fed’s application of the Keynesian ZIRP (zero interest rate policy). Siegel was surprisingly favorable about Keynes’ contributions to macroeconomic theory, but was shocked to learn that Keynes advocated a “permanent cheap credit policy,” and in fact, wanted central banks to keep rates close to zero as a sign of the good life. Skidelsky confirmed that this was Keynes’ view.
Skidelsky has written a new book, “Keynes: The Return of the Master.” Unlike his three-volume biography, it is quite hagiographic. Skidelsky stated that “Keynes was not an inflationist,” but later wrote that Keynes advocated a “permanent cheap credit” policy and zero-percent interest rates. Clearly you can’t have it both ways.
The whole idea of eliminating interest rates is heretical, and just plain bad, economics. Hayek’s major criticism of Keynes was that he didn’t understand the complexity of capital theory, and this naive view of zero-interest rates and permanent cheap money proves it.
Keynes would be pleased to learn that the Fed has adopted a zero-interest rate policy for the near future. It’s crazy to keep rates far below the natural rate, a policy that will lead again to asset bubbles and structural imbalances. It’s like giving candy to kids, getting them high but eventually sick.
Siegel and I also lambasted Keynes and his followers for adopting the anti-saving mentality that continues to plague Keynesians today. His “paradox of thrift” – the idea that by reducing consumption, saving can slow the economy and reduce further saving – denies an understanding of how savings and investment work to encourage entrepreneurship and economic growth. University of Virginia economist Ken Elzinga made this point to me: Keynes failed to appreciate the value of entrepreneurial creativity and the capitalist process of “creative destruction” that Joseph Schumpeter discussed.