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The Age of Keynes

Grand Pursuit: The Story of Economic Genius [1], Sylvia Nasar, Simon & Schuster, 558 pages

[2]In December 1974, in the midst of the first energy crisis, Friedrich Hayek received the Nobel Prize in Sweden and confessed, “we have little cause for pride: as a profession we have made a mess of things.” He admitted that the stagflation of the 1970s was largely a product of policies “which the majority of economists recommended and even urged governments to pursue.”

His apology could equally apply today. The financial crisis of 2008 and subsequent Great Stagnation can largely be laid at the feet of a predominant school of economics. We still live in and suffer from the Age of Keynes, the primary protagonist in Sylvia Nasar’s new history of 20th-century economics. John Maynard Keynes’s followers continue to encourage deficit spending, easy money, and progressive taxation.

Nasar’s thesis is that “economics rescued mankind from squalor and deprivation.” I suspect that honor goes more to the inventors, entrepreneurs, and businessmen of the 19th and 20th centuries and to the statesmen who established a constitutional framework to preserve life, liberty, and property. Most of the geniuses in Nasar’s book—Marx, Sidney and Beatrice Webb, and Keynes, in particular—probably did more to thwart progress than to encourage it.

Nasar is a talented writer whose bestselling A Beautiful Mind, the life of the mathematical savant John Nash, was made into the award-winning film of the same name in 2001. She performs brilliantly when she tells the life of a single subject, but she faces a daunting challenge weaving together a coherent story covering some 150 years of history involving dozens of players and subplots.


Her overarching theme is noteworthy: humanity’s quest to break free from poverty and a 14-hour work day. She divides recent history into three major acts: “hope” (1870-1914), “fear” (1914-1945), and “confidence” (post-1945). She asks what role economists played in developing the framework of these acts.

Her characters are not the usual suspects found in the standard textbooks. Instead of starting with Adam Smith, the architect of modern economics, she begins in the mid-19th century with the depressing account of Marx and Engels and their doctrines of exploitation, alienation, and crisis of market capitalism. She rightly criticizes Marx, but she misses the chance to show how Marxism-Leninism was a giant leap backwards by failing to introduce the classical school before it. Adam Smith, David Ricardo, and John Stuart Mill, among others, had made remarkable progress—despite their errors—before Marx showed up. And the house that Adam Smith built was enhanced by the French laissez-faire school of J.B. Say, Frédéric Bastiat, and Alexis de Tocqueville and the subsequent marginalist revolution by Carl Menger, William Jevons, and Léon Walras. Only Alfred Marshall of the British economic school makes an appearance on her stage.

That’s unfortunate, given that Adam Smith’s 1776 magnum opus, The Wealth of Nations, focused on the very same theme as Nasar’s book. The avowed purpose of Smith’s “system of natural liberty” was to generate in his words “universal opulence which extends itself to the lowest ranks of the people.” Yet Nasar claims that the founding father of modern economics was oblivious to methods that could “raise living standards” and gives credit entirely to Alfred Marshall for discovering that increased labor productivity and entrepreneurship are the keys to higher wages and standards of living.

Had she not read about the pin factory and the benefits of the division of labor in The Wealth of Nations? Was she unaware of the earlier contributions of the Frenchman J.B. Say, which integrated the vital role of supply-side entrepreneurship into economic thinking; or those of Eugen von Böhm-Bawerk, the famed Austrian author of The Positive Theory of Capital and John Bates Clark, the Columbia professor who pioneered the principle that wages are determined by the marginal productivity of labor?

Surely Clark, omitted in The Grand Pursuit, qualifies as one of the “economic geniuses” of the 20th century. There’s good reason that the annual award given to the brightest, most prolific American economist under the age of 40 is named after John Bates Clark. The first two economists to win the Clark medal were Paul Samuelson and Milton Friedman, important figures in Nasar’s history. Clark would have been a perfect counterpoint to Beatrice Webb, whom Nasar praises as the inventor of the welfare state in Britain. Beatrice and her husband Sidney are given more coverage than any other personality in Nasar’s book except Keynes and Irving Fisher.

The story of Beatrice Webb is a neglected but fascinating tale that reads like a Jane Austen novel in Nasar’s romantic and absorbing account. (This chapter alone is worth the price of the book). Beatrice Webb’s life is tragic because she was a brilliant, charismatic woman who was a devout libertarian and intimate friend of social Darwinian philosopher Herbert Spencer. But she converted to gradualist Fabian socialism and was a key figure, according to Nasar, in convincing Winston Churchill and other British leaders to adopt the welfare state in Britain. She later became an apologist for the centrally planned Soviet Union. (Webb reminds me of Hillary Clinton, who started off as a Goldwater conservative but was radicalized in the 1960s.)

In the United States, Webb’s contemporary J.B. Clark moved in the opposite direction. He shifted from being a social reformer to becoming a conservative defender of the capitalist system after brilliantly solving the “joint-input problem” in economics. Clark’s marginal productivity theory undercut the socialist exploitation argument that workers were being unjustly underpaid in the unfettered marketplace. Clark opposed the power of both corporate monopolies that attempted to force wages below labor’s marginal value and labor unions that imposed above-market wages on big businesses. In 1914, he wrote a book entitled Social Justice Without Socialism. Apparently it was ignored by the Webbs and the British Parliament.

Nasar often juxtaposes her favorite characters, which makes for compelling reading in the battle of ideas—Joseph Schumpeter and Friedrich Hayek in Vienna, Keynes and Fisher in the Roaring Twenties, Hayek and Keynes in the Depression Thirties, Keynes and Friedman in the war years. She could have added others: Webb and Clark, for example, or the American Thorstein Veblen versus the German Max Weber on the meaning of market capitalism.

Keynes gets the most ink in Nasar’s account, and for good reason. Time rated him the most influential economist of the 20th century, ahead of Milton Friedman at number two. But influential is not the same as good. Lord Keynes has created more mischief than any other economist in modern times. Marxists, socialists, and cranks had long attacked thrift, capitalism, and laissez-faire policies before he came along. They advocated progressive taxation, easy credit, and deliberate deficit spending in bad times. But it was the “ingenious” Keynes—who told his students his name was pronounced “Keynes as in brains”—who provided the theoretical underpinnings of today’s spendthrift society in a book presumptuously called The General Theory of Employment, Interest, and Money. 

The Roman philosopher Seneca wisely said, “There is no genius without a touch of madness.” And there is plenty of madness in Keynes. His whole purpose was to turn classical economics on its head. Instead of balanced budgets, sound money, and laissez faire, he created a new model justifying a debt-laden consumer society, a welfare state, and permanently cheap money. He even advocated building bridges to nowhere. “To dig holes in the ground will increase employment,” he wrote. “Pyramid-building, earthquakes, even wars may serve to increase wealth.” Lord Keynes is the father of today’s fiscal insanity.

Nasar is critical of many players in her dramatis personae, especially Karl Marx and Joan Robinson, but Keynes escapes unscathed. She glorifies his genius in solving “the political problem of mankind,” to wit, “economic efficiency, social justice, and individual liberty.” While she pays polite homage to market-defenders like Friedrich Hayek and Milton Friedman, Keynes is clearly the hero of her book. He championed big government as the golden mean between the extremes of totalitarianism and laissez faire, and his new macroeconomic model provided a “lifeline” for “drowning men” in the 1930s. Nasar approvingly cites Hayek’s letter to Keynes’s widow wherein he fawns that Keynes was “the one really great man I ever knew, and for whom I had unbounded admiration.”

The final chapters about post-World War II global economy are surprisingly unfinished, as if Nasar had to cut the story short because her book was running over 500 pages. For example, she fails to bring back the market defender Milton Friedman as a counterweight to Keynesian wunderkind Paul Samuelson. Friedman versus Samuelson would have made a great clash of the titans and a fitting ending to the book. In an earlier chapter, Friedman is introduced as a young economic statistician at the U.S. Treasury Department and an early convert to Keynesianism who introduced income-tax withholding to help pay for the war. Amazingly, Friedman never shows up again, despite his transformation at the University of Chicago into the most passionate critic of Keynesian economics and the welfare state.

Virtually nothing is written in this book about Friedman’s heralded work A Monetary History of the United States, co-authored with Anna Schwartz, which countered the Keynesian/Marxist argument that the Great Depression was caused by defects in the free market. “Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government,” Friedman wrote. An “inept” Federal Reserve allowed the banking system and the economy to collapse, he contended.

[3]A book that promises to tell the story of the miracle of economic growth in the 20th century surely should include a discussion of the supply-side revolution of the 1980s and 1990s that has spread around the world. Yet Nasar is silent about that revolution, the collapse of the Soviet Union and socialist central planning, and the impact of both on emerging markets, whose leaders finally threw off the mind manacles of socialist thinking. Franklin Roosevelt shows up regularly in the 1930s, but there’s not a single word about Thatcher or Reagan in Nasar’s account.

She ends her book with the story of Amartya Sen, an Indian-born Harvard professor who won the Nobel Prize in 1998, and his theme of social justice. She notes how Sen was inspired by John Rawls’s “magisterial” thesis that “a just society should maximize the welfare of the worst-off group.” Nasar made a wise choice in selecting India as a laboratory to discover ways to alleviate poverty and social injustice. The world’s largest democracy has indeed made much progress, thanks not to the heavy central-planning model of Nehru but to a succession of recent leaders determined to open India’s economy. Sen has long known that famines are government-made, not natural disasters. The key to India’s success in raising living standards and curtailing poverty has been a large dose of economic freedom. Still, India has a long way to go and continues to suffer from wide-ranging state economic intervention, onerous rules for business licensing, and corruption.

Nasar’s epilogue is perhaps too optimistic. “Confidence” is not a descriptive word for describe today’s global economy. Investors and political leaders have anything but confidence in the West after the financial crisis of 2008-09. She says “there is no going back,” but there may not be any going forward either—until those “madmen in authority” (Keynes’s term) in Washington get out of the way.

Mark Skousen has taught economics at Columbia University and is the author of The Making of Modern Economics [4].

19 Comments (Open | Close)

19 Comments To "The Age of Keynes"

#1 Comment By Ben, Okla. City On November 9, 2011 @ 9:49 am

“We still live in and suffer from the Age of Keynes”

Yeah right. We live and suffer in the age of Larry “the Lizard” Kudlow.

Every time someone proposes Keynesian style demand management (such as infrastructure spending since unemployment in the construction sector is high, material costs are low, and interest rates are low) the Austerians say we can’t so that. You guys killed off the Keynesians (except for the Military Keynesians) in the 1980s. Please stop it with the blame game.

#2 Comment By Art R. On November 9, 2011 @ 10:42 am

Mr. Skousen’s review article and his unabashed advocacy of the laissez faire and “supply side” schools of economics remind me of the old joke: ” How many economists does it take to screw in a light bulb?”

Answer 1. None. If it really needed changing, market forces would have caused it to happen.

Answer 2. None: If the government would just leave it alone, it would screw itself in.

Answer 3. None. The “invisible hand” does it.

#3 Comment By Ken Hoop On November 9, 2011 @ 1:36 pm

“The financial crisis of 2008 and subsequent Great Stagnation can largely be laid at the feet of a predominant school of economics.”

Skousen makes quite a claim.

I’m open to elaboration. He gives none. How did Keynes cause deregulated finance’s collapsing the economy via CDS’s, etc?

#4 Comment By Pyrrho On November 9, 2011 @ 3:46 pm

Yeah right. We live and suffer in the age of neoliberal failure.

Yet somehow it’s always Keynes’ fault.

#5 Comment By Libertarian Jerry On November 9, 2011 @ 7:25 pm

Much of Keynes “economics” is wrong.But to blame Keynes for today’s meltdown is also wrong. Despite the vultures on Wall Street and their illegal shenanigans, the main culprits in America’s economic decline are greedy socialist politicians trying to buy votes by playing Santa Claus with other people’s money and a majority,not all, but a majority of American people who want something for nothing. Add in the enormous waste in government plus stupid war after stupid war and you have a recipe for fiscal disaster. Keynes only supplied the means: fiat money printing,low interest rates,easy credit,low savings rates and so forth. The perfect recipe do bury America under a pile of debt so large that it will never be paid off. In the end America will be totally bankrupt,our money will be worthless and the American people will be turned into perpetual debt serfs. Keynes’s ideas provided the means,but it was the American politicians and people who did the deed.

#6 Comment By Ben, Okla. City On November 9, 2011 @ 8:44 pm

“He even advocated building bridges to nowhere. “To dig holes in the ground will increase employment,” he wrote. “Pyramid-building, earthquakes, even wars may serve to increase wealth.” Lord Keynes is the father of today’s fiscal insanity.”

Ummm, no. To take this quote out of context and suggest that Keynes was making real policy prescriptions is just ridiculous. He was making a point by exaggeration. Keynes didn’t really advocate for warfare or pyramid building, he was simply pointing out side benefits of otherwise abhorrent or silly enterprises. Yes, people really do get rich and get employed when everyone gets mobilized for warfare. It’s undeniable. Big natural disasters get the construction trades going.

Keynes was pro-capitalism. He was trying to save capitalism as much as possible and make modifications WHERE NECESSARY in order to preserve broad political support for capitalism. It’s no good to extol the virtues of a system that is great for economic efficiency….yet a little weak in the area of distributional equity…when the Bolsheviks are hanging the rentier class from the nearest tree. That’s the world that Keynes lived in. Communism was seen as a real alternative by lots of reasonably intelligent people in the Western world. Keynes wanted to preserve the good things about capitalism and fix some of its flaws.

#7 Comment By Pyrrho On November 10, 2011 @ 7:19 am

“Conservatives” argue that Keynes didn’t rescue us from depression, it was the war. Well, from an economic standpoint, wasn’t building all of those ships, tanks and planes, only to bury them in a hole four years later, essentially what Keynes was calling for?

The complete intellectual unraveling and neurotic breakdown of the “conservative” movement and the GOP are really something to behold.

After the next, immanent meltdown on Wall Street, the “conservative” movement will be finished for a generation. No amount of talk show propaganda and “campaign contributions” will save them.

#8 Comment By Jim L On November 10, 2011 @ 8:11 am

Wow it is all Keynes fault. Ah…but how? Keynes theory is that in bad economic times the government moves in to stimulate the flow of money and jobs through deficits and in good times the government gently raises taxes to pay the deficit off. Everyone and the market keep forgetting the second part. Remember the Bush “deficits don’t matter” well they do. If the economists hadn’t got hijacked by capitalists who don’t like any taxes and the social welfare mob that never saw a government project they didn’t like, we wouldn’t be in such a mess.

#9 Comment By lester On November 10, 2011 @ 5:36 pm

Ben- Why do we need infrastructure spending though? I’m not saying we don’t need it, but isn’t it a little odd that we have a 4 trillion dollar a year budget and crumbling infrastructure?

With what we pay in taxes you’d think we would have amazing infrastructure. The states priorities are elsewhere is what that says.

“when the Bolsheviks are hanging the rentier class from the nearest tree. That’s the world that Keynes lived in. Communism was seen as a real alternative by lots of reasonably intelligent people in the Western world. Keynes wanted to preserve the good things about capitalism and fix some of its flaws.”

It’s not the world we live in. communism failed so thers no need for a keynes to water capitalism down.

#10 Comment By JakeJ On November 10, 2011 @ 9:02 pm

History says that interest baring money systems ALWAYS fail – that they are inherently unstable.

Economics will ALWAYS be a dismal science until it comes to that obvious conclusion.

Modern economics must be about creating a new system of money that both facilitates exchanges between producer and customer and that promotes the creation of ever newer goods and services.

#11 Comment By Buzz Baldrin On November 11, 2011 @ 7:08 am

Bretton Woods created unparalleled prosperity until LBJ and Nixon and their big spending legislators jumped ship with their guns and butter spending. This forced Nixon to abandon the gold standard proposed by Keynes at Bretton Woods. Unfortunately, the US refused to be legally bound the gold standard, Keynes’s tool of choice to prevent the LBJ’s of the world from printing money to finance bubble economies and aggressive wars against third world countries.

#12 Comment By Hardeep SIngh On November 11, 2011 @ 11:57 am

What Skousen also forgets to mention is that Keynes agreed with Hayek on many aspects such as strong laws to protect private property, not pushing real wages above competituve market levels so that unemployment reamin low. This is what Keynes had to say about Hayek’s ‘Road to Serfdom’ “Morally and philosophically I find myself in agreement with virtually the whole of it.

Keynes is misunderstood and maligned by the right constantly but very few of them actually know that he was about.

#13 Comment By Hardeep SIngh On November 11, 2011 @ 12:06 pm

In 1931 Friedrich von Hayek extensively critiqued Keynes’s 1930 ‘Treatise on Money’ only to have Keynes assert that the Treatise no longer reflected his thinking. However, after reading Hayek’s The Road to Serfdom, Keynes] wrote to Hayek saying: “In my opinion it is a grand book … Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement.” Yet he concluded the same letter with the recommendation:

What we need therefore, in my opinion, is not a change in our economic programmes, which would only lead in practice to disillusion with the results of your philosophy; but perhaps even the contrary, namely, an enlargement of them. Your greatest danger is the probable practical failure of the application of your philosophy in the United States.
On the pressing issue of the time, whether deficit spending could lift a country from depression, Keyne] replied to Hayek’s criticism in the following way:

”I should… conclude rather differently. I should say that what we want is not no planning, or even less planning, indeed I should say we almost certainly want more. But the planning should take place in a community in which as many people as possible, both leaders and followers wholly share your own moral position. Moderate planning will be safe enough if those carrying it out are rightly oriented in their own minds and hearts to the moral issue. This is in fact already true of some of them. But the curse is that there is also an important section who could be said to want planning not in order to enjoy its fruits but because morally they hold ideas exactly the opposite of yours, and wish to serve not God but the devil.”

#14 Comment By Hardeep SIngh On November 11, 2011 @ 12:11 pm

In ‘The Economic Consequences of the Peace’, Keynes had written:

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Keynes remained convinced of the dangers of inflation to the end of his life, during World War II he argued strongly for policies that would minimise post-war inflation.”

#15 Pingback By The American Conservative » Weekly Round-up: How to Honor Veterans, Crunchy Conservatives, Rick Perry’s Implosion On November 11, 2011 @ 1:44 pm

[…] Mark Skousen reviews Grand Pursuit: The Story of Economic Genius by Sylvia Nasar and says she’s greatly marginalized the importance of key figures such as Milton Friedman and Adam Smith, while elevating Keynes and Marx. […]

#16 Comment By Ben, Okla. City On November 11, 2011 @ 5:50 pm

Lester: If you return to unfettered capitalism, you will simply have a return to the same social forces that created the Progressive Era and the New Deal. It’s already started with the OWS phenomenon. Capitalism creates a great dynamism in the economy which we should harness, but it must be tempered with provisions for those who can’t compete in such a system, and it must offer real opportunities to those who start out life with very little. I’m not interested in Social Darwinism.

#17 Comment By John Fordham On November 12, 2011 @ 11:01 am

Unforgivable not to have even mentioned the name of Mises, who was, as far as I know, the best opponent of Keynes. I read somewhere recently that Mises is marginalized even today because he was consistent in opposing the state in almost all things. Hayek was much more ‘moderate’ in that regard.

#18 Comment By Mark, Huntsville On December 1, 2011 @ 6:35 pm

In my opinion John Fordhan is absolutely correct that Misses was the most determined defender of freedom / free enterprise / capitalism (related terms if not synonyms). His book, Human Action, is outstanding. If anyone deserved the Nobel prize in economics in the 20th century, it was he.

The 20th century was indeed the century of socialism. In their countries at least, FDR, Hitler, Stalin, and Mao were idolized. The cult of personality was alive and well. Misses stood outside and faulted socialism of any kind. He could barely keep a job.

Here in the United States, many Americans were taught to love FDR, Uncle Joe (not McCarthy of course), and to hate Hitler. In truth, they were all popular socialists. Granted, only two became (had the power to become?) mass murderers, but each enthusiastically expanded Government power and blamed resistance on the greedy rich. Has this come to an end? Need I ask?

Speaking of Stalin, I recently learned that Robert Duvall played Stalin in a movie by that name. Like “The Path to 9/11” it is hard to impossible to find. You think the days of censorship are over? Of course it is not government censorship. It is the censorship of political correctness. It is enforced by intimidation, smear campaigns, defamation of character, etc. There is nothing liberal about modern American liberalism.

#19 Comment By JERRY On May 16, 2012 @ 5:57 pm

What amazes me is that in all the hubbub over the contents of this book somehow one of the greatest economists of the 20th Century is never mentioned and is lost in the shuffle. That economist being Ludwig Von Mieses, who even Keynes admitted toward the end of his career that he (Keynes) had gotten it wrong and Von Mieses had gotten it right.