John Maynard Keynes: Economic Savior or Medieval Thinker?

In this episode of Fascinating!, Rik from Planet Vulcan takes us on a deep dive into the life and enduring influence of John Maynard Keynes, one of the most significant figures in modern economics. From his privileged upbringing in upper-middle-class England to his groundbreaking work during the Great Depression, Keynes shaped what we now know as macroeconomics. But was Keynes’ influence truly revolutionary, or was it a polished extension of medieval intelligent design thinking applied to the economy?

With dry humor and sharp insights, Rik challenges the assumptions behind Keynesian interventionism, drawing parallels to feudal governance and top-down economic planning. While Keynes may have been a brilliant thinker, his legacy of government-managed markets still resonates with ideas from a bygone era, ignoring the power of evolutionary thinking in socioeconomic systems. Join Rik as he unpacks Keynes’ contributions and asks whether it’s time for Earthlings to move beyond the medieval mindset still shaping much of modern economics.

Transcript

Good day to you, and welcome to Fascinating!  I am your host Rik, from Planet Vulcan.  My continuing mission on Planet Earth:  to search for signs of intelligence and to encourage its spread. 

In this essay, we will have an in-depth look at the enormous influence of John Maynard Keynes on the study of economics.  His influence began during the Great Depression of the 1930’s, and resulted in an significant change in the way economics is done.

Let’s have a look at the life of this fascinating Englishman, and let’s trace the path of the impact his ideas have had on economic thought.

First a short bio:

Keynes was born in 1883 in Cambridge, England.  His father, John Neville Keynes, was an economist and a lecturer at the University of Cambridge, while his mother, Florence Ada Keynes, was a social reformer and later became the mayor of Cambridge.

England was and still is highly class conscious.  The Keynes family were considered upper middle class, which means that they were almost on a par with the titled aristocracy as far as social standing was concerned, even though technically they were commoners. And members of the upper middle class had by this time achieved dominance in government, while the political power of the landed aristocracy had greatly diminished.

Keynes attended the best schools - Eton College and later King's College, Cambridge. Initially at University, he studied mathematics but soon shifted his focus to economics under the mentorship of prominent economists Alfred Marshall and Arthur Cecil Pigou.

Keynes was associated with the influential Bloomsbury Group, a collective of influential English writers, intellectuals, philosophers, and artists, active primarily in the early 20th century. They were centered in the Bloomsbury district of London. Prominent members besides Keynes included Virginia Woolf, E.M. Forster, and Lytton Strachey. The group was known for its progressive views on art, literature, and society, and they rejected Victorian norms. Their work significantly shaped modernist literature, economics, and visual arts, advocating for innovation, sexual liberation, and intellectual freedom.

Keynes’s intellectual interests were wide and varied, and he was by all accounts a brilliant thinker.  Friedrich Hayek, who was a frenemy of Keynes, expressed the opinion that for Keynes, economics was really just a sideline, and that his brilliance shone more brightly in other areas; and since Keynes did not read any foreign languages other than French, the voluminous and important publications about economics written in German were not easily accessible to him.

After completing his studies, Keynes briefly worked in India Office and taught at Cambridge University. 

Keynes' most important work came during the Great Depression. In his seminal book "The General Theory of Employment, Interest, and Money" (1936), he challenged the prevalent idea among economists at the time, which held that market processes would normally return the economy to full employment naturally after a shock.

Keynes posited that during periods of economic downturns, aggregate demand (total spending in the economy) could be insufficient, leading to high unemployment and underutilized resources. He argued that governments could and should intervene through fiscal and monetary policies—specifically, by increasing government spending, cutting taxes, and influencing interest rates by making changes to the growth rate of the money supply, to stimulate aggregate demand and reduce unemployment.

Thus was born what we now call macroeconomics.  

Keynes was instrumental in the planning and negotiations that led to the establishment of the Bretton Woods system in 1944, which aimed to create a stable postwar economic order and established institutions like the International Monetary Fund (IMF) and the World Bank.

Keynes advocated for a system of fixed exchange rates anchored by the US dollar and supported by international monetary cooperation to prevent the kinds of economic imbalances that he believed had led to the Great Depression and the collapse of international trade.

The IMF, by the way, originally had the sole mission of making short-term loans to governments with balance of payments problems, to facilitate the maintenance of fixed exchange rates.  It is interesting to note that the IMF still exists, more than fifty years after the collapse of the Bretton Woods system and its fixed exchange rates.

The World Bank, originally the International Bank for Reconstruction and Development, had the mission of making loans for projects in nations recovering from the destruction of World War II.  It too still exists, far beyond the time when recoveries were complete.

Both institutions have reinvented themselves by finding new missions, and now constitute litter on the institutional landscape, worse than so-called “forever chemicals”, which in truth disintegrate more quickly than self-perpetuating “forever bureaucracies”.

Keynes’s ideas were enormously appealing to advocates of strong and intrusive government.  And the acceptance and spread of Keynesian thinking has been greatly facilitated by the government funding flowing towards those who advocate it.  It has been rough going for those who question it.  It’s difficult to get grant money from an institution if you plan to question the value of that institution’s functions.

Keynes suffered from heart problems and died on April 21, 1946, at his home in Sussex, England, at the age of 62.

It’s interesting to speculate about what course Keynes’s intellectual development would have taken if he had lived longer.  By all accounts, he was a brilliant and flexible thinker who took the scientific method seriously and remained open to new ideas and new evidence.

It's similar to speculation about how John Lennon’s thinking might have evolved from his youthful infatuation with the idea of a communist utopia as revealed in his song “Imagine”.  Lennon was only 40 years old when he was shot to death outside his New York City apartment by a deranged publicity seeker.

In particular, it seems likely that Keynes’s views on the importance of the money supply, which he thought was of little consequence, would have changed in light of evidence to the contrary, particularly the evidence presented by Milton Friedman and Anna Schwartz in their highly influential work, "A Monetary History of the United States, 1867–1960", published in 1963.

Not so the views on monetary policy favored by the followers of Keynes, who for whatever reason have always clung to the primacy of fiscal policy; perhaps the reason is revealed in the fact that Keynesians typically favor vast expansion of what is euphemistically referred to as the “public sector”, and this expansion is a natural tie-in with the program of temporarily filling in the gaps in aggregate demand during downturns, where the spending increases are never in truth merely temporary, but which seem to ratchet ever higher.

There are further interesting developments in the history of economic thought concerning the still-ongoing dispute between economists who argue about the relative importance of monetary policy and fiscal policy, but this dispute is not the subject of this essay.  If this dispute is of interest to you, there is plenty of material you can access.

I find the question “Should there be ANY intervention” far more interesting than the question “What form should the intervention take”, a position which takes for granted what ought to be a matter of sober reflection.

In this essay, I propose to examine the impact of Keynes himself and the impact of those who describe themselves as “Keynesian” in light of the theme of evolutionary thinking vs. intelligent design thinking.

Keynes himself, and his followers to an even greater extent, represent medievalist intelligent design thinking.  Keynes did understand at least that the phenomenon we call the socioeconomic system is an evolving complex system with a life of its own, a view that has become increasingly diluted among the Keynesians who carried on in his name.

Keynesians now pretty much subscribe to the idea of intelligent design to a much greater degree than did Keynes himself.  Keynes himself merely argued that economic evolution could take us to places where the self-correcting mechanisms of the economic system, which he at least acknowledged, would be insufficient to restore full employment and output after an economic shock, and that consequently there were situations where intervention by governments would be necessary to get the system back on track.

A prime example of such a situation was what Keynes referred to as a “liquidity trap”, which he put forward as an argument that in an environment of low interest rates, people had an incentive to hang on to their money rather than spend it, which could lead to a more or less permanent lack of effective aggregate demand, a problem which he believed could persist indefinitely, and which could only be solved by fiscal stimulus that would make up the shortfall.  He claimed that monetary stimulus in such a situation would be like “pushing on a string”.

The liquidity trap idea was at least plausible, even though it’s difficult to find any evidence that such a thing has ever happened following an economic shock.  

We are supposed to believe that we must choose between the devil of monetary intervention and the deep blue sea of fiscal intervention.  But before discussing how to most effectively intervene, we need to do some clear thinking about whether we should intervene at all.

And here is the place in the narrative where you really, really need to consider this stuff from a Vulcan’s-eye view.

This particular Vulcan urges you to look at your governing classes and the manner of governance that they typically promote as archaisms carried over from Europe’s feudal era.  

In feudal times things were organized hierarchically, with the king at the apex, and accountable only to God.  The king’s authority was delegated to various ranks of nobles, and the whole system was supported by the agricultural labor of serfs, slaves for all practical purposes.  

Beliefs evolved amongst members of the ruling classes, such as the idea that engaging in commerce inevitably resulted in soiled hands because you had to gouge profits out of whosever hide you could; that their work by contrast was noble in every sense, because it was they, in league with the church, that created social order out of what would otherwise have been chaos; and that they must from their lofty perches oversee and guide the actions of everyone lower in the hierarchy, particularly the labor of the serfs, ideally with benevolent intentions.

Parallel beliefs exist among the members of Earth’s ruling classes to this day.  They either do not see, or are willfully blind to, the fact that their ways of thinking about governance have become obsolete. 

Obsolete because medievalist ways are incompatible with evolutionary thinking, which emphasizes the cultivation of emergent spontaneous order as an approach to governance that is preferable to the intelligent design approach. 

The intelligent design approach has failed spectacularly in the area of economic planning 100% of the time, and now that the emphasis has shifted from planning to regulation we can observe that in many cases regulation causes more harm than good.

I asked my chatbot, “If I wished to defend the idea that economic regulation is effective and desirable, what historical successes could I point to?”

The bot proposed the following as examples of regulatory successes:

1 – New Deal financial regulation, including Glass-Steagall, the Securities Act and the creation of the Federal Deposit Insurance Corporation.

2 – The Clean Air Act and the work of the Environmental Protection Agency.

3 – Tightening of bank regulation following the 2008 financial crisis.

4 – Occupational Safety and Health Act.

5 – Antitrust.

6 – The Food and Drug Act.

If this list represents successes, you have to wonder what would qualify as failure.

For example, the Glass-Steagall Act was based on several ecnarongis (i.e., knowing things that are not so).  Everyone “knew” at the time that the stock market crash had caused the depression, and that the stock market crashed because of excessive speculation:  the first two ecnarongis.

In truth, the stock market crash was a symptom of underlying economic problems and not a cause, most significantly the undermining of international trade by the Smoot-Hawley tariffs that were about to be enacted into law, and the consequent retaliatory tariffs imposed by other countries, all of which worked to shrink the volume of world trade almost to nothing.

The third ecnarongi was the foolish idea, still widely believed, that speculation is inherently problematic, to the point of evil.  This ecnarongi was part and parcel of the response the newly-created Federal Reserve made to the downturn in economic activity, where the Fed board of governors decided that it was more vital to battle the practice of speculation than it was to fulfill their legislative mandate of acting as a lender of last resort to banks that were financially sound, but whose assets were not sufficiently liquid for them to meet depositors’ demands for cash during bank runs.  

So sound banks failed along with the unsound, as the Fed took actions to battle speculation and ignored their lending mandate, and the the real-world effect of the Fed’s actions was to drastically increase the severity and duration of the depression.

But what about the Federal Deposit Insurance Corporation, which is actually neither insurance nor a corporation, but a system of deposit guarantees?  Deposit guarantees have worked effectively to make bank runs a thing of the past, but a guarantee is not as good as insurance, which would automatically put a price on risk.

Once again, social engineering by government preempted the evolution of a market for true deposit insurance.  And just as it was with redlining, another clumsy way of managing risk briefly emerged in the form of the infamous “Regulation Q”, which forbade the payment of interest on demand deposits (basically checking accounts).  

This regulation amounted to an attempt to repeal the laws of supply and demand, which makes about as much sense as trying to repeal the law of gravity; look up “disintermediation” for an entertaining tale of regulatory futility; and it wasn’t long before the physarum found its way to the oat flakes and the regulation collapsed.

Glass-Steagall did its part in the war on speculation by creating a sharp distinction between commercial banking and investment banking.  The law forbade commercial banks from owning common stocks as an attempt to make commercial banking ultra-safe.  The investment bankers, the ones who deal in corporate finance, were allowed to take risks that were forbidden to commercial banks.

The actual result of Glass-Steagall was to make things more difficult and expensive for the banking industry; and of course as we have already noted, the war on speculation was nonsense from the beginning – it was a solution searching for a problem.  Glass-Steagall was eventually repealed, although it still has its fans.

So Glass-Steagall was junk, and the FDIC has been problematic.  What about the securities act?

The best that can be said about the securities act is that it could have been worse.  Many of the proposals floating around at the time of the New Deal were aimed at absolutely prohibiting the sale of securities that were deemed “too risky”, a troublesome and undefinable idea.  Fortunately, the act as it finally came into being focuses mainly on disclosure requirements, so that market participants presumably would be able to make informed decisions about assuming risk.

What about the other sources of pride for afficionados of regulation?  In the interest of brevity, let’s not address the EPA or OSHA, which have at least been effective if not optimal.

And as for the financial crisis of 2008, I devoted an entire Season 1 podcast essay to this topic, under the title of “Blame”, and I invite you to listen to it.  I titled it “Blame” because finding someone to blame for the crisis was put forward, and successfully so, as a substitute for diagnosing the problem.  So we heard a lot about “greedy bankers” and few people found it necessary to look any deeper if we could just attach blame to them and then put them in a straitjacket to keep them out of mischief.

This interpretation of the crisis allowed regulators to expand their regulatory authority over bankers, and to extend their authority to other institutions besides banks, claiming that getting tough with everyone was necessary to control excessive risk-taking.

In truth the crisis was a regulatory failure, and not a market failure, and the excessive risk-taking can be traced to the too-big-to-fail doctrine.  The excessive risks so many institutions were nonchalantly taking can be traced to implementation of this doctrine that incentivized the risk-taking.

And as for anti-trust, a good case can be made that anti-trust was and is also a solution looking for a problem.  Trust-busting was inspired largely by the success of John D. Rockefeller’s Standard Oil Corporation, which supposedly had driven its competitors out of business by employing the tactic of “predatory pricing”.

Subsequent sober analysis has revealed that predatory pricing cannot possibly work unless you can prevent further entry into the industry from which you have driven your competitors.  If you cannot, then charging prices that are less than your costs merely costs you money.  In truth, Standard Oil dominated the industry because they were efficient and had lower costs.

But never let a good crisis go to waste, even if the crisis is imaginary.  As Herbie used to say, a lie is as good as the truth if you can get people to believe it.  And this particular lie gave us the Sherman antitrust act.

Under the Sherman Act, the justice department can sue a business for charging a lower price than its competitors; also for charging a higher price than its competitors; and of course for charging the same price as its competitors.

Charging a lower price than your competitors opens you to charges of predatory pricing; charging a higher price opens you to charges of price gouging; and charging the same price opens you to charges of collusion.

What about the famous AT&T breakup of which regulators are so proud?  Never mind that AT&T itself was a monopoly that had been created by government action in 1913 (see the “Kingsbury Commitment”) based on a theory that sounds pretty loopy with benefit of hindsight, which was that due to high investment requirements to create infrastructure, i.e., telephone poles and copper wire, a single competitor with even a small cost advantage was bound to dominate the industry as the company with a small advantage would gain more customers and spread their fixed costs over a larger customer base and their cost advantage would consequently become even greater.  

This idea was loopy because any such monopoly could be upended for a variety of reasons, for example in this case by technological innovation in the form of wireless communication.  

And what about the lengthy assault, beginning in 1969, by the justice department on IBM corporation, which was characterized as an unassailable monopolist that had to be broken up.  Eventually, in 1982, the suit against IBM fizzled out, because evolution in the high-tech industry had produced organizations like Microsoft and Apple Computer that had in fact successfully competed with IBM, and alongside which IBM has now become a minor player, with annual revenues equal to about 1% of the total revenues in the tech industry.

As the song says, there ain’t much to add once all the subtractin’s done.  The brightest spots in the history of regulation do not look all that bright from a Vulcan’s-eye view.  

The regulatory ideal is an example of medievalist intelligent design thinking, promoted and kept alive by people such as Marx and Keynes; greater numbers of Earthlings need to catch on to more modern ways to thinking based on what we can learn from the study of natural evolution.

The shiny side of the coin is that modern Keynesians have at least rejected the labor theory of value that has become dogma for the disciples of Marx, in favor of the subjective theory of value that stemmed from the marginal revolution.  AND Keynesians have finally mostly rejected national economic planning as a viable option for creating an economic system.

The tarnished side of the coin is that modern Keynesians still cling to medievalist ideas of governance, where the ruling classes monitor markets and the behavior of market participants, and intervene when some idea or other captures their imaginations with simple, easy-to-understand wrong answers, and they try to institute half-baked solutions that are based on shallow and confused thinking, to the detriment of all of us except the politically connected.

The applicable lesson of natural evolution is that socioeconomic order emerges spontaneously based on human actions, and not because some sort of regimentation is imposed from above.  

Keynesians are not sufficiently impressed with the power of this notion of emergent order – indeed many of them do not even exhibit an awareness of it – and still believe that their advice and guidance is indispensable if we do not want the Earth to spin off of its axis and take us all to realms of darkness.

Fascinating!

As a bonus to this week’s episode, my associate Prego de Nada has requested that I pass the following message along to you, my listeners, as a public service.

The message is that American men are unwittingly embarrassing themselves when they refer to their dangly bits as a “schwanz”.

Schwanz actually means “tail”, and the unshortened version of the word is “Schwanzstuecker”, or tail sticker.

So do not say “Schwanz” when you should be saying “Stuecker”, now that you know the rest of the story

I invite you to listen to the next essay in the Fascinating! podcast series, and to have a look at the Fascinating! YouTube Channel.

Please recommend Fascinating! to your friends if you find the lessons from nature in these essays personally valuable.

Theme music:  Helium, with thanks to TrackTribe.

Live long and prosper.

Savor your experiences.

Treasure your memories.

Anticipate a happy and rewarding future.

And respect nature’s wisdom.