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J. M. Keynes is not enough

The liberal society will preserve its innate vitality and pragmatism only if its dominant ideologies are scrutinized by the critical eye of the intellectuals. With regard to this James Piereson's critique of Keynes's intellectual legacy, published in New Criterion (May, 2009), is more than necessary in these days when Keynes obviously is the "economist of the hour."

In his essay "The cultural contradictions of J. M. Keynes," Piereson makes a readable and at the same time profound analysis of Keynes's economic theory and intellectual influence. Piereson does not regard Keynes only as a brilliant economist. "Keynes was more than an economist - he says - Indeed, he was one of the most influential intellectual figures of his era."Keynes, like many other great thinkers, had not only the authority of the scholar, he also enjoyed an intellectual power that exceeded the realm of pure economics.

Keynes's most influential works are The Economic Consequences of the Peace - this book was published for first time in 1920 and became popular with the prediction that the Treaty negotiated in Paris (1919) will financially ruin Europe and eventually cause another war. The Kenynes's bestseller is The General Theory of Employment, Interest, and Money, which appeared in 1936 and exercised long lasting influence on governments and politicians after the Second World War until the end of the 1970s.

Keynes's writings were not confined only in economics. As a member of Bloomsbury group, he wrote extensively on historical and political subjects and was interested in art. He understood that the "master economist" has to be "mathematician, historian, statesman, and philosopher." Piereson notices that Keynes was well aware that economics cannot be isolated from history, politics, psychology, and culture. He knew that the great changes in economic practice must be accompanied by corresponding changes in society's cultural assumptions that define our socio-political beliefs and values. He was witness of a revolutionary change in economy and technology prior the First World War and he worried that the old "protestant" culture of thrift and commercial investing actually harmed the future development.

Keynes's logic was that the old "Protestant" ethics was the core and the engine of the Western capitalism, but it was inadequate in the new economic environment in the beginning of the 20th century. The abundant wealth was regarded as capital, the amassed capital was reinvested, and the consumption and expenditures were restricted. According to Keynes this cycle of saving and reinvesting without consumption caused overproduction and elevated the risk for economic depression. Instead to feeding up the general prosperity this old philosophy stimulated poverty or at least hampered the possibility the accumulated wealth to spread over the all social segments. Businesses and governments regarded the balanced budgets as an end-goal and the idea for general wellbeing received only lip service by the ruling elites. But as Piereson says, the tragedy of this time was that all this wealth eventually would be expended in a very irrational way - not in consumption and consumerism, but rather in war. Moreover, the postwar order (after the First World War) although the great hopes for beginning of a new age was built on old political prejudices and tactics - the defeated nations, Germany, Austria and etc., should be kept on their knees, the economic ortodoxy would be perserved.

The classical culture of saving, investing, conflict (which is classical, but not liberal) and punishing (social, political, and economic Darwinism), was the culture that Keynes attacked in his books. He wanted to create a theory combining the best of classical liberalism and socialism. This theory demanded revised cultural worldview. Because of his faith that it is possible all important governmental decisions be made by public-spirited experts acting for the general interest, his theory had been successfully criticized in the last 20 years of the century by neoliberal thinkers such as Friedman and Hayek. The present economic crisis have not turn the wave of economical analysis completely in his favor. Keynes have been vindicated, but partially.

Piereson finishes his essay with the following: "Next to Winston Churchill, Keynes was (for good and ill) the most influential Briton of the last century. His influence is not only pervasive in the field of economics, but also in the worlds of politics and culture as well. He mounted an attack not simply upon classical economics, but on the broader political and cultural assumptions of nineteenth-century civilization. In doing so, he laid down the foundations for the mixed system of welfare capitalism under which we live today. We judge Keynes far too narrowly if we view him mainly as a theorist of stimulus packages and counter-cyclical government spending.

The present financial slump represents both a crisis of the free markets and of the mixed system that Keynes envisioned and did so much to bring into being. It is a system in which the government plays a large role in the economy, but in many areas on the basis of decisions that are highly political in nature. This is certainly true of interventions into the real estate, insurance, agricultural, and financial markets-and of several other markets as well. This is also true of many questions which have only recently arisen, such as: What industries or institutions should be bailed out or saved from themselves? Where are the lines to be drawn between those who should be saved and those allowed to fail? How far we should go in assisting mortgage holders or in propping up housing values? Should we compensate individuals who lost money in their retirement accounts? How far should governments go in borrowing against the future to promote recovery or to smooth out the business cycle? The resources governments can command are great but not unlimited. Governments also owe obligations to the future which, for obvious reasons, frequently go unrepresented. All of the questions are complicated by the fact that every bailout creates incentive for future episodes of recklessness or laxity. We have few political rules by which to make such decisions or moral standards by which to limit claims against society.

Unlike the classical theorists whom he criticized, Keynes gave little thought to the challenge of limiting government's role, or of defining its relationship to the market, or of devising institutions that might serve such purposes. His economic theory is thus of little use in answering the kinds of questions posed above. His economic theory presupposed a revised relationship between the state and the market, but he paid little attention to the damage this might do to political institutions established in the preceding era. He cast aside the moral assumptions of the liberal order but failed to suggest workable ones to replace them. Consequently, the Keynesian order operates in a moral and political sea with few markers to direct it." Montreal Review READ MORE

James Piereson is a Senior Fellow and Director of Manhattan Institute's Center for the American University and president of the William E. Simon Foundation. Mr. Piereson's research focuses on the importance of the classical liberal education and intellectual pluralism.

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