Gary North (www.garynorth.com), February 20, 2019
Let us say that a carpenter wishes to cut fifty boards for the purpose of laying the floor of a house. He has marked his boards. He has set his saw. He begins at one end of the mark on the board. But he does not know that his seven-year old son has tampered with the saw and changed its set. The result is that every board he saws is cut slantwise and thus unusable because [the board is] too short except at the point where the saw first made its contact with the wood. As long as the set of the saw is not changed, the result will always be the same. Cornelius Van Til
I first read this
in the summer of 1963. I spent the academic year 1963/64 studying under Dr. Van
Til. I have never forgotten this analogy. Just as a sharp buzz saw cannot cut
straight if it is set at a crooked angle, sharp people cannot think straight if
they are set at a crooked angle. You can sharpen a crooked buzz saw ever so
precisely. It will still not cut straight. The same is true of intellectual
defenders of obvious nonsense. This analogy has served me well ever since.
Over the years, I
have become convinced about just how well this analogy applies to Keynesians.
above-average IQs. Sometimes they are mathematically skilled. They graduate
from institutions of higher learning with advanced degrees. Yet becoming a
Keynesian intellectually incapacitates the person who has chosen this
intellectual career path. He must become a defender of obvious nonsense. The
more rigorously that a Keynesian trains himself to defend the system, the more
crooked he cuts, conceptually speaking.
ONE BIG IDEA
Keynes offered only one central idea: Government spending overcomes
recessions by increasing consumption. This was an ancient error in 1936,
the year that The General Theory was published. He dressed up this
ancient error with incoherent jargon. His disciples then added irrelevant
equations and superfluous graphs.
bothered to deal with this crucial question: “Where does the government
get the money that it spends into the economy?” This remains the crucial
question that Keynesians need to answer. Yet for all of their equations, for
all of their incomprehensible jargon, and for all of their rhetoric, they never
face this question.
It is such a
simple question. It has a simple answer. A government can obtain money from
only three sources: taxation, lending, and monetary inflation. There are
no other sources.
governments run massive deficits most of the time. They certainly run massive
deficits in depressions and recessions. So, they do not get all of their income
from taxation. If they did, they would not run deficits. Keynesians understand
that raising taxes in a recession would depress the economy. So, Keynesian
policy-makers recommend that the national government borrow money. From whom?
Either from the private sector or the central bank.
To believe that
government borrowing increases wealth is to believe that politicians and
salaried bureaucrats are wiser spenders than money-owners are — people who
invest their own money. This is a universal belief among Keynesians. They trust
the short-term economic judgment of people with no skin in the game.
They trust people who spend other people’s money.
In short, they
trust people like themselves: salaried anonymous bureaucrats who are immune
from public scrutiny. They cannot be fired because of the failure of their
I prefer to trust
the free market, which is guided by competitive monetary bids of people with
skin in the game. If they guess wrong, they lose money — their own money, not
yours and mine.
What about you?
Which system do you trust?
INVESTING VS. GOVERNMENT SPENDING
Here is an obvious
question that free market economists should ask Keynesians directly, but they
never do: “What would the lender who lends money to the government have
done with his money had he not lent to the government?” It is a simple
question. It has an obvious answer: he would have invested it. The
lender was not going to use his money on consumer goods. He owns lots of goods.
He does not need lots more goods.
people in a recession cut back on their consumer spending. This is true of rich
people, upper-middle-class people, middle-class people, lower-middle-class
people and even poor people. Rich people see investment opportunities: capital
goods selling at fire-sale prices. The rest of the population gets scared. So,
most people put their money in the bank. What does the bank do with the money?
It does not put it in a vault, drawing no interest. It buys investment assets.
It may make loans to consumers, but consumers tend to be frightened in
recessions. They cut back on debt. Maybe a bank makes loans to consumers who
want immediate spending, and therefore who run up their credit card debt at
high rates. But, as a group, they borrow too little to make a difference for
the overall economy. There are not that many of them.
The Pareto 20/80
distribution curve of wealth tells us that the vast majority of any nation’s
wealth, approaching 80%, is owned by the top 20% of citizens. This was true
when Vilfredo Pareto made the discovery in the 1890’s, and it remains true
comes from about 20% of the population. Therefore, most of a nation’s wealth is
owned by this same group. Most of a nation’s income is directed into the bank
accounts of this same group. This should come as no surprise. The reason for
this was explained over two centuries ago by J. B. Say in his famous law:
“Production creates its own demand [assuming no government-enforced price
floors].” Keynes, more than any other economist, rejected Say’s law. The
General Theory is an incoherent tirade against Say’s law.
The General Theory really is incoherent. If you don’t believe me, try
to read it. This is why it is rarely quoted except by critics who cannot resist
quoting obvious nonsense. No one cites Keynes verbatim in order to win an
argument. That is because you can’t win an argument by citing incoherent jargon
and obvious nonsense.
The man who
persuaded the academic world to adopt Keynesianism was not Keynes; it was Paul
Samuelson. This began in 1948, when his lower-division college textbook, Economics,
was first issued. It has never been out of print. Every edition from 1961 to
1976 sold about 300,000
copies. It is in its 19th edition. It has been the most
successful college-level textbook in history. It made Samuelson a
multimillionaire from book royalties. It was Samuelson, not Keynes, who became
the pied piper of classroom economics. But he was a reverse pied piper. He did
not lead the plague-infected conceptual rats out of the afflicted community. He
led them in from impoverished villages across the mountains.
Samuelson’s assessment of impact of The General Theory. He wrote a laudatory essay in 1946,
which was published in the arcane journal, Econometrica. He wrote
clearly and forthrightly, which has never been Econometrica‘s style.
Herein lies the secret of the General Theory. It is a badly written book, poorly organized; any layman who, beguiled by the author’s previous reputation, bought the book was cheated of his five shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgments. It abounds in mares’ nests or confusions. In it the Keynesian system stands out indistinctly, as if the author were hardly aware of its existence or cognizant of its properties; and certainly he is at his worst when expounding its relations to its predecessors. Flashes of insight and intuition intersperse tedious algebra. An awkward definition suddenly gives way to an unforgettable cadenza. When finally mastered, its analysis is found to be obvious and at the same time new. In short, it is a work of genius.
It was not a work
of genius. It was a work of conceptual self-deception. It was defended with
verbal incoherence. It was Samuelson’s self-appointed task to try to make a
silk purse out of this sow’s ear. He persuaded three generations of academic
economists that they have wisely (and profitably) devoted their lives to
promoting massive government debt that cannot be paid off and will not be paid
Ludwig von Mises
correctly characterized Keynesian economics in 1948, the year of Samuelson’s
textbook: the economics of stones
QUESTIONS, THEN TWO
You don’t have to
have an IQ above 100 to be able to torpedo Keynesianism. You just ask these
1. “Where did the money come from that the
government spends into circulation?”
2. If the
government runs a deficit, which is what Keynesians recommend in recessions, it
did not get all of its money through tax revenues. “Did the borrowed money
come from private lenders or from the central bank?”
3. “If the
money came from private lenders, what would the lenders have done with their
money if they had not loaned it to the government?”
If the money did not come from private lenders, then it must have come from the
central bank. “How does money created out of nothing create wealth?”
These are really
two questions. (1) “What would lenders to the government have done with
their money if the government had not offered the promise of guaranteed
repayment?” That money would have been spent either on consumption or
production. This raises a second question: (2) “Why would either of these
options be worse for the economy than spending by government bureaucrats?”
To understand the
fallacies of Keynes, you don’t need to understand equations, graphs, and
jargon. You just need the ability to follow an argument based on this
principle: there is no such thing as a free lunch. Put differently, you cannot
get bread out of stones.
economists are not skilled in the use of logic, let alone responding coherently
to it. They are trained from their Economics 1 course until the day they retire
from college teaching not to reason from obvious premises to economic conclusions.
They get no tenure consideration for arguing coherently without equations and
graphs. They are probably going to be penalized if they attempt to do this.
Graduate students in economics learned this fact of academic life no later than
their senior year in college. If they did not learn it, their grades would not
have been sufficiently high to get them into grad school.
WAR ON THRIFT
famous for his criticism of thrift. What he criticized was thrift in the
private sector. Thrift was great as far as he was concerned if the thrifty
person bought government bonds, and the government then spent the money on
anything. You think I exaggerate? Here is a direct quote from Keynes’ General
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing”( p. 129).
Here is what he
wrote on page 220.
In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies went to live in pyramids to shelter them after death, or, repenting of their sins, erect cathedrals in and down monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. Quote to dig holes in the ground, unquote paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services.
Notice that he did
not call for millionaires to invest. He called on them to spend. He did not ask
them to direct their money toward production: he directed them to spend their
money as fast as possible. It is spending by millionaires on consumption, not
the savings of millionaires for future consumption by others, that is the key
to wealth creation in the mental universe of Keynes and his disciples.
Keynes called on
governments to spend on public pyramids and burying bottles of money because he
did not trust the millionaires to keep spending on mansions and their own
personal pyramids. He knew they would invest in capital goods. He attacked the
idea that millionaires could benefit the economy by saving and investing in the
private sector. His book is dedicated to a refutation of investing during a
recession. The entire Keynesian movement, which dominates academia and
policy-making today, rests on this intellectual premise: “Consume, don’t
invest, during recessions.”
millionaires trust the government with their money? Because the government
promises to guarantee the return of their money. But why should millionaires
believe this promise? Because governments back up this promise with the threat
of violence. Governments have the power to send tax collectors into people’s
homes and stick guns in their bellies. “Hand over your money,” says
the man with a badge. Governments come before millionaires and say this:
“We sell promises to return your money. We can guarantee this because we
have the power of taxation. Therefore, you can be certain that you will get
your money back. You have our word. What’s not to trust?”
AND CLASS POSITION
Keynes was the
defender of present-orientation. He was the defender of “consumption
now.” He was, in this sense, a defender of lower-class economics. Edward
Banfield, a Harvard political theorist in the late 1960’s, wrote a section on
lower-class and upper-class attitudes in his book, The Unheavenly City
(1968). He identified lower-class thinking as present-oriented. The lower-class
person thinks little about the future. Lower-class people want to consume now.
They borrow at high interest rates in order to get this consumption.
Upper-class individuals are the opposite. Keynesian economics is a defense
of lower-class economics.
economists in universities dare not use this kind of rhetoric against Keynes
and Keynesians. They would not get tenure if they used it early in their
careers. They would not be published in mainstream, tenure-generating academic
journals. They would become pariahs. Fortunately, I am not part of academia.
So, I can call a spade a spade. Keynesianism really is best encapsulated in the
famous phrase by Keynes: “In the long run, we are all dead.” In the
meantime, Keynesians give this advice to politicians: “Borrow and spend,
inflate and spend, monetize government debt, and never pay it off.”
economics is the economics of debt-addicted, lower-class spendthrifts: modern
apostles of big government. In his concluding remarks in his 1946 article on
Keynes, Samuelson wrote:
With respect to the level of total purchasing power and employment, Keynes denies that there is an invisible hand channeling the self-centered action of each individual to the social optimum. This is the sum and substance of his heresy. Again and again through his writings there is to be found the figure of speech that what is needed are certain “rules of the road” and governmental actions, which will benefit everybody, but which nobody by himself is motivated to establish or follow. Left to themselves during depression, people will try to save and only end up lowering society’s level of capital formation and saving; during an inflation, apparent self-interest leads everyone to action which only aggravates the malignant upward spiral.
The message is
clear. “Left to themselves,” people cannot be trusted with their own
money. That would mean resource allocation by the metaphorical invisible hand
of the market’s process of voluntary exchange. Keynesians prefer to trust the
economy to the palsied hands of tenured bureaucrats and the grasping hands of
elected politicians, who want access to other people’s money in order to buy
votes from special-interest groups.
I would rather
live in an economy governed by the invisible hand of the free market than in an
economy governed by the palsied hands of government bureaucrats and the
grasping hands of politicians. I would rather live in an economy in which
customers are in authority rather than politicians and bureaucrats. Customers
spend their own money. Politicians and bureaucrats want to spend my money. I
resent this. I can spend my money more wisely than politicians and bureaucrats
can. Keynes did not believe this. Neither did Samuelson.
The free market economy
is governed by the sanctions of profit and loss. The Keynesian economy is
governed by the sanctions of badges and guns. I recommend the former: greater
personal liberty and greater per capita wealth.
economics is counter-intuitive. It was answered, line by line, by Henry Hazlitt
in his coherent and devastating critique of Keynes: The Failure of the
“New Economics.” It was published in 1959. It sank without a
trace. Why? Because it was hostile to the prevailing climate of academic
opinion. Also, it was easy to read. That is always out of fashion in academia.
Fortunately, it is available today from the Ludwig von Mises Institute. You
can even download it for free. It is 450 pages
long. Yet even Hazlitt, for all of his penetrating insights written in the
vernacular and devoid of equations and graphs, did not boil down his critique
into two simple questions.
This is odd. The
heart of his classic book on economics, Economics in One Lesson (1946),
was this insight: the fallacy of the thing not seen. The book calls on readers
to ask this question: “What would property owners have done with their
money if they had not suffered violence?” This is the question that
undergirds my two questions.
1. “What would lenders to the government have
done with their money if the government had not offered the promise of
“Why would this have been worse for the economy than spending by
answer these two questions in anything resembling common language. That is
because they cannot answer it this way without sounding ridiculous.
Keynesianism is a
long parade of would-be emperors without clothes. They attempt to cover their
conceptual nudity with academic fig leaves: equations, graphs, and jargon. This
was Keynes’ strategy. It was also Paul Samuelson’s.
These men are the
wizard of Oz. They are, collectively, the man behind the curtain.
Call me Toto.
Toto did not
complete the procedure. Pulling back the curtain was step one. He should have
completed the procedure by lifting his leg on the wizard. That is what humbugs
deserve whenever they impose economic
quackery with deception backed by government power.
In the movie, the
now-unemployed wizard departed from Oz by ascending in a hot-air balloon. The
junior wizards of Keynesian economics will not find their departure so easy.
They hold their tenured positions in governments and universities, isolated and
secure from downturns in private labor markets. But the day is coming when
governments around the world are going to default on their economic promises to
the voters. Keynesians will be called upon by politicians to provide
justifications for this default, and also provide explanations showing why it
is not really the governments’ fault. It is the free market’s fault. When they
attempt to fulfill their role in public affairs as court prophets, defending
massive government failure in the name of Keynes, they will be seen by the
enraged public as intellectual laughingstocks and charlatans.
They have always been
charlatans. They should have been laughingstocks. I recommend patience. The day
of fiscal reckoning draweth nigh.