Saturday, August 29, 2009

Where Keynes Went Wrong

I recently received an advanced review copy of a compelling and important book entitled "Where Keynes Went Wrong," scheduled to be published on October 1, 2009 by Axios Press. One of the perks of hosting a show is the large number of free books I receive every month. Better still is getting books weeks before they are released. This particular book, by Hunter Lewis, is fantastic and is must reading for those who are concerned about the future of our country. It provides one of the most thorough critiques of John Maynard Keynes and, more importantly, it restores the economic way of thinking that use to be a central part of Western thought and was the mighty force that made nations prosper. If nations applied the principles in Hunter's book, those nations would grow economically.

The timing for the book could not better. One year ago the US economy (and many economies around the world) began a terrible meltdown and responded with an approach very similar to what economist John Maynard Keynes promoted during the Great Depression. Lewis' compelling and powerful book eloquently argues that Keynes approach made that Depression far worse than it should have been and will have a similar impact on our economic situation today.

In the press release for the book we see that "When the world financial system began to fall in 2008, the US government reacted decisively with a stimulus package, bailouts, and printing, borrowing, and spending trillions of dollars. All of these interventions were taken from a playbook devised by the last century's most influential economist, John Maynard Keynes. But is Keynes right? The implications of this question are large and timely. If Keynes is wrong, then so are the economic policies of Barack Obama, George W. Bush, and virtually all governments today."

He tackles Keynes with extraordinary vigor and raises the questions that are desperate to the issues of the day. Did Keynes have proof for his theories? Lewis argues that the answer is absolutely not. In fact, the author noted in an interview that "Overall, the most surprising thing is the lack of evidence, much less proof for anything he says. It is just a series of brilliant hunches. But there is really nothing to back up the hunches. In the whole of the General Theory, Keynes most important book, there are only two pages devoted to actual evidence." Imagine building an economy on such flimsy evidence and even those two pages were lacking.

The two pages -- and the rest of the book -- are full of paradoxes that tend to only confuse and not bolster his arguments. The following are a few examples from Lewis of the type of approach Keynes would take to problems based on the General Theory:

  • "If too much bad debt is the problem, for example during the Crash of 2008, the solution is to add more debt."

  • "An economy depends on the confidence of the players. If confidence has been shaken by too much bad debt, restore confidence by adding more."

  • "If low interest rates held down long have caused trouble, lower them further and hold them down longer."

  • "If the public seems to be opposing the idea of borrowing and spending more, their elected representatives in government can do it for them."

These types of paradoxes (and many more) not only confuse the debate, but when they are applied in the form of public policy the consequences for the Great Depression was an economic downturn that lasted almost two decades. The jury is out on what kind of impact Obama's policies will have today, but human nature and the way a person responds to polices is unchanged. Lewis does an excellent job of providing a window of our own possible future based on the policy pursuits of Obama. What we can expect is long term pain.

This book is extremely readable and might be a force to impact the opinions of the general public. Unfortunately, I don't think most people will read a book about John Maynard Keynes except for those in the academic world who have already made conclusions about the economist. Many are familiar with the popular book, Free to Choose by Milton Friedman, but virtually no one (outside of academia) know about Capitalism and Freedom (also by Friedman) which has almost the exact same message. Titles matter. One that focused on our problems, rather than the philosopher behind them, would likely be a more popular work. This book is great, however, and with the times we are in it could create a huge following. With it coming out just before the holiday season, I believe this could be the idea gift for the person looking for answers to today's biggest problems.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

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