'..Like monetarists, Keynes held no capital theory .. the role time plays..' - Jesús Huerta de Soto
thoughts site


'..Like monetarists, Keynes held no capital theory .. the role time plays..' - Jesús Huerta de Soto

Posted by archive 
'..the current situation actually involves a repeat of the duel between Hayek and Keynes during the 1930s.'

'..More intelligent and highbrow, though no less mistaken, is the opinion of Skidelsky, since he at least explains that the Austrian business-cycle theory[16] offers the only alternative to his beloved Keynes and clearly recognizes that the current situation actually involves a repeat of the duel between Hayek and Keynes during the 1930s.[17]'

- Jesús Huerta de Soto, An Austrian Defense of the Euro, June 22, 2012

'..Like monetarists, Keynes held no capital theory to enable him to understand the division of economic processes into productive stages and the role time plays in such processes..'

After our examination of monetarism, it seems appropriate to embark on a critical analysis of Keynesian theory. We have chosen this approach for two reasons. First, the “Keynesian revolution” erupted after old neoclassical monetarism (a mechanistic conception of the quantity theory of money, the lack of a capital theory, etc.) had gained a firm foothold. Second, nowadays Keynesian economics has undoubtedly been pushed into the background with respect to the Monetarist School. Despite these facts, we must emphasize that from the analytical viewpoint we adopt in this book, i.e., that of the Austrian School, monetarists and Keynesians use very similar approaches and methodologies. Like monetarists, Keynes held no capital theory to enable him to understand the division of economic processes into productive stages and the role time plays in such processes. Furthermore his macroeconomic theory of prices rests on such concepts as the general price level, the overall quantity of money, and even the velocity of circulation of money.50 Nevertheless certain significant peculiarities of Keynesian thought warrant discussion.

Before we begin, however, let us remember that Keynes possessed only a very limited knowledge of economics in general, and of the market processes of entrepreneurial coordination in particular. According to F.A. Hayek, Keynes’s theoretical background was limited almost exclusively to the work of Alfred Marshall, and he was unable to understand economics books written in foreign languages (with the possible exception of those in French). Hayek wrote:
Keynes was not a highly trained or a very sophisticated economic theorist. He started from a rather elementary Marshallian economics and what had been achieved by Walras and Pareto, the Austrians and the Swedes was very much a closed book to him. I have reason to doubt whether he ever fully mastered the theory of international trade; I don’t think he had ever thought systematically on the theory of capital, and even in the theory of the value of money his starting point—and later the object of his criticism—appears to have been a very simple, equation-of-exchange-type of the quantity theory rather than the much more sophisticated cash-balances approach of Alfred Marshall.51
Keynes himself admitted there were gaps in his training, especially with respect to his inferior ability to read German. When referring to Mises’s works in his book, A Treatise on Money, Keynes had no choice but to confess that his poor knowledge of German had prevented him from grasping their content as fully as he would have liked. He went on to say:
In German I can only clearly understand what I know already!—so that new ideas are apt to be veiled from me by the difficulties of language.52
- Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles (Third Edition, 2012), page(s) 542, 543 & 544.


50 John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936 and 1970), chap. 21, pp. 292–309. It is obvious in Keynes’s book, The General Theory, that his macroeconomic theory of prices is simply a variant of the monetarist conception. In his book Keynes makes the following explicit assertion:

The Theory of Prices, that is to say, the analysis of the relation between changes in the quantity of money and changes in the price-level with a view to determining the elasticity of prices in response to changes in the quantity of money, must, therefore, direct itself to the five complicating factors set forth above. (Keynes, The General Theory, pp. 296–97; italics are added)
The best modern exposition of Keynes’s theoretical framework is that of Roger Garrison (Time and Money, chaps. 7–9), who shows that Keynes was ultimately a socialist who did not believe in free markets for investment. Keynes himself acknowledged this fact when he wrote that his theories were “more easily adapted to the conditions of a totalitarian state” (Collected Writings [London: Macmillan, 1973], vol. 7, p. xxvi). This statement appears in the prologue (which Keynes wrote on September 7, 1936) to the German edition of The General Theory. The exact words follow:
Trotzdem kann die Theorie der Produktion als Ganzes, die den Zweck des folgenden Buches bildet, viel leichter den Verhältnissen eines totalen Staates angepasst werden als die Theorie der Erzeugung und Verteilung einer gegebenen, unter Bedingungen des freien Wettbewerbes und eines grossen Masses von Laissez-faire erstellten Produktion. (See John Maynard Keynes, Allgemeine Theorie der Beschäftigung, des Zinses und des Geldes [Berlin: Dunker and Humblot, 1936 and 1994], p. ix)
Footnote 76 of this chapter contains Keynes’s explicit acknowledgement of his lack of an adequate theory of capital.

51 F.A. Hayek, A Tiger by the Tail: A 40-Years’ Running Commentary on Keynesianism by Hayek, compiled and edited by Sudha R. Shenoy (London: Institute of Economic Affairs, 1972), p. 101.

52 John Maynard Keynes, A Treatise on Money, vol. 1: The Pure Theory of Money, in The Collected Writings of John Maynard Keynes (London: Macmillan, 1971), vol. 5, p. 178, footnote 2. In the last piece of writing he published before his death, Haberler commented ironically on the weakness of the critical remarks Keynes directs at Mises in his review of the book, Theorie des Geldes und der Umlaufsmittel, printed in The Economic Journal (September 1914) and republished on pp. 400–03 of volume 11 of The Collected Writings. See Gottfried Haberler, “Reviewing a Book Without Reading It,” Austrian Economics Newsletter 8 (Winter, 1995); also Journal of Economic Perspectives 10, no. 3 (Summer, 1996): 188.


76* It is important to remember that John Maynard Keynes himself explicitly and publicly admitted to Hayek that he lacked an adequate theory of capital. In Keynes’s own words:
Dr. Hayek complains that I do not myself propound any satisfactory theory of capital and interest and that I do not build on any existing theory. He means by this, I take it, the theory of capital accumulation relatively to the rate of consumption and the factors which determine the natural rate of interest. This is quite true; and I agree with Dr. Hayek that a development of this theory would be highly relevant to my treatment of monetary matters and likely to throw light into dark corners. (John Maynard Keynes, “The Pure Theory of Money: A Reply to Dr. Hayek,” Economica 11, no. 34 [November 1931]: 394; p. 56 in the Wood and Woods edition)
* Money, Bank Credit, and Economic Cycles (Third Edition, 2012), page 561.


'It was different with the "new economics" of Lord Keynes. The policies he advocated were precisely those which almost all governments, including the British, had already adopted many years before his "General Theory" was published. Keynes was not an innovator and champion of new methods of managing economic affairs. His contribution consisted rather in providing an apparent justification for the policies which were popular with those in power in spite of the fact that all economists viewed them as disastrous. His achievement was a rationalization of the policies already practiced. He was not a "revolutionary," as some of his adepts called him. The "Keynesian revolution" took place long before Keynes approved of it and fabricated a pseudo-scientific justification for it. What he really did was to write an apology for the prevailing policies of governments.'

- Ludwig von Mises, Lord Keynes and Say's Law, April 25, 2005