Economists From England

"You must realize how bad, temporarily, capitalism had become in public opinion. I remember seeing a poll of small town attitudes in local newspapers. They asked questions like "should we nationalize the banking system?" More than half of those editors, about the most conservative group in the world, were in favor of nationalizing the banking system. Father Coughlin, the Detroit demagogue who turned anti-Semitic, complained about "fountain pen money, the perpetrator of great wealth, the money changers in the temple." It was kind of a crude expansionism. Huey Long and "every man a millionaire," or whatever it was. So I would say that Keynes thought of himself as saving the system. And lots of the New Dealers ― original New Dealers, Veblenites, technocrats ― did not like Keynesian economics. They said "that is using palliatives, it's not getting rid of the wicked capitalistic ethos." Keynes told Roosevelt when he came here in 1933 that he needed to spend so much more per month in deficit spending. He gave very precise figures with great self-confidence."

"An optimist who lived at a time when the world economy was running so badly that clever gimmicks could still work wonders, Keynes's object was to save capitalism from itself. In the end, his prescription in its most simple form self-destructed, as the obligation to run a full-employment humanitarian state caused modern economies to succumb to the new disease of stagflation - high inflation along with joblessness and excess capacity. Economists of the most diverse views are constantly asking themselves: What would Keynes advise if he were now alive. And usually - whether the economist is a free-marketeer like Friederick von Hayek or one with strong interventionist leanings like John Kenneth Galbraith - they pay Keynes the supreme compliment of believing that if brought back to earth, Maynard would be favoring just what each of them happens to favor. One also might wonder what Lord Keynes would prescribe for the huge structural deficit of Ronald Reagan, with the crowding out of investment that it implies once the American economy reattains high levels of employment."

"Yes, Keynes was a genius. Yes, some of his ideas were inchoate and would not have lent themselves usefully to diagramming and symbolic manipulation. Yes, by the time of the Radcliffe committee many of his British admirers were still frozen in the Model T version of his system. And yes, Keynes resented excessive simplifying of his paradigms. Nevertheless, in science it is not the incoherent, inchoate and ineffable that has a cash value. If that were so, Goethe would be a greater scientist than either Einstein or Newton. What matters is the Kuhnian paradigm that people who are not geniuses can use. That which so many scholars independently agreed upon cannot be independent of the text that Keynes wrote down for them to read. What is remarkable is not the cogency of the case that Leijonhufvud manages to muster, which is rather flimsy, but rather how strong was the latent demand in the 1970s for a work to debunk Keynesianism. Harry Johnson put the same point in a different way."

"Keynes's intellect was the sharpest and clearest that I have ever known. When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool. I was sometimes inclined to feel that so much cleverness must be incompatible with depth, but I do not think that this feeling was justified."

"There are still many people in America who regard depressions as acts of God. I think Keynes proved that the responsibility for these occurrences does not rest with Providence."

"A decade and a half ago Lord Keynes brought together a selection of his writings on the political and economic issues from the end of the last war to the world slump of 1931. “Here are collected’, he wrote, ‘the croakings of twelve years, the croakings of a Cassandra who could never influence the course of events in time.” We know now that that was over-modest of him: that he exercised all too much influence by his book against the Treaty of Versailles — where he was almost entirely wrong!— and none at all up to that time with regard to monetary policy, the return to the Gold Standard and other issues where he was quite right. How characteristic of human affairs!"

"How is it that such an extraordinary man (in the best sense), whose intellect was so wide-ranging and who was just as much artist and organizer as he was scholar, could at the same time be so blind to moral-political postulates (which even in the narrower domain of economics are more important in the long run than clever monetary formulae) without which human society cannot exist? To fully appreciate the kind of man and the kind of philosophy we are here concerned with, it is useful to compare Keynes with Adam Smith. In the depth and extent of their influence at least, the two men were strikingly similar. Moreover, both Smith and Keynes had interests which extended far beyond the confines of economics. But whereas Smith left us, in addition to his magnum opus on the Wealth of Nations (1776) a book on the Theory of Moral Sentiments (1759) which exposes the full moral-philosophical foundations of his much-misconstrued economic doctrines, Keynes has left us, in addition to his economic works, a monograph on the theory of probability (A Treatise on Probability, 1921). For Smith, whose book on the Wealth of Nations was planned as a segment of a giant opus on the cultural history of mankind, economics was viewed as an organic part of the larger whole of the intellectual, moral, and historical life of society; for Keynes, economics was part of a mathematical-mechanical universe. The one man was a representative of the humanist spirit of the 18th century; the other a representative of the geometric spirit of the 20th century; a deistic moralist was the one, an exponent of positivistic scientism the other."

"John Maynard Keynes, who died in 1946 at the age of 62, is not only the best known economist of our times but also a man who by any standards must be reckoned as one of the leading personages of the first half of the twentieth century. The history of the era which followed World War I can no more dispense with the name of this singular individual than it can with the names of Einstein, Churchill, Roosevelt, or Hitler. It is only in this broad perspective that Keynes' full importance becomes visible. How ought we to judge the influence of this man? Is he the Copernicus of economics, as so many claim, the man who banished the ghosts of economics grown rigid in the chains of tradition, who opened the door to prosperity and stability? Or did he destroy more than he created and has he summoned into being spirits that today he possibly would be gladly rid of? It is difficult to make a simple answer to these questions. A fair judgment would have to take into account not only the manifold talents and personal charm of the man, but would require also the dissection of issues which have nourished most of the economic controversies of our time and which have given even the experts pause. We may begin by noting a characteristic trait of this animated, impulsive, and artistically sensitive man: his virtuoso-like ability to change positions on important questions, positions which he had only shortly before defended with intelligence and vigor."

"Later economists continued to hew a revisionist line, maintaining absurdly that Keynes was merely a benign pioneer of uncertainty theory (Shackles and Lachmann), or that he was a prophet of the idea that search costs were highly important in the labor market (Clower and Leijonhufvud). None of this is trie. That Keynes was a Keynesian—of that much derided Keynesian system provided by Hicks, Hansen, Samuelson, and Modigliani—is the only explanation that makes any sense of Keynesian economics. Yet Keynes was much more than a Keynesian. Above all, he was the extraordinarily pernicious and malignant figure that we have examined in this chapter: a charming but power-driven statist Machiavelli, who embodied some of the most malevolent trends and institutions of the twentieth century."

"Keynes turned the question back again. He started thinking in Ricardo’s terms: output as a whole and why worry about a cup of tea? When you are thinking about output as a whole, relative prices come out in the wash — including the relative price of money and labour. The price level comes into the argument, but it comes in as a complication, not as the main point. If you have had some practice on Ricardo’s bicycle you do not need to stop and ask yourself what to do in a case like that, you just do it. You assume away the complication till you have got the main problem worked out. So Keynes began by getting money prices out of the way. Marshall’s cup of tea dissolved into thin air. But if you cannot use money, what unit of value do you take? A man hour of labour time. It is the most handy and sensible measure of value, so naturally you take it. You do not have to prove anything, you just do it."

"This seems to me Keynes's important contribution to economics: that he asked a number of very fundamental new questions. He asked what determined the level of employment. He asked whether the economy was inherently stable at the level of full employment, automatically returning to it when disturbed. He asked, as I say, how the rate of interest is determined. These questions remain with us, and will and must remain, central to all economics."

"The consequences of Mr. Keynes's attack upon orthodoxy are very far reaching. First, it cuts the ground from under the pretended justification of inequality, and allows us to see the monstrous absurdity of our social system with a fresh eye."

"Keynes was in his most lucid and persuasive mood; and the effect was irresistible. At such moments, I often find myself thinking that Keynes must be one of the most remarkable men that have ever lived—the quick logic, the birdlike swoop of intuition, the vivid fancy, the wide vision, above all the incomparable sense of the fitness of words, all combine to make something several degrees beyond the limit of ordinary human achievement."

"Here was Keynes at his best and his worst. His worst, because some of his social and political theory would not stand too close scrutiny; because society is not likely to run out of new wants as long as consumption is conspicuous and competitive; and because, as an undergraduate once remarked, democratic government is more than a gathering of benevolent Old Etonians. His best, because of the roving, inquiring, intuitive, provocative mind of the man."

"1919...Henri Bergson, Karl Barth, Ernst Cassirer, Havelock Ellis, Karl Jaspers, John Maynard Keynes, Rudolf Steiner—indelible figures—were all active in their various spheres."

"Keynes is very helpful about the economics of the New Party. He says that he would, without question, vote for it. The attitude of the Labour Party on...Free Trade, has disgusted him. He feels that our Party may really do an immense amount of good and that our programme is more sound and certainly more daring than that which any other party can advance."

"A criticism of Keynes and Hayek would have to begin by pointing out the fact that in their theoretical systems there is no place for the uncertainty factor and anticipations. … It is good proof of Keynes’ intuitive genius that he reaches practical results that in many respects are very much superior to his deficient statements of certain theoretical problems."

"Fascism entirely agrees with Mr. Maynard Keynes, despite the latter's prominent position as a Liberal. In fact, Mr. Keynes' excellent little book, The End of Laissez-Faire (1926) might, so far as it goes, serve as a useful introduction to fascist economics. There is scarcely anything to object to in it and there is much to applaud."

"Have you read Keynes on the Economic Consequences of the Peace Conference? I think it is important as giving in a clear and definite form the criticism of a Liberal-minded man who saw the proceedings from the inside... I can not help thinking that it really gives the scheme of a bold Liberal policy in foreign affairs. Aim, the re-integration of Europe, both political and economic. Method, the correction of the Versailles settlement by the L[eague] of N[ations.] [I]t gives us a real fighting policy which has the further advantage of being right."

"The background of my economic thinking was first developed by a study of Keynes—more in conversation with him than in reading his early writings, for he did not write General Theory until the thirties. ... I sent the [Mosley] Memorandum to Keynes for his comments...Keynes then 'with Mosley's permission, showed it to Hubert Henderson, they both agreed "it was a very able document and illuminating"'. Keynes supported me throughout this period, and even later went so far as to say to Harold Nicolson he would have voted for the New Party. My own memories of this brilliant and charming person with the gentle manner and razor-keen intelligence, consist mostly of lunches in his house."

"I have concentrated thus far on one aspect of achievement: the creation of a theory or theories, which in some form pass into the standard usage of economists. But with Keynes, and with other economists, theories were not the whole story. Keynes was also an applied economist using the existing body of theory in conjunction with the available facts of the world to try to shape certain outcomes, be they the international monetary system in 1931–2 or 1941–6, or the financial policy of the British Government in 1915, 1929–33 or 1940–6. And shape them he did with some success through various forms of private and public persuasion. How he did so and why he did so are also subjects for historians of economics, not to mention biographers, who may in the process of writing a biography have acquired additional perspectives."

"Victorian changes in the University had brought his parents to Cambridge. The further transition from the last Victorian reforms of the 1880s to the modern state-supported institution that emerged after the First World War encompassed both Neville and Maynard Keynes’s connections with the administration of the University. For this reason it is necessary to provide some institutional background against which the Keyneses’ lives and times can be set."

"There is a paradox in Keynes's fall in esteem. With respect to our economy, Keynes set out to explain two main problems: why our economy was given to fluctuations and whether it was possible to achieve a closer approximation of full employment than had been achieved thitherto. Keynes's answer to the policy question was that government expenditures and tax receipts could serve as a steering wheel, and that one requisite for such a steering wheel to be effective is that government be a bigger part of the economy than it was before the Great Depression. Our success since World War II in avoiding anything more severe than the recession of 1981-82 has been due in large part to the effects of our much bigger government."

"Keynes believed that the policy implications of his theory were profound; not only did the theory point to ways in which a closer approximation to full employment can be sustained, but he envisaged that continuing full employment combined with an emphasis on consumption and public goods would lead to an egalitarian change in income distribution. The rentier income of the capitalist would disappear and the upper tail of the income distribution would be snipped off by taxation. He believed that both measures to raise the consumption function and the socialization of investment were necessary to sustain full employment and were desirable as social goals."

"Keynes is misunderstood by modern Platonists, who keep trying to find his Truth, keep trying to stuff him into a stable Platonic theory. Right from the beginning Platonic thinkers like Friedrich Hayek and J. R. Hicks could not grasp his method. (...) The very title of the General Theory embodies this sophistic tactic."

"I guess no one will be surprised that the story of Keynes’ life and thought makes me think about the “rhetoric” of economics. My thought is this: Keynes was a Sophist, not a Platonist. To read him as a Platonist, as economists mostly have, makes him nearly impossible to understand."

"Mr. Keynes, whose famous book [The Economic Consequences of the Peace] is a remarkable example of a generous attitude to a defeated enemy. Indeed, it may be regarded as characteristically English in that lack of emotional balance which made it so very fair to our enemies and so harsh to our allies and ourselves."

"I think that if you went in for the Tripos, merely re-reading Economics in the ten days before it, you would probably get a first class: & that if you did not, you wd not injure your position, since it wd.. be known that you had had very little time free for economics."

"I integrate the insights of Keynesian and classical theories. Although Keynes’s General Theory provides the foundation for much of our current understanding of economic fluctuations, it is important to remember that classical economics provides the right answers to many fundamental questions. In this book I incorporate many of the contributions of the classical economists before Keynes and the new classical economists of the past several decades. Substantial coverage is given, for example, to the loanable-funds theory of the interest rate, the quantity theory of money, and the problem of time inconsistency. At the same time, I recognize that many of the ideas of Keynes and the new Keynesians are necessary for understanding economic fluctuations. Substantial coverage is given also to the IS–LM model of aggregate demand, the short-run tradeoff between inflation and unemployment, and modern models of business cycle dynamics."

"Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers."

"If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront."

"The historical balance sheet of Keynesian policy is clear. The most extensive experiment, Roosevelt’s New Deal in the United States during the 1930s, ended in failure."

"The publication of Keynes's The Economic Consequences of the Peace at the end of 1919 and its wide circulation had serious effects. It did much to injure the authority of Lloyd George, and weaken rather than strengthen his efforts to deal with the reparations question by stages. Its account of the way in which President Wilson had been outmanoeuvred in Paris seriously undermined his position in America at a crucial time. Finally, it did much to create throughout Britain and the Commonwealth—and even the United States—a kind of guilt complex about the Germans, which has never been wholly effaced and which was to prove the source of disaster. The legend of the "Carthaginian Peace" did infinite harm both in Germany and in Britain. When all is said and done about reparations and the folly of the promises given by some politicians and the estimates made by leading bankers and "experts", it is almost comical to recall the facts. Over the years Germany actually paid £1,000 million. To meet this she borrowed from the outside world £1,500 million. In a word, it was Germany who received the indemnity, largely from America."

"Maynard Keynes was fully committed to the idea that a system of capitalism and liberal democracy was workable, but his image of workability was not that of a machine that could be set into operation and then left to run on its own. For Keynes, workability meant a continued application of open-minded intelligence and decency to the diagnosis of new situations and to the modification of institutions to deal with them. This view of society and of the role of economic ideas in society is hard to see amid the complications and confusions of Keynes's theoretical writings."

"[Keynes] was much too mercurial and impulsive a counsellor for a great emergency. He dashed at conclusions with acrobatic ease. It made things no better that he rushed into opposite conclusions with the same agility. He is an entertaining economist whose bright but shallow dissertations on finance and political economy, when not taken seriously, always provide a source of innocent merriment to his readers. But the Chancellor of the Exchequer, not being specially gifted with a sense of humour, sought not amusement but guidance in this rather whimsical edition of Walter Bagehot, and thus he was led astray at a critical moment. Mr. Keynes was for the first time lifted by the Chancellor of the Exchequer into the rocking-chair of a pundit, and it was thought that his very signature appended to a financial document would carry weight. It seems rather absurd when now not even his friends—least of all his friends—have any longer the slightest faith in his judgments on finance."

"I shall quote another economic source, one of particular significance—Keynes, the British diplomat and author of The Economic Consequenices of the Peace, who, on instructions from his government, took part in the Versailles peace negotiations, observed them on the spot from thc purely bourgeois point of view, studied the subject in detail, step by step, and took part in the conferences as an economist. He has arrived at conclusions which are more weighty, more striking and more instructive than any a Communist revolutionary could draw, because they are the conclusions of a well-known bourgeois and implacable enemy of Bolshevism, [...]"

"Neo-classical economics also considered other factors which influence the development of the national economy, e.g., the growth of population, changes in consumer preferences, and technical progress. Technical progress, however, is treated as a phenomenon outside the field of economics, influencing the process of economic development only by chance, and not being involved with it organically. Keynes' theory did not fundamentally change any of the views which concern the mechanism of economic development. According to Keynes, the division between accumulation and consumption is also determined on the basis of a marginal psychological calculation. But in his theory, another factor is taken into account, namely, the tendency for capital owners to hold back a certain part of their incomes in a liquid form i.e., as money and other means of payment. This introduces certain complications, since besides the decision as to what part of the income should be allocated for consumption and what part for accumulation, a third consideration is brought in, namely, what is to be done with accumulated wealth: should it be saved or invested, or should it be retained in a monetary form. The great differences in the division of incomes in the capitalist system in principle accelerate economic development. However, according to Keynes, complications arise since some of the capital owners hold back money in a liquid form. Part of the labour force and of the productive capacity are thus made to lie idle, and the productive forces of society are squandered."

"Why does Camelot lie in ruins? Intellectual error of monumental proportion has been made, and not exclusively by the politicians. Error also lies squarely with the economists. The "academic scribbler" who must bear substantial responsibility is Lord Keynes..."

"It was only by the crisis of 1929-1930 which shook the capitalist economy of the whole world to its very foundations and the long depression following it that bourgeois economists were forced to interest themselves in problems of this kind. Then, John Maynard Keynes produced his famous theory of employment which dealt with mass unemployment and economic stagnation as tendencies inherent in the modern capitalist system which the state ought to counteract by an appropriate policy of intervention. Partly under the influence of Keynes, partly independently of him, and in some cases even earlier, economic theories betraying similarities to the Marxist theory of reproduction and accumulation began to appear."

"He was declaring that the trouble with the engine was not fundamental, that it was amenable to a technical fix. At a time when many of the world's intellectuals were convinced that capitalism was a failed system, that only by moving to a centrally planned economy could the West emerge from the Great Depression, Keynes was saying that capitalism was not doomed, that a very limited sort of intervention — intervention that would leave private property and private decision making intact — was all that was needed to make the system work. Confounding the skeptics, capitalism did survive; but although today's free-market enthusiasts may find this proposition hard to accept, that survival was basically on the terms Keynes suggested. World War II provided the jump start Keynes had been urging for years; but what restored faith in free markets was not just the recovery from the Depression but the assurance that macroeconomic intervention — cutting interest rates or increasing budget deficits to fight recessions — could keep a free-market economy more or less stable at more or less full employment. In effect, capitalism and its economists made a deal with the public: it will be okay to have free markets from now on, because we know enough to prevent any more Great Depressions."

"Keynes was no socialist – he came to save capitalism, not to bury it. And there’s a sense in which The General Theory was, given the time it was written, a conservative book."

"Now I’m not saying that Keynes was right about everything, that we should treat The General Theory as a sort of secular bible - the way that Marxists treat Das Kapital. But the essential truth of Keynes’s big idea - that even the most productive economy can fail if consumers and investors spend too little, that the pursuit of sound money and balanced budgets is sometimes (not always!) folly rather than wisdom - is as evident in today’s world as it was in the 1930s. And in these dangerous days, we ignore or reject that idea at the world economy’s peril."

"Keynes himself was very much interested in monetary policy. He was a specialist all his life in the theory of money and interest rates. But this approach fell out of fashion and people concentrated on fiscal policy. Then, when monetary policy came back into fashion, people concentrated on the money supply and other monetary aggregates, such as M1 and M2, rather than interest rates, but that was not the way to go about it. Fortunately, I think interest rate policy is more effective now."

"Keynes, it has been stressed, is not a radical. He wanted to reform capitalism in order to make it work better and to preserve it. How is it possible that any capitalist could object to a policy of the preservation of capitalism? The answer is that many capitalists are unaware of the precarious state of the system during a period of serious depression, and do not see the proper relationship between their own position and that of the system as a whole. It is inevitable that most of the effective measures listed in the full-employment legislation above will be strongly opposed by some group of the capitalist population."

"Whatever the number of hours that Maynard, no time was wasted. His mind worked quickly and he possessed to a high degree the power of concentration. He also worked steadily at home and was allowed to share his father’s study, a tribute to the son’s habitual quiet attention to the subject in hand, for the father was extremely sensitive to any kind of disturbance."

"Keynes was unmistakably a man formed by the previous century. In the first place, and like so many of the best economists of the earlier generations, from Adam Smith to John Stuart Mill, Keynes was primarily a philosopher who happened to deal in economic data. He might just as well have been a philosopher had the circumstances positioned him differently; indeed, in his Cambridge years, he wrote some properly philosophical papers, albeit with a mathematical bent. As an economist, Keynes always saw himself responding to the nineteenth-century tradition in economic reasoning. Alfred Marshall and the economists who followed J. S. Mill had assumed that the default condition of markets, and therefore of the capitalist economy at large, was stability. Thus instabilities—whether economic depression, or distorted markets, or government interference—were to be expected as part of the natural order of economic and political life; but they did not need to be theorized as part of the necessary nature of economic activity itself. Even before the First World War, Keynes was beginning to write against this assumption; after the war, he did little else. Over time he came to the position that the default condition of a capitalist economy could not be understood in the absence of instability and the inevitably accompanying inefficiencies. The classical economic assumption, that equilibrium and rational outcomes were the norm, instability and unpredictability the exception, were now reversed. Moreover, in Keynes’s emerging theory, whatever it was that caused instability could not be addressed from within a theory which was unable to take that instability into account. The basic innovation here is comparable to the Gödelian paradox: as we might put it today, you cannot expect systems to resolve themselves without intervention. Thus, not only do markets not self-regulate according to a hypothetically invisible hand, they actually accumulate self-destructive distortions over time. Keynes’s point is an elegantly symmetrical bookend to Adam Smith's claim in The Theory of Moral Sentiments. Smith argued that capitalism does not in itself generate the values that make its success possible; it inherits them from the pre-capitalist or non-capitalist world, or else borrows them (so to speak) from the language of religion or ethics. Values such as trust, faith, belief in the reliability of contracts, assumptions that the future will keep faith with past commitments and so on have nothing to do with the logic of markets per se, but they are necessary for their functioning. To this Keynes added the argument that capitalism does not generate the social conditions necessary for its own sustenance."

"The same challenge—how to understand what had happened between the wars and prevent its recurrence—was confronted by John Maynard Keynes. The great English economist, born in 1883 (the same year as Schumpeter), grew up in a stable, confident, prosperous, and powerful Britain. And then, from his privileged perch at the Treasury and as a participant in the Versailles peace negotiations, he watched his world collapse, taking with it all the reassuring certainties of his culture and class. Keynes, too, would ask himself the question that Hayek and his Austrian colleagues had posed. But he offered a very different answer. Yes, Keynes acknowledged, the disintegration of late Victorian Europe was the defining experience of his lifetime. Indeed, the essence of his contributions to economic theory was his insistence upon uncertainty: in contrast to the confident nostrums of classical and neoclassical economics, Keynes would insist upon the essential unpredictability of human affairs. If there was a lesson to be drawn from depression, fascism, and war, it was this: uncertainty—elevated to the level of insecurity and collective fear—was the corrosive force that had threatened and might again threaten the liberal world."

"In summary, in my judgment, Keynes was a politician, but a politician whose constituency was not electoral but intellectual he had to be a scientist to be a politician. And he was a good enough scientist, with a strong enough sense of scientific integrity, and a strong enough aesthetic preference for truth, to recognize eventually that the social science he knew was not good enough to solve the problems he recognized as politically important and that he had to reform the science to make it politically relevant and useful. He was a scientific political economist. One can emphasize either the "scientific" or the "political" and which adjective one emphasizes depends on whether one is writing a political biography of the man himself or a history of economic thought but both adjectives are appropriate and both are necessary to characterize what the man was and what he contributed to British society and British social history."

"As many of Keynes' disciples would now admit, his theories had two important weaknesses when applied in postwar Britain. They ignored the economic impact of social institutions, particularly the trade unions; in fact Keynesian policies were unlikely to work in Britain without strict control of incomes... And they ignored the outside world... [T]he fundamental Keynesian concept of demand management had become unreliable. Keynes believed that a government could maintain full employment of a country's productive capacity without creating inflation, by increasing or reducing the demand for its output, through adjusting taxes or government spending. But it had become impossible to discover with any accuracy how much additional demand the government should inject into the economy so as to produce full employment... Keynes was right in saying that adequate demand is a necessary condition for full employment; but, given the inadequacy of the information available and the uncertainty about how people will use their money, fine tuning of demand is not possible."

"In order to understand the situation into which we have been led, it will be necessary to take a brief look at the intellectual sources of the full-employment policy of the "Keynesian" type. The development of Lord Keynes's theories started from the correct insight that the regular cause of extensive unemployment is real wages that are too high. The next step consisted in the proposition that a direct lowering of money wages could be brought about only by a struggle so painful and prolonged that it could not be contemplated. Hence he concluded that real wages must be lowered by the process of lowering the value of money. This is really the reasoning underlying the whole "full employment" policy, now so widely accepted. If labor insists on a level of money wages too high to allow of full employment, the supply of money must be so increased as to raise prices to a level where the real value of the prevailing money wages is no longer greater than the productivity of the workers seeking employment. In practice, this necessarily means that each separate union, in its attempt to overtake the value of money, will never cease to insist on further increases in money wages and that the aggregate effort of the unions will thus bring about progressive inflation."