The current economic recession has brought about a revival of Keynesian economics, with its presumption that a market economy is susceptible to irrational boom and bust cycles, which requires "activist" government policy through deficit spending to correct. The historical record has shown, however, that such policies not only have generally failed, but often have been counterproductive in merely generating new inflationary and unsustainable bubbles. Shortly after John Maynard Keynes made this case for government fiscal and monetary activitism in his book, The General Theory of Employment, Interest, and Money, the AIER Research Reports for July 13, 1936, offered a brief and highly critical review pointing out the inflationary dangers of Keynes's "new economics." Due to its renewed and insightful relevancy, AIER's 1936 review of Keynes's General Theory is reprinted as today's commentary.

Mr. Keynes’ earlier two volume work on monetary theory was noteworthy in that it presented in mathematical form the relationships which exist in a modern economic society between money incomes, savings, and investments. He showed that expansion and contraction of credit made it possible for the total of monetary investment to exceed total monetary savings, and vice versa. Continuing the theoretical discussion of these relationships, he showed that their variation could account for the business cycle. Unfortunately, when he endeavored to apply his theory, he selected the inverse relationship of the variables from that which has been found to exist. In other words, he assumed that depressions were caused by a deficiency of monetary investment with respect to monetary savings. Had he made a further study of the facts in the case, he would have discovered that the boom period itself is made possible by an excess of monetary investments (credit financed) with respect to monetary savings. A depression is the normal and inevitable aftermath of such a bootstrap-lifting process.

This latest book by Mr. Keynes is an attempt to find his way out of the maze into which his earlier erroneous assumptions drew him. Of course, it is primarily of importance to the student of business cycle theory; but to all economists it should be an object lesson, illustrating the desirability of squaring theory with facts before wandering too far in its development.

Mr. Keynes’ fundamental rightness in his basic equations and persistent blindness with regard to his subsequent erroneous assumptions have made him a vociferous proponent of the spend-for-prosperity group. His method of curing a depression is being tried in this country virtually in accordance with the terms of an open letter which he addressed to Mr. Roosevelt nearly two years ago. The inevitable aftermath of our inflationary progression will not be easy for the American public to bear, but economists may well rejoice if Mr. Keynes is still alive to realign his theory to fit the facts of life.

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