Where Keynes Went Wrong and Why World Governments Keep Creating Inflation, Bubbles and Busts

Where Keynes Went Wrong is the author's attempt to help us understand the thinking behind all the new policies our governments are starting to implement. The author breaks down exactly what Keynes said and believed, and then makes a clear, documented case for why he believes Keynes was wrong.

If you want to understand more about the current economic crisis, and why our governments are taking the steps they are to end it, then this is the book for you.

And don't think this book is so complex that you'll have to muddle your way through. You won't. The author has done a masterful job of demystifying Keynes. He's put Keynes's theories, and the follow-up critiques, in layman's terms, so we can easily understand them. In other words, this is an economics book written for regular people, not economists.

And if you simply want to be well-read, then Where Keynes Went Wrong will fit the bill as well. This bold book will definitely be a hot topic in boardrooms and around dinner tables in the months to come.

The author, Hunter Lewis, has written six books relating to economics, including the best-seller Are the Rich Necessary? He's the co-founder of Cambridge Associates, a global investment firm, and is a graduate of Harvard University.

So, keep listening to find out why Keynes' most well-known theory, The Paradox of Thrift, could be dead wrong; how Keynes ignored his own advice in his private life; and why the global economy might have been better off if leaders had done nothing after the crash of 2008.

We should start out by explaining how the book's set up. After a very brief chapter explaining why he wrote the book, the author devotes chapters two through nine entirely to Keynes. Everything on these pages has been taken directly from Keynes's papers or speeches.

This enables readers to discover first-hand exactly what Keynes believed. The author says many of his theories have been taken out of context over time, or evolved through the grapevine. These pages give us the chance to learn about Keynesian theory directly from the source.

Now, the truth is you could skip these pages if you wanted to. Why? Because the author spends chapters 10 through 17 relisting every point that Keynes made in the last seven chapters, and then offering his argument for why Keynes is wrong. Every point and theory Keynes expressed is dissected, analyzed, and argued.

So, you get to read Keynes in his own words all over again, only this time you get the author's counterpoint right underneath it.

The structure of this section is impressive. It could have been easy to get lost between Keynes' words and the author's, but every point from Keynes is numbered, and then the author's rebuttal is subheaded directly underneath. This organization makes it impossible to misunderstand who is saying what.

The last six chapters sum up the author's points again, which helps readers to grasp what he just went over. He reiterates why Keynes's theories aren't the best to follow, and offers more evidence to support his arguments.

So, let's take a look at some of Keynes' more popular theories, and hear what the author has to say about why he's wrong.

The author starts out by giving us an entire chapter on interest rates. Why? Because Keynes argued strongly against high interest rates. In his opinion, interest rates should be kept as close to zero as possible. He believed high interest rates were the death of any economy.

But the author argues that continually lowering interest rates does nothing but lead to inflation, bubbles, and then crashes.

Think about this scenario for a moment. When interest rates are really low, what do people and businesses do? They go out and get a loan. People buy homes and cars, and businesses invest in other businesses or expand their own.

But when money is so cheap, it's only logical that people are going to be less careful about what they do with it. This mindset leads to our so-called booms. People invest in speculative or unsound ventures. For a while, things seem to be going at breakneck speed. And according to Keynes, these bad investments are better than no investments at all. As long as the government keeps printing more money and lending it out, societies can stay in a perpetual state of boom.

But common sense tells us that nothing lasts forever. When governments have to keep printing money to keep the bubble inflated, we get exactly what happened in the nineties: dot-com companies that lasted only a few years, and a real estate market that expanded so fast that people had to borrow more and more money to be able to afford a home.

The bubble, or boom, eventually pops. Things are bad for a while, and then the cycle starts again.

One of Keynes's most well-known theories has been bandied about a lot during this economic crisis. In fact, you may already have heard of it. It's called The Paradox of Thrift.

In short, Keynes says that during an economic slump, people automatically want to save money instead of spending it. And, Keynes is very anti-saving.

Once people start saving their money, it puts more pressure on the economy. The reason, according to Keynes, is that when people save, they don't invest. This limits business capital, which causes the slump to deepen even further.

Now, this may seem to make sense on the surface. And throughout 2009, all you had to do was turn on the news to hear commentators touting this concept.

But, the author argues, Keynes is wrong here. Anyone who overspends and is worried about his job is going to start saving money. This is true in the best of times or the worst of times – and it's just a common-sense thing to do.

But it's important to realize that this is a classic case of individual versus group behavior. What works for one person may or may not work for a large group of people. And although the author briefly mentions this concept in other parts of the book, a concession here as well would have made his argument more balanced.

In the author's opinion, the current slump only worsened when the government began printing new money and injecting it into the economy. This lowered interest rates and led to a mass wave of wasteful borrowing and spending.

The author reasons that this approach is just like trying to cure a hangover with more alcohol. Pumping more money into businesses or investments that are unsustainable simply makes things worse, because the money just gets wasted.

The author argues that when people save their money, they have it on hand for emergencies when it's needed. And when the economy does start to recover, those funds are immediately available for investment or spending, which speeds up recovery.

The logical next question is, what if the powers that be do nothing? What if they simply step back and let the markets self correct on their own?

Well, Keynes believed markets couldn't self-correct. And, this is exactly why so many leaders, in the US especially, thought that quick and drastic action was necessary to stop the freefall of unemployment and wages.

The author devotes an entire chapter to explaining why this is wrong.

For instance, he gives us several historical examples of slumps and depressions that were completely left alone. That is, the governments did nothing to stop them. And you know what? The economies recovered on their own, in record time, and emerged stronger than they were before.

Look at the 1921 depression that occurred in the United States. This depression recorded the sharpest price breaks ever known, even more so than the Great Depression later on in the decade. But the 1921 depression never gets talked about. Why? Because it was so short. And the reason is that the government did very little to stop it. Wholesale prices fell at the beginning, which led to hourly wage decreases as businesses strove to maintain profitability.

But this fall created equilibrium, which markets must have to be successful. In just over a year, prices and wages began to recover to their previous levels.

The author brings up several more points to support his argument here. And, like all his rebuttals, every fact and figure, and every claim, is backed up and well sourced.

This section on self-correcting markets will hit home with readers, because it's a question so many of us, and our leaders, have struggled with during this latest crisis. And it's a bit frightening to realize that the author could very well be right. If we'd had the sense to just leave our economies alone, we might have been better off.

Sure, it would have been painful to go through. But, the author argues that we're so ready to avoid any pain that we're jeopardizing our long-term future. Sometimes, he says, short-term pain is necessary to achieve a stronger economy in the long run.

Now, the author does occasionally talk about politics in this book. After all, a book about economics can't avoid mentioning the very leaders who are implementing economic policy. Especially when those leaders follow Keynesian theories.

He focuses almost exclusively on American leaders, mainly the US presidents George W. Bush and Barack Obama. But, we never get the sense that he favors one of these politicians over the other. Both presidents followed the advice of economists who were pro-Keynes. The author dissects speeches and policies that help shed light on why they made the decisions they did.

Chapter twenty-one, called Upside Down Economics, is particularly enlightening. Here, the author recaps all of Keynes's theories that he thinks are paradoxes. These theories are mentioned and discussed throughout the book, of course, but it's really interesting to see them gathered together in one place. For instance, Keynes says that if too much bad debt is the problem, then the solution is to add more debt. The crash of 2008 is a great example of this theory being put to the test.

But, what if you followed this rule in your own life? Imagine you've put a ton of debt on your credit card. Does it make any sense to add even more debt to get out of debt?

Not a bit.

Another good example of what the author calls a Keynes paradox is his approach to savings. You already heard that Keynes was very anti-saving. But, he didn't practice what he preached. Keynes was an avid saver in his own life, since his biggest goal was to become rich.

So, if Keynes believed that saving was the way to wealth, why did he tell everyone that spending was the way to wealth? His theory was that the more we spend, the more we have. And, he felt that new money printed by the government was a form of saving, just as genuine as traditional saving.

The author has done a thorough job giving us an overview of Keynes' theories. But we should point out that there's intense uncertainty when it comes to economics. No one actually knows whether our leaders are doing the right thing when it comes to flooding the markets with cash. Only time will tell with this.

So, is this the kind of book that will make you want to grab a bag of popcorn and stay up late into the night reading? Well, probably not. It's economics, after all. But, the author has done a masterful job of making this complex information as simple as it can be. And there's no doubt that, in light of our current global situation, the subject matter is interesting.

Even if you have no prior understanding of economics, you'll still be able to grasp the concepts in these books. The author uses clever metaphors to help shed light on some of Keynes's ideas, and his down-to-earth language makes these ideas easy to understand.

The book is also incredibly well organized. There's so much information here, from so many sources, that it could have been very easy to get lost. But that doesn't happen in this book. It's always very clear, whether you're reading about a theory of Keynes, or reading the author's rebuttal or personal opinion.

Thanks to this organization, it's actually really easy to pick up and put down this book.

Where Keynes Went Wrong is an excellent way for those of us who know nothing about Keynes to get acquainted with his theories. And, Hunter Lewis offers some really compelling arguments for why our leaders might be making some big mistakes by following in his footsteps. But again, keep in mind that his approach is polemic throughout the book. There is no one on Keynes' side of the fence to defend his theories and point out when they were dead on.

So, take this book with a grain of salt. It's a book that flatly argues that Keynes is wrong. And due to the uncertainty we're all facing with the global economy, some readers might want a more balanced argument so they can decide for themselves.

At any rate, the book is a concise, easy way to stay up to date with what's happening in our world.

Where Keynes Went Wrong, by Hunter Lewis, is published by Axios Press.

That's the end of this episode of Book Insights.