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Book Review: “Where Keynes Went Wrong and Why World Governments Keep Creating Inflation, Bubbles and Busts” by Hunter Lewis

Posted by HH on December 16, 2009

Reviewed by Travis Kent

In the book “Where Keynes Went Wrong and Why World Governments Keep Creating Inflation, Bubbles and Busts “, Hunter Lewis takes on one of the most influential Economists in the history of the modern world. A little background as to why this is important. John Maynard Keynes was a British Economist in the early 20th century. His book “The Economic Consequences of the Peace” published in 1919 dealt with economic theory based upon the Versailles peace conference for World War 1. Later, Keynes penned “General Theory of Employment, Interest and Money” or more commonly called, The General Theory.  These and his other works have shaped public monetary policy by many world leaders, including western Europe and the United States.

In this book, Hunter Lewis does essentially 2 things: (1) attacks the general writings and teachings of Keynes and (2) lays out his argument why governments should not be following Keynes, his followers and his writings. While the text of this book contains 6 parts laid out by the author, each can be read and absorbed independent of the others. There are 2 main parts: “What Keynes Really Said” is a systematic study of Keynes writings, mostly from “The General Theory”,  that address many areas of macroeconomic theory, laid out free of criticism and “Why Keynes Was Wrong” where the author takes on the writings of Keynes that are outlined previously.

As an example, Mr. Lewis takes on Keynes’ famous “Paradox of Thrift”. Keynes Paradox of Thrift is, stated very simply, that while in times of recession it may be good for the individual to save, but if everyone saves, then it is detrimental to the economy. The implication is that demand drives the economy and for demand to exist, money must be spent.  Lewis debunks this in Chapter 10 with the following:

“The bad investments of the recent past need to be liquidated, or at least marked down in price. Until this happens, savers should build their cash positions and refuse to use them. To invest at the old, unrealistic asset price would just continue the old pattern of throwing away money.”

The obvious argument here is that there is no paradox. Spending savings in a recession does not address the economic problems and serves only to drag out the inevitable bubble burst. Or as Keynes puts it, “…consuming more alcohol will not cure the hangover.”

Mr. Lewis succeeds in pointing out several flaws in Keynes’ theories that seem to escape world leaders when setting policy. From monetary policy, interest rate theory and recession recovery, Keynes ideas are to this day employed throughout the world and have been used most recently by Presidents George W. Bush and Barak Obama. I would highly recommend this book for any reader interested in learning about how governments arrive at decisions to raise or lower interest rates, bailout corporations or simply guide the economy in good times and bad.   

Travis Kent is surety underwriter and regular book reviewer for Economic Perspectives


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