The global economy is a mess today because most economists, bankers and political leaders don’t understand that most basic of subjects: Money. When it comes to monetary policy, they have it backwards, thanks to the misbegot- ten ideas of John Maynard Keynes. Before Keynes and like-minded peers, economists understood that the real economy was the creation of products and services. Money was the symbol economy. It represented what people had produced. It was a facilitator of commerce.
The ability of people to trade with one another is how we achieve a higher standard of living. Money measures wealth; it is not wealth itself. It is a claim on products and services that people have created. That’s why counterfeiting is illegal; it’s thievery. But when government does this, it’s called quantitative easing, or stimulus.
Money reflects what we do in the marketplace. But instead of recognising that basic truth, Keynes posited the exact opposite. To his way of thinking, money controls the economy. Change the supply and you can change economic output, just as a thermostat controls a room’s temperature. Government, not the marketplace, is the real driver of commerce. Other “economic actors” such as investors, venture capitalists, entrepreneurs and business executives are secondary; they merely respond to the prompts of government officials and central bankers. (While monetarists focus exclusively on the money supply, Keynes thought it useful to employ fiscal tools such as spending and taxes to help steer the economy. He and his acolytes, however, had virtually no concept of taxes being a barrier or hindrance to commercial activity; they simply saw them as a way of controlling an economy’s total purchasing power or “aggregate demand”.
Keynes did share one crucial view with the classical economists: They both saw the economy as a machine that should run smoothly. So-called business cycles—booms and busts—were phenomena to be studied with an eye toward eliminating them. Classicists thought more “perfect competition” among businesses, minimal government regulation, prudent levels of government spending, a gold standard and low taxes, along with combating unsound banking practices, would do the trick. The cult of Keynes thought that free markets were inherently unstable, capitalists were their own worst enemies, and wise government officials, like Keynes, were necessary to save businesspeople from themselves. Get the government controls right—primarily monetary—and the economy would purr smoothly forever after.
Joseph Schumpeter thought both the classicists and the Keynesians were utterly wrong in looking at the economy as if it were a clock. To him, “equilibrium” didn’t exist. The marketplace was always changing; the pace would vary, but things never stayed still. New methods, inventions and the constant rate of improvement of existing things meant that government officials could never run an economy the way one drives a car.
The Forbes 400 list of the richest Americans and our list of global billionaires demonstrate that Schumpeter had it right. “Economic actors” are the drivers. Government can either impede their activities or create an environment in which they can rise and flourish.
This would seem self-evident. Yet, economies all over the world are in trouble. Government leaders and economists galore talk about monetary policy as if it could rev up economies that are staggering under excessive taxation, suffocating regulation and massive government spending. (Remember, government doesn’t create resources. It gets them through taxation, borrowing or inflation, which is—Keynes got this right—another form of taxation.)
Most governments loathe the truth that the people on our lists are essential to prosperity and a higher standard of living. Government wants the benefits of what such people create, but it doesn’t want anyone to get rich from the creation.
What We Owe Churchill
This autumn marks the 75th anniversary of the start of World War II, the most murderous and widespread conflict in history. Civilisation hung in the balance and by the spring of 1940, Nazi Germany was on the cusp of victory. Only Winston Churchill’s leadership kept Britain in the war when all seemed lost as France—credited by knowledgeable observers, including Germany’s general staff and Soviet dictator Joseph Stalin, as possessing the finest army on Earth—was collapsing. We forget today that Churchill’s achievement was, as the Duke of Wellington put it after his victory at Waterloo, “the nearest-run thing you ever saw in your life”.
When Churchill took office on May 10, 1940—the very day Hitler began his offensive against Belgium, Holland and France—his political position in parliament was weak. Neville Cham- berlain was out as prime minister but remained in the war cabinet, and he and his loyalists controlled the Con- servative Party machinery. Churchill was deeply distrusted by many Tory backbenchers. Chamberlain had the power to bring Churchill down, if he so chose, even if he couldn’t resume the top position himself.
Churchill’s supreme test came soon enough. On May 24, following two weeks of shockingly bad military news, Lord Halifax, Britain’s foreign secre- tary and a powerful Conservative Party figure, made a stunning proposal to the war cabinet: Britain should begin peace negotiations with the Nazis. His rationale being that the longer they waited, the weaker Britain’s position would become, as it looked like the British army in France was about to be annihilated. Churchill responded with uncharacteristic circumspection, knowing he hadn’t the political power to confront and beat Halifax head-on. He had to play for time and keep Chamberlain, who was leaning toward agreeing with Halifax’s analysis, from formally siding with the foreign secretary.
This internal battle, the most crucial of the war, was kept secret for decades. It went on for five ex- traordinarily tense and dramatic days. Churchill triumphed, and so, ultimately, did Western civilisation. (This astonishing story, on which so much depended, has been well told by John Lukacs and other historians.)
But we should appreciate just how close Hitler came to winning. No other British leader in the spring of 1940 could have kept Britain in the war. World War I’s heroic leader, David Lloyd George, who admired Hitler, was ready to lead a collaborationist government, just as France’s hero, Henri Pétain, actually did when France sued for peace that June.
If Britain hadn’t been in the war when Hitler invaded Russia, the US would never have provided critical aid to Moscow. It wouldn’t have been politically feasible.
Germany and, to a lesser extent, Japan would have dominated the world. As Churchill warned, “If we fail, the whole world, including the United States, including all that we have known and cared for, will sink into the abyss of a new Dark Age made more sinister, and perhaps more protracted, by the lights of perverted science.” The US would have remained mired in economic stagnation and would have been forced to pursue policies in a manner that wouldn’t upset the world’s new masters.
The political ramifications of a global Nazi/fascist victory are too ghastly to contemplate.
Charles Krauthammer, in his book Things That Matter (Crown Forum, 2013)—a fascinating collection of his columns and essays—has a short chapter aptly entitled “Winston Churchill: The Indispensable Man,” in which he makes the case for why Time magazine should have chosen Churchill in 1999 as the Person of the Century. “Because only Churchill carries that absolutely required criterion: Indispensability. Without Churchill, the world today
would be unrecognisable—dark, impoverished, tortured. Above all, victory required one man without whom the fight would have been lost at the beginning. It required Winston Churchill.”
Steve Forbes is Editor-in-Chief, Forbes