Keynes’s Criticisms of “the Free Market” Were Actually Criticisms of Unfree Central Banking Regimes

Keynes’s analysis of the possibility of underconsumption in capitalist economies is not a general theory of market economies, but rather is relevant, at best, to economies with central banking systems. Selgin helps demonstrate that by contrast, competition in money production can link saving and investment, thus avoiding Keynes's critique. In addition, Selgin's argument provides a framework to understand central banking’s inability to achieve its intended results. Many of the macroeconomic problems in historical capitalism can thus be traced to interference with financial markets, rather than to market failures.

The economist Henry Simons once observed that Keynes’s criticisms of “the free market” were actually criticisms of unfree central banking regimes. George Selgin’s recent book contributes to that perspective by showing how a completely unregulated banking system could avoid the macroeconomic problems that have plagued economies with central banking systems the world over.

If Selgin is right, Keynes’s theory of underconsumption is not a “general theory” of capitalism’s failures, but a special theory about how economies may fail when hampered by specific financial institutions. Aside from misspecifying the problem, the Keynesian theory also provides unsatisfying solutions. Hence, Selgin offers a modernized version of pre-Keynesian theory and a way of eliminating both the problems with which Keynes was concerned and those that the implementation of his theories eventually caused.

—Steven Horwitz, review of The Theory of Free Banking: Money Supply under Competitive Note Issue, by George Selgin, Critical Review: A Journal of Politics and Society 3, nos. 3-4 (Summer-Fall 1989): 411-412.