Keynes Was Not Much Better at Investing than He Was at Understanding Economics

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Mark Thornton
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John Maynard Keynes was an English “economist” who spawned a revolution in economic thinking that broke out in Britain from a cesspool of socialist thinking, creating a title wave of anti-economics that overwhelmed and dominated the economics profession worldwide known as Keynesian economics. His experience as an investor is very instructive of his mindset and the unfortunate revolution that he brought to the world.

The Keynesian Revolution

Most economists now eschew the label “Keynesian economics” but that is only natural given the past wreckage of its failures. The components of Keynes’s own thinking and writing have been absorbed, interpreted (often beyond recognition), and ultimately rejected as false and even dangerous (in name only).

Nevertheless, when the body of Keynes’s thought has now been picked clean of its tissue, the skeleton remains and dominates the profession and even popular thinking. The government is now in charge of the economy!

When Keynes was being educated at socialist Cambridge University, the real world was still one where laissez faire dominated and controlled. It had succeeded in lifting up the working class and built a mighty engine of capitalism, and government was considered a separate and distinct entity subject to its own rules and regulations, like the gold standard and balanced budgets.

Keynes published his book, The General Theory of Employment, Interest, and Money, in 1936 and he died in 1946, leaving the world with the fully bastardized Bretton Woods gold system, an embedded view of technocratic socialism, and the new “macro” view of economics that fully dominates schooling, propaganda, and policy.

By eliminating the teaching of the history of economic thought, especially in graduate programs, the modern economist cannot really think of it in terms of anything else. The central bank, the Federal Reserve, and the Treasury Department manipulate the economy like puppets by pulling various strings. Everything else, including “microeconomics,” is viewed as just “specializations,” micro policy, or the main revenue source from teaching Principles at university.

Economists may genuflect to the “free market” as a necessary evil, but their real views are that the market has all sorts of imperfections and the market creates all sorts of evils in the world. In a real sense, this is a disingenuous perspective and flies totally in the face of historical facts. The very idea that the government could be largely done away with and not be used to diagnose, treat, or cure the economy would be seen as ludicrous and send most newly-minted PhDs into a mental meltdown.

Keynes the Investor

Keynes was the son of a professor and was trained in mathematics himself. He was a wonderkid, publishing famous books on probability, economics and politics, and was a big player in international affairs and an important architect in redesigning the world monetary order away from the gold standard.

In investing, Keynes has even been designated one of the first experts in institutional investing in directing large amounts of funds for institutional portfolios and endowments. Keynes was an “active” investor, and his investment philosophy changed over time through trial and error. Keynes expert, David Chambers, showed that Keynes’s experience as an investor was not “one of unqualified success,” noting that in his first decade failed to even match market returns and for a crucial “period of three years in the late 1920s, he actually was substantially behind the market.”

It appears that Keynes invested institutional money in small value stocks and that he tried to use his understanding of the business cycle to engage in market timing. Both of these approaches are now largely rejected by professional institutional investors and led Keynes to produce poor performances for his clients.

Timing the market and picking the winners from among small stocks takes genius and hard work, or a super large ego. In Keynes’ case, it was surely ego, rather than genius that was at work. He was an extremely self-confident individual. 

After the stock market crashes and the Great Depression began, Keynes began work on his magnum opus book, The General Theory, and he thereafter hid under the investment philosophy of diversification and buy-and-hold strategies, which did not really help his investment returns in the late 1930s.

But notice the timing of all this: His investment philosophy failed both before 1929 and after 1929. The Great Depression hit in the early 1930s and Keynes began writing his most influential book, which was published in 1936.

The hallmark of the book, and what generally moves his entire economic model, is his assumption of “animal spirits,” telling investors and capitalists what to do next. According to Keynes expert Justyn Walsh:

Keynes would utilize the insights gained from his roller-coaster ride on the financial markets to develop a revolutionary theory that accounted for the booms and busts of modern economies. A central contention of Keynes’ radical thesis would be that financial markets were not always efficient, and that upheavals in the world of money could lead to disturbances in the real economy.

From Personal Experience to General Theory

Keynes’s General Theory was supposed to overcome capitalism and its internal mechanisms of caution and stability and replace it with an unabashed optimism and utopianism of a technocratic future where bureaucratic economists would chart the course of the economy and even be in charge of the wind that propelled its sails.

What Keynes failed to appreciate was that central banks were already in charge of the “world of money” and were already the cause of the “disturbances in the real economy.” Moreover, he seemed not to realize that governments were the cause of all the widespread destruction of WWI and the massive increase in the size of governments, spending, and debt. How anyone could fail to notice the connection between these events and post-WWI monetary and economic problems in the United Kingdom is beyond explanation.

John Maynard Keynes by all accounts was an egomaniac. No one doubts that he was a socialist, or that his book, The General Theory, calls for all-round government control of the economy and for the socialization of investment. However, it is vital that we recognize that this ego drove his investment philosophy and that his dismal investment performance is something he blames on the “free market” and that he, in turn, advocated socialist investment and economic policies as a result. 

Here is one of Keynes’s most-remembered quotes where he was disparaging the Classical Economists like Adam Smith and John Stuart Mill:

Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

It would appear that we are now the slaves to the view of “defunct economist” John Maynard Keynes and that our “madmen” in authority, such as Fed Chairman Jay Powell and Paul Krugman, are distilling their frenzy from none other than Keynes himself!

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