Resuscitating Keynes: Oh No, Not Again! 17 comments
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Dr. John Maynard Keynes must get tired of being dug up over and over again by economists looking for a mentor in times of crisis.
I must say, his mistaken formulas sure do have staying power.
Dr. Martin Wolf, writing last week in the Financial Times, goes digging again; but it's useless. Why? Because we are not all Keynesians now, even if so illustrious an economist as Milton Friedman was foolish enough to say we were, probably in a moment of exasperation.
In fact, the opposite is true: Keynes's unfounded notions of pushing on a string will subject us all to its deleterious effects today, just it did our ancestors back in the 1930s.
Bailouts, debt financing, government spending, inflating the money supply to save debtors and attempt the futility of restoring failing demand--all have been tried, and all have done much more harm than good.
No, Dr. Keynes did not teach us the following "three broad lessons" in spite of what Dr. Wolf says:
Non-Lesson No. 1
"... [Keynes believed] we should not take the pretensions of financiers seriously. ... Not for him, then, was the notion of 'efficient markets.'"
This is a non sequitur if I've ever seen one. Keynes may have been cynical about bankers; but I bet he'd love to rise from the dead to confirm that he always believed in efficient markets. Where does Wolf get the connection?
Non-Lesson No. 2
"The economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so."
Wolf talks of "the world" as if we were all parts of one entity acting in concert. In fact, each nation is acting as an individual; and each nation's government should act as an individual, i.e. should cut costs, indeed must cut costs when the money is no longer there to pay for them.
A government can only spend money it doesn't have in three ways: borrow it, confiscate it through taxes, or create it. Because we are already a debtor nation we should not do the first; the second will exacerbate the current shortage of discretionary income; and the third will eventually cause the dollar to collapse, thereby leading up to the confiscation of all dollar-holders' purchasing power--not something to do when foreigners hold a good chunk of your debt.
Of course demand is shrinking. You may not have noticed, but the bubble has burst. The demand we once had was a mirage. And you can't revive a nation's economic demand by stuffing it with borrowed or artificial money like the foie gras of some goose--or rather, you can, but it won't work because this goose is dead. You'll get nothing to show for your efforts except a bag of ruffled feathers.
And Dr. Wolf is forgetting that it is not for lack of will that we or our governments cannot "spend all our income." It is the "income" that simply isn't there, unless we attempt to fabricate it out of more monetary helium, which is how we got the bubble in the first place. (See my article, plus page 2 and 3 linked on my blog, for my view on how this happened.)
Non-Lesson No. 3
Now, this is the one that really gets my blood boiling, so I'm going to have to breathe deeply as I punch my keyboard.
In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians--Ludwig von Mises and Friedrich von Hayek--argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions [my italics]: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.
I don't have enough room here to analyze the error in Wolf's statements about the Austrians, but I'll say that the Austrian view of the 1920s is shared by more than one empiricist. I'll just name one: Edward C. Harwood of the American Institute for Economic Research.
To call the Austrians a "secular religion" may have a scrap of truth to it; but that doesn't mean they are wrong about their analysis of the 1920s. Dr. Wolf's criticism is more a statement about their description of their own methodology, rather than their theories; and in fact, the Austrians are quite empirical in their methodology in spite of themselves.
Even if they weren't, the Doctor mustn't throw out the baby.
More erroneous statements
Both Wolf and Keynes continue to err with the following affirmations:
- "[Keynes recognized] that the minimum state was unacceptable to a democratic society with an organised economy." Nothing could be further from the truth. Such a minimum state is unacceptable only to those who claim humans have the capability of organizing such a society's economy, which we can't, to wit our present mess.
- "Keynes would have insisted that ... [m]arkets are neither infallible nor dispensable. ... [T]hey can also go seriously awry and so must be managed with care." Keynes may indeed have so insisted; but no one has yet proven that humans can manage markets, in fact quite the contrary; the more we try to macromanage them, the more markets rebel.
- "The election of Mr. Obama surely reflects a desire for just such pragmatism." The election reflects no such thing. It reflects a slight majority's secular-religious belief in the spread-the-wealth Obama-Messiah, and/or shows an aversion to Bush and anyone like him.
- "The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended." You cannot sustain what doesn't exist. You can try to recreate it; but you will fail, just as Roosevelt did back in the 1930s. (See "pushing the string," above.) Roosevelt, with Keynes's encouragement, began the monetary inflating that is the scourge of the fiat-money 20th Century.
- "Also important will be direct central-bank finance of borrowers." This is a good way to transfer solvency problems from the private sector to the taxpayer; nothing more, nothing less.
- "A debt-for-equity swap is surely going to be necessary." Bailouts for special interests; nothing more, nothing less--and one of those special interests is politicians themselves, because it reinforces the electorate's belief in the politicians' capacity to "do something about it."
And on and on the good Doctor goes, making one Keynesian mistake after another.
Wolf finishes with a most sappy and hubristic "We must do better. We can do so, provided we approach the task in a spirit of humility and pragmatism, shorn of ideological blinkers."
Oh, gag me with a spoon. Who is the secular-religious one now?
Keynesian economists lack an understanding of simple market dynamics, and of how far the world has distanced itself from them. To blame the free market for 1929 or for our current turmoil is like blaming a train wreck on the train itself instead of the inebriated conductor.
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Although not 100% followed, both the USA in the 1930's and Japan in the 1990's used a Keynesian approach. Economists believe in both occasions the government was not forceful enough.
Maybe this time after the Keynesian recipe does not work, we can put this philosophy to bed once and for all.
A regression to the mean can prevent a regression below the mean. I would be happy to see a 1-2 year recession rather than a more severe contraction. I fear as you do, that government mucking around is making the patient quite ill. Breeding instability, possible 0% interest rate hoarding of money (gold and goods if they flush the system with too much newly minted money), and complete arbitrary uses of taxpayer money is a recipe for disaster. Almost everyone feels we are headed in that direction right now.
No wonder even the Fed is hoarding cash (theoretically backstopping other people's losses).
A small bone of contention still appears though I like your well thought out article. I believe stimulus works if it actually creates utility (real goods and services the public needs) and if it comes at the bottom of the cycle or if the economy is stuck at the bottom of a recession/depression over a long period of time.
Unlike academics and mathematicians, the market can't be absolute and quantified. There is a psychological component in it all. Changing people's psychology to see better times ahead works in certain extremely rare circumstances. Thankfully, most circumstances need no such actions since they are just normal economic cycles.
Sadly, you are right government thinks they can feed you medicine all the time thereby negating it's usefulness and wrecking the economic health of the patient.
Right now the government has only helped by frightening everyone, yanking money supply, shrinking dividends, and making people feel that some are benefitting at their demise. And I can't honestly tell them that they are wrong. Frankly, I'd be scared to death of another 4 years of Bush Jr. and his cronies.
Simple solutions that work briefly and then cause larger, different problems.
Wolf thinks that people will submit to his will. And then his diktats will make everything okay and the people will be happy.
I shiver thinking what my life will be under his commands.
1) allow the economy to suffer a near complete collapse while debt based excesses are eliminated or;
2) hyperinflate the currency into worthlessness.
Option 1) will eventually restore economic health after suffering considerable pain during the readjustment, while option 2) will lead to financial chaos as seen in Weirmar Germany and in Zimbabwe today.
Sadly, the only medicine for Keynesian induced problems that our politicians are willing to utilize is bigger Keynesian policies. Eventually this will lead us down path 2).
I'm with you Katy! Ich bin ein Salzburger!
Nice slam dunk btw. In your face Doc!
When the locomotive engineer and the passengers are more inebriated than the conductor, no one really notices until it's too late!
Humility? Shorn of ideological blinkers? Humility is admitting that nobody knows or agrees about how to fix this mess. I don't know and Wolf doesn't know. One camp wants to revive Keynes. Another camp reminds us that Keynesianism has never worked.
The very idea that some cabal of macroeconomic wizards can fix this thing is 'ideological'. To think otherwise requires putting on blinkers so you can ignore the equally valid reasoning of people who disagree with your solutions.
I'm not saying there are no solutions or that nothing will help. I'm just pointing out that people who advocate humility rarely possess it themselves, and people who warn against ideological blinkers are usually wearing a pair that filters out anything they don't want to see.
What I think Keynes was on about is that every able-bodied person is a potentially wasting asset, like an unsold airline seat or hotel room. To undergo long periods of unemployment is to forego whatever wealth the unemployed people might have produced, while still feeding, housing, and clothing them. Money, the score-keeping system, is irrelevant to this fundamental fact. Of greater concern IMO is the mis-allocation of resources. Government is often guilty of this, but market forces have also produced some whoppers. Building unneeded shopping malls, SUVs, or McMansions is just as much a loss of potential wealth as unemployment - moreso, perhaps, because of the natural resources also consumed.
Our real fear should be of a powerful, centralized United States government that came into being as a result of the two world wars: We need to have the courage to face our fears and not divert ourselves with bogey men such as Keynes.
Big government in the United States began during World War I just after personal income taxes were ruled constitutional, for the first time, by the Supreme Court. Before World War I, there were virtually no income taxes, government remained decentralized (as the Founding Fathers wanted) and the Federal government was relatively weak.
America emerged with the habits of big government and with a new role as a world leader after World War I.
The power of the Federal Government was increased during the Great Depression but the Supreme Court ruled that most of the programs created by the Roosevelt presidency were unconstitutional, After that, in 1935, the economy began to grow and continued to grow at a good pace right up to World War II which started for the United States at the very end of 1941 (Dec.7, 1941) (Unemployment remained high, but it has remained almost as high today when measured the same way it was measured then.)
Third and most important, big government took the form, and got the power, that it has now during World War II. For the first time, Income taxes taxes became so onerous for the general population that they were withheld from paychecks by a government which was afraid citizens would refuse to pay otherwise.
As causes of big, centralized, controlling government, the contributions of the Roosevelt presidency and the thought of John Maynard Keynes are very small when compared with World War I and II.
The real enemy is our all-powerful and all-interfering government, not John Maynard Keynes. We need the courage to face the enemy squarely and not divert ourselves with bogey men such as John Maynard Keynes.
From what I've read of Keynes, he was very pragmatic and included things like trying to stop the WWI allies from driving Germany into the ground in the 1920s, and observing that the blind faith governments were putting in gold was causing them to put up a lot of trade barriers and causing massive deflation.
Finally, I hear all of these pundits talk about how Roosevelt's policies never worked, but I never hear a rational explanation of how the world actually did get out of the depression --- other than the enormous fiscal deficits driven by the Second World War.
But, somehow, spending on very low return war is better than spending on (relatively) high return infrastructure.
Flash back to the neo-con's answer to 1970's stagflation and Milton Friedman's Shock Economics Theory he plied so well in South America for right wing fascists.
Roll tape a bit forward to the Gipper. Cut taxes, spend on defense out the wazoo, run record deficits, de-regulate markets and watch Uncle Milties' magic work.
While every right wing neo-con tape loop is buzzing with out-of-control GSEs, we all seem to conveniently ignore how all of this silly and frightening theoretical economic approach played out around the world through the likes of the IMF, World Bank, Halliburton, and their ilk.
Look at any country where this supply-side, trickle down, deregulated gambit has played and look at how eeiry is the similarity between those countries and this one:
1. The top 1% control 40% of all financial wealth in the U.S. The top 20% another 52%, leaving the rest of us (80%) America's financial wealth at a whopping 8%.
2. In terms of inherited wealth only 1.6% inherit moe than $100,000. 91.9% receive nothing. Yet the "death tax" is the highest priority on the ultra-conservative agenda.
Now for some sobering reminders:
Under Clinton we enjoyed a $287 Billion SURPLUS that's now an ever-growing DEFICIT that at last peek was nearing $1.4 Trillion and national debt that has grown from $5.7 Trillion to $10.2 Trillion in just seven years.
It wasn't because Clinton was an economic genious. He simply returned out-of-control revenue reduction (tax cuts) back to the Reagan rates and chose folks who shared his philosophy of government and its role. I'll put my money in the hands of the guys that believe that it's the government's job to invest in the 80% of us that need practical ways to grow our own wealth (smart energy policy, infrastructure development, education).
As for trusting in the markets to right the ship....?
Is it too much effort to remember that it was a Repubilcan Congress that ignored pay-as-you-go. Thank you, Ted, but I'll take someone steering the ship who can string together two sentences without sounding like and idiot and one who actually works at the Presidency vs. one whose most remarkable achievement was taking the most number of vacation days while in office.
You can join the rest of us in teh 21st Century whenever you extract your head from the sand.
stimulus spending needs to be targeted or it will not have any long term benefits. except for covering the budget shortfalls of the states and repairs on the interstate highway system - i have heard no stimulus which is beneficial.
With a name Delay--I trust she's not related to the Hammer--she falls back on conservative delaying action to wait for the free market to make amends. Nonsense, throwing out the rascals will only bring in more rascals to engender greater harm to the common good, which to the free market adherents is an anathema. At least the heavy hand of governance in bailing out the shattered economy will set up tough guidelines to ensure against Ponzi profit aggrandizement for the sake of a handful of notorious traders and investment financiers, who still vilify FDR and smarter government, at the expense of building a viable nation for all to share in its wealth.
On Dec 29 09:56 AM Smarty_Pants wrote:
> The ultimate problem with Keynesianism is that it leads to the situation
> we are in today. Eventually the application of 'borrowing to spend'
> puts you in a spot where your only choices are to;
>
> 1) allow the economy to suffer a near complete collapse while debt
> based excesses are eliminated or;
>
> 2) hyperinflate the currency into worthlessness.
>
> Option 1) will eventually restore economic health after suffering
> considerable pain during the readjustment, while option 2) will lead
> to financial chaos as seen in Weirmar Germany and in Zimbabwe today.
>
>
> Sadly, the only medicine for Keynesian induced problems that our
> politicians are willing to utilize is bigger Keynesian policies.
> Eventually this will lead us down path 2).