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Keynes vs. Von Mises

Jan. 06, 2009 4:01 AM ET24 Comments
Katy Delay profile picture
Katy Delay

In 'Is your recession really necessary?' the FT editors demonstrate their misunderstanding both of the errors in Keynes's delusions, and of the true value of the only economic analysis of business cycles that actually gets it right.

Keynes's idea, according to the article, is that

[g]overnments must respond [to signs of recession] by supporting demand with loosened monetary and fiscal policy. These weapons are slow-acting blunderbusses; they do not allow for rapid responses or fine-tuning. ... It is not possible to liquidate the malinvestment without risking allowing unemployment to spiral out of control and demand to fall with it. ... [G]overnments must work together, internationally, to sustain demand. They must not sit idly by.

On the other side of the issue, the article quotes the Austrian Ludwig von Mises as disagreeing:

[P]olicy that aimed to 'bolster up undertakings that would otherwise have succumbed to the crisis, and on the other hand to give an artificial stimulus to economic life by public works schemes ... eliminated just those forces which in previous times of depression have ... paved the way for recovery'.

The editorial critics dismiss the Austrians as "liquidationists," gloom-and-doomers who believe in the Biblical dictum that you reap what you sow. Economists like von Mises and von Hayek, they think, are no more than repressed social conservatives who confuse science with religion.

But the editors have misjudged two things: (1) the solidity of the Keynesian formula, and (2) the thrust of the Austrian argument.

The Keynesian formula advises attempting to "restore demand," something the Austrians think is futile, to wit impossible, and counterproductive. Sure, they say, you can find holes to fill and keep workers busy; but ultimately government spending drains the financial markets of the very capital that private enterprises will need in order to do a better and quicker job of recovery.

This article was written by

Katy Delay profile picture
Katy Delay is a freelance commentator, an amateur cartoonist, and the author of a short biography of her father, economist Edward C. Harwood. He was the founder of the third oldest think tank in the U.S., the American Institute for Economic Research, of which she is currently a trustee. Having grown up literally inside the Institute offices, Katy absorbed a great deal about the dismal science; yet she also sympathizes with a public lulled to sleep by the phrase "economic research," combining as it does two of the most boring words in the English language. After getting her degree from Mount Holyoke College, she spent the next 30 years taking her American heritage for granted on five continents. Ultimately, through personal experience, she came to appreciate the significance of her father's lifework and to realize that the degree of freedom and opportunity we are supposed to have in this country is unique. They are also just as fragile as her father had warned. She began to study, and then to write. Since 2004, various websites and newspapers such as Mises.Org, PrudentBear.com, SeekingAlpha.com, and the Los Angeles Business Journal have published her articles. In 2005, she started a blog with the byline: "Proving that economics and a sense of humor are not mutually exclusive." Her first book, the Harwood biography, was published in 2013.

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Comments (24)

Another Awsome column, Katy. Thanks
Smarty_Pants profile picture
“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved. ” - Ludwig von Mises, (1881 - 1973)

"Madison, agreeing with the journal of the convention, records that the grant of power to emit bills of credit was refused by a majority of more than four to one. The evidence is perfect; no power to emit paper money was granted to the legislature of the United States." - George Bancroft (1800 - 1891)

“We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.” - Daniel Webster, (1782 - 1852)

"Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." - George Washington, (1732-1799)

"Paper money eventually returns to its intrinsic value - zero." - Voltaire, (1694 - 1778)

The cause of our current 'crisis' was known and understood more than 200 years ago. Unfortunately that didn't stop it from recurring yet again.

What percentage of our population (or of Congress) do you suppose knows that 330 years ago Voltaire predicted our eventual fate?
Smarty_Pants profile picture
"The word is GOVERNMENT not "GUB'MINT" as you have repeatedly written in your posts. I imagine you're trying to be humorous, but it just comes off as ignorant when you constantly repeat the same incorrect spelling." - wildhawk

I use that spelling on purpose and it is a term of disdain, not humor. I actually use 'government' when discussing foreign countries, but since our political structure is full of arrogant, self-interested, crooked, lying scoundrels whose main goal is to exercise power over us 'commoners' for their own enrichment and benefit, then they do not deserve the respect that calling them 'government' would bestow.

While I'm sure there are many fine and upstanding people who hold positions in the government (Ron Paul comes to mind), they are in the vast minority. I regret the fact that such people might be painted with my wide brush, but their unpopular and moral acts of resistance are swamped by the remaining crowd of opportunistic hooligans.

If it helps you to visualize, imagine I am spitting in disgust every time I use the word "gub'mint" (ptui!).

If the day ever comes when, as a whole, they should deserve the respect that their offices should receive, I will gladly revert to using 'government' as a general reference.

As an aside, I could be calling them by a lot worse names but there is no need to sink to that level.
Wildhawk profile picture
Smarty Pants- GRAMMAR POLICE. The word is GOVERNMENT not "GUB'MINT" as you have repeatedly written in your posts. I imagine you're trying to be humorous, but it just comes off as ignorant when you constantly repeat the same incorrect spelling. Perhaps you could try using "gov't" as an alternative if you're simply looking to write a shorter word, rather than a failed attempt at humor. But I have to imagine it takes some mental effort on your part to deliberately spell the word government wrong, simply for effect. What that effect is, I have no idea.

I have little to argue with your points, but the "gub'mint" comments complete detract from the weight and believability of your argument.
Smarty_Pants profile picture
"Seems to me that even the worst evils put forth by the Keynsians - the FDIC, social security, SEC, etc. - are preferable to the alternatives: fascism (which, to the extent that it had an economic ideology, adapted Austrian school concepts) and socialism" - donzelion

The application of Keynesian theory over the past 95 years (since FED was founded) have resulted in a fascist economic system today:

"Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners. Where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the “national interest”—that is, as the autocratic authority conceived it." - The Concise Encyclopedia of Economics

Anyone who believes that private property isn't being 'required' to be used in "the national interest" in our country today hasn't been paying attention.

Examples abound:

Try building a house on a lot where a snail-darter is known to live.
Can't, your property rights have been rescinded "in the national interest".

Try starting a business that is judged by a bureaucrat to have an adverse impact on the ecology. Can't, your property rights have been rescinded "in the national interest".

Try driving without your seatbelt on. You'll be ticketed "in the national interest".

Try not registering for the draft when you turn 18. You may be prosecuted and fined up to $250,000 and/or serve up to five years in prison, "in the national interest". Because as we all know, you may own your body, but the gub'mint has first claim on its use.

The US has evolved into a mild fascist country already. The gub'mint is presumed to have first claim on everything and we are 'allowed' to own and use property only where the gub'mint doesn't object.

This is an extreme opposite to Austrian Economics which rests on absolute personal property rights to utilize your 'stuff' any way you see fit so long as you do no harm to others. After all, it's YOUR stuff.

Without private ownership and absolute property rights, you can't have a truely free market, which Austrian's claim is the best way to improve standards of living for society as a whole.
Great Article!

@donzelion: I dont know, people throw fascism (among other labels) around and i havent seen a very good definition (sorta like people throwing "liberty" and "democracy" around). I've seen it written that Roosevelt and the New Deal was fascist (wiki has some cliffs notes on the controversy; folks forget about the NRA, etc). i think the institutions speak for themselves regardless of how you want to label them. Social Security was a very badly thought out institution. Its a "ponsey" scheme and its a few steps away from the government telling everyone to have more children for the state.

I suggest folks do some homework. Go read "Economics in one Lesson","America's Great Depression" and to round things out "SuperCapitalism", they are even in audio book format.
"No amount of hysterical government grandstanding will change reality..."

Er, well, except that starting in the later 1930s, hysterical grandstanding by government figures really did change reality. Seems to me that even the worst evils put forth by the Keynsians - the FDIC, social security, SEC, etc. - are preferable to the alternatives: fascism (which, to the extent that it had an economic ideology, adapted Austrian school concepts) and socialism.
Good article, Katy. It's rare to find a university graduate who can analyze unstructured problems.
O-B-WON profile picture
I don't consider myself to be one of the sharpest knives in the drawer, .....

But after bringing myself somewhat up to speed on this current economic mess, I can only conclude that most of us see "it" coming, but are powerless to do anything about it...

I don't think it’s not that we don’t want to change, it's just that we can't.

Bringing about an economic change in the way we do business (ie the Federal Reserve) would involve life changing events for all of us and social / economic holocausts that would be unimaginable. Even tho it is unavoidable… nobody wants to be blamed for causing such pain… even tho that’s what it’s going to take….

I’m a retired military aviator, and economically I feel like I’m a passenger on an aircraft with idiots at the controls… (and those idiots at the controls are the only ones with parachutes)

….. Excuse me….. I think I’m getting airsick
Since this bail out is going to cost about 2 trillion, would it not have been cheaper to give each citizen $25000 to pay off their debt & pay down their mortgage. Then the bans would have been flush with cash and we would have people buying everything, pushing us past full employment.
Giving the banks money to loan us who do no longer have jobs was the perfect way to do it wrong.
ngwun profile picture
06 Jan. 2009
Had not heard of Katy Delay. Now on watchlist, thanks. :)

"...understanding is not moralistic; it is simply realistic. And no amount of hysterical government grandstanding will change reality--although it can change people's perception of it, which is what the politicians want."

Seeming is not being. We get confused, often by choice.

Smarty_Pants - "The question is who gets the benefit and who pays the tab?" Spot on. Read Marcus Aurelius. Analysis of who gets & who pays clears the view of many situations, but government, almost by definition, is about getting one or several societal subsets to transfer assets, in the broadest sense including wealth, labour, sex, focus, etc., to another, preferably smaller subset. Sometimes an election or revolution changes the direction of transfer, but more often just shuffles the individuals within a subset.

derryl profile picture
Keynseans and Austrians disagree about the nature of the business cycle. But what I'm seeing now is a cycle in the rise and fall of theories about the rise and fall of economic activity. Call it the business cycle theories cycle.

For happy decades Keynes was on the bottom and everyone agreed deficits are bad. Now Keynes has arisen and deficits are 'necessary'. When Keynesian policies are once again proven to not work, the business cycle theories cycle will cycle him back down to the bottom and Austrian creative destruction will once again rule the airwaves, until the next cycle when Keynes will be resurrected again and dragged triumphantly through the streets of MSM.

Sorry, I had a rough day and I'm feeling a little giddy.
"Creating a finite, inflexible currency is asinine. Where is the universal law of economics which requires your medium of exchange to be a finite number of tokens?" ososry

Well, consider then a 100% reserve money and banking model with money backed by common stock. Money limited in neither amount nor value. Click on My Website for details.
Really good article - thanks.

I see Keynesian policies as a political rather than an economic choice. 'The General Theory' mapped a strategy for getting out of an extant depression in which double-digit GDP shrinkage and very high levels of unemployment were already being experienced. At least as I read it, there was no suggestion that economic cycles could or should be smoothed and fine-tuned using the suggested tools. The myth says otherwise, of course, and politicians (together with those who benefit from their spending of our money) work the myth rather than the actual theory.
Smarty_Pants profile picture
"Would anyone care to argue that there never have been nor ever will be any government projects that have economic benefit?" - DougM

All gub'mint projects benefit somebody. The question is who gets the benefit and who pays the tab? It's extremely rare that the party which pays the tab is the one that benefits, and if so, to an extent equal to or greater than the cost they pay.

Your premise is correct, it is difficult to point at a gub'mint project which is economically viable. If it were, a private business would be earning money at it. The fact that there aren't private businesses undertaking the project is usually the reason that the gub'mint gets involved in the first place.

In general, the gub'mint usually only considers economically unviable projects in the first place, so it isn't a big surprise to see them turn into a big waste of taxpayer money.
At the end of the day, what really matters is whether the projects undertaken by government have a positive economic return. Would anyone care to argue that there never have been nor ever will be any government projects that have economic benefit? I expect there are plenty of such projects available, and their comparative attractiveness rises as other projects in the private sector fall off a cliff and as interest rates plunge. Unfortunately, there are all too many projects that have little or no value, and the machinery of government inevitably showers resources into the good, the bad, and the ugly.
Smarty_Pants profile picture
"Creating a finite, inflexible [value holding] currency is asinine." - ohsosry

Then what label should we apply to a currency that has lost 95% of it's purchasing power since it was created? Soon enough it will lose 95% of what little purchasing power it has left.

A 'flexible' currency is no more useful than a flexible yardstick.

If someone offered to sell you 100 feet of rope for $20 but you knew that the definition of a 'foot' was "flexible", would you take the offer?

How would you feel to discover that the rope was shorter than your arm and the person who sold it to you told you "It's OK. I'm using a flexible yardstick"?

The whole point of money is to provide a stable means of storing value so you can exchange it for other items. If the value of money is not fixed and in fact is continually reduced by people you won't ever meet, doesn't that greatly reduce its usefulness?

If not, then why was the hyperinflation in Weimar Germany a bad thing? The were just being incredibly 'flexible' with their money. Same goes for Zimbabwe today, a highly 'flexible' monetary system there. So flexible that nobody wants to hang on to money any longer than they have to for fear that it will literally be worthless tomorrow.

That seems like a great way to run a country. NOT.
axelrod608 profile picture
The Keynsian approach brought Japan the past two decades. It's a damn shame the theorists don't actually look at reality now and then. The laws of natural consequences apply regardless of what people believe.
Smarty_Pants profile picture
One would think that despite repeated exammples throughout history demonstrating that the artificial expansion of the money suppy ALWAYS leads to a huge boom followed by a huge bust that economists would eventually come to the point where they would realize that there's a basic flaw in the Keynesian approach of economic stimulation via credit expansion.

Those who did realize this causative relationship and applied logic and reason to understanding the actual dynamics of the market are the ones who eventually find the Austrian School of thought and come to understand the impacts of gub'mint created distortions in markets.

Given that there are some pretty smart people who still adhere to Keynesianism, one must either presume they are either blindly dogmatic and don't let facts get in the way of their beliefs, or they realize what's going on and simply wish to maintain their power and control over the political process to their own benefit. Neiter case provides much in the way of comfort to the masses which suffer for their choice to continue meddling based on a disproven model.

As the author succintly puts it:

"Von Mises's understanding is not moralistic; it is simply realistic."

That's just the way it is. Get used to it. You're going to have to whether you like it or not. The changes that are coming are beyond the politician's control at this point. They can only make it worse.

Good article Katy! I knew there was a reason I added you to my watchlist. Glad I did now. Wear the scorn and ridicule this article is sure to generate with pride.
Good job Katy!
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