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© 2012 Sanjeev Sabhlok's revolutionary blog
The more I read Steve Kates's work, the more I learn. Key elements of an excellent article by him, written in 2002, are provided below.
That Alan Greenspan thinks of the General Theory as his font of economic knowledge only adds to the depressing quality of this article. There it said that “the Fed Chairman has been known to rise from his chair midconversation and read aloud relevant passages from that 65-year-old book for visitors.” It is anyway quite clear from the actions he takes that Greenspan does think this way, but it is only one more indication of just how deeply ingrained Keynesian theory has unfortunately become.
And we have an example of such Keynesian expenditure policy before us, if anyone would care to look. Japan has suffered under the effects of Keynesian demand stimulation for almost a decade now. The effect has been to take the relatively mild slowdown experienced internationally at the beginning of the 1990s and turn it into an ongoing, ever-deepening recession that shows not the slightest sign of retreat.
To find that the head of the Federal Reserve in the United States is a devotee of Keynes should be a further example of how poorly based monetary policy is. That we are now in serious risk of a global recession is largely related to the decisions of the Fed over the past two years. Other central banks throughout the developed world have followed the same processes, which have led to the same sorry outcome.
The concept of insufficient aggregate demand is strongly embedded in "modern economics".
It will, however, gall most "trained" "modern" economists to know that their delusion that recessions have anything to do with underconsumption had been long demolished by economists like Ricardo, Say and J.S. Mill. But Keynes, given the enormous clout he wielded, plucked this failed and rejected idea and made it the centrepiece of his theory of unemployment in 1936.
Keynes actually did not advocate this idea till much later, when he came upon Malthus's writings on the subject. But others (in USA) before him had started a great murmuring about this rejected idea. And so, Hayek, who heard about this murmuring, decided to demolish this absurd idea once again, in an article entitled, The "Paradox" of Savings in 1929 (available here).
Why did Hayek bother to refute something that had already been refuted on innumerable occasions in the past?
Because, as he noted: "it is not impossible that with able exposition and extensive financial backing it may exert a certain influence on policy in Anglo-Saxon countries. For this reason it seems worthwhile subjecting this theory to detailed and exhaustive criticism." He was right to take pre-emptive action, but it failed to stop Keynes's "able exposition" in 1936 that exerted a "certain influence" on policy – an influence our "economists" have yet to get over.
This is what Hayek wrote:
The assertion that saving renders the purchasing power of the consumer insufficient to take up the volume of current production, although made more often by members of the lay public than by professional economists, is almost as old as the science of political economy itself. The question of the utility of “unproductive” expenditure was first raised by the mercantilists, who were thinking chiefly of luxury expenditure.
The idea recurs in those writings of Lauderdale and Malthus that gave rise to the celebrated Théorie des Débouchés of James Mill and J.B. Say, and, in spite of many attempts to refute it, it permeates the main doctrines of socialist economics right up to T. Veblen, and Mr. J.A. Hobson.
But while in this way the idea has found a greater popularity in quasi-scientific and propagandist literature than perhaps any other economic doctrine hitherto, fortunately it has not succeeded as yet in depriving saving of its general respectability, and we have yet to learn that any of the numerous monetary measures intended to counteract its supposedly harmful effects have been put into practice.
This state of affairs, however, may yet be endangered by a new theory of underconsumption now current in the United States and in England. Its authors are people who spare neither money nor time in the propagation of their ideas. Their doctrine is no less fallacious than all the previous theories of underconsumption.
All the words in red above can readily apply to Keynes, who was a seriously incompetent economist. His followers have taken economics almost back to the time before Adam Smith, a regression in theory that the world cannot afford.
Robert Genetski has analysed the financial crisis in two excellent articles (this) and (this), in October 2011. Both are worth reading. The conclusion of his second article reads: "As long as policymakers continue to use the Keynesian framework in developing economic policies, the potential for another financial crisis is uncomfortably high." Now that I've started understanding the dynamics of the federal reserve a little better (particularly with Griffin's talk), I don't think the situation will readily change. What we can therefore expect is not just a financial crisis but a long-term economic crisis in USA, with lukewarm (or negative) real growth, allowing others (like India?) to catch up.
Here are a few colour-annotated extracts from Genetski's first article: How Keynesian Economic Theory Contributed to the Financial Crisis.
EXTRACTS
It has been three years since the worst financial collapse in modern history. Key policymakers dealt with the crisis through the application of the Keynesian economic theory.Series of Policy MistakesThe financial crisis resulted from a series of policy mistakes by each of these policymakers. As the financial situation deteriorated in response to each policy mistake, the key players appeared oblivious to why things kept getting worse.On October 9, 2008, after successive policy moves failed to contain the damage, White House Chief of Staff Joshua Bolten raised an important question: “I just wonder, Hank, why after all the steps we’ve taken to stabilize the market, are the markets not responding?”Paulson’s response: “Josh, I wonder exactly the same thing.” (Paulson, p. 346).Ignorant of Alternative PerspectiveThe reason financial markets failed to respond as these policymakers expected is their decisions were based on a flawed economic theory. Each of the key U.S. players—Paulson, Bernanke, Geithner and President George W. Bush—views the economy from a Keynesian economic perspective. None of these key policymakers were aware of an alternative classical economic perspective, which provides a different interpretation of economic events and how to deal with them.Keynesian theory assumes when government increases its spending or provides credit to various entities, it adds to the total amount of spending or credit. The alternative classical economic theory assumes government spending and loans come at the expense of private spending and credit. From the classical perspective, a government move to boost spending or credit to one area of the economy simultaneously weakens another area.A second distinction between the two competing theories relates to monetary policy. The Keynesian view emphasizes the importance of interest rates as a guide to the amount of money or liquidity in the economy. The classical view downplays the importance of interest rates and focuses instead on the amount of money and liquidity in the banking system.A final distinction between the two theories relates to the role of confidence. The Keynesian view assumes confidence plays a leading role in determining the economy’s performance. In contrast, classical economic theory views confidence as a consequence of economic conditions.
Policymakers consistently relied on a Keynesian perspective to formulate economic policies to deal with the financial crisis. In so doing, they contributed to the financial crisis.Gathering Economic StormFrom 2001-2005 the Federal Reserve adopted a highly expansive monetary policy. One key measure of money is bank reserves. They are the one measure of money completely under the control of the Federal Reserve. When the Fed creates bank reserves, the banking system transmits the newly created reserves into more spending. From 2001-2005 the Fed increased bank reserves at a 5 percent yearly rate. During 2005 bank reserves were essentially unchanged.Critical Policy DecisionsPaulson’s discussion of the deterioration in the US economy in 2007 and 2008 is instructive. Throughout he shows how policymakers never considered the slowdown in spending and developing lack of liquidity might be related to Fed policy.Wrong Call on ConfidenceBy January 2008 it became readily apparent the economy was getting worse. Instead of looking for the reason liquidity was drying up, Paulson and Bernanke perceive the problem as a lack of confidence. In an attempt to boost consumer confidence, Paulson recommends a $150 billion “stimulus” program including one-time tax rebates and tax breaks to encourage business investment. The idea was to put money in the hands of people so they would spend it.Keynesian economic theory assumes when government provides people with more money, it raises their confidence and has a multiple effect on boosting spending throughout the economy. Classical economic theory assumes there is no increase in demand from government spending. Instead, government borrowing to fund the spending reduces the amount of credit available to others. The reduction in available credit produces less spending in other areas. This offsets the increase in demand from government spending.During the spring of 2008, as consumers received and spent their tax rebates, there was a brief increase in demand. Since the market tends to allocate credit to its most efficient uses, policymakers’ decisions to reallocate it to other areas will tend to weaken, not strengthen the economy.The weakness in the economy throughout the spring and summer of 2008 is consistent with this classical view.
For simplicity's sake I have crunched ALL of economics into just two laws (here). You understand these two laws and you understand the economic way of thinking.
Keynes broke the first law (that there is no free lunch). Hence he was a fool, not an economist. But by his popularity he set in train a process by which thousands of "macro-economists" started imagining that they could break the first law of economics, just like fool "physicists" who imagine they have discovered a perpetual motion machine.
For those of you who (still!) believe that the government can borrow (thus print) endless amounts of money to "create" jobs and prosperity (and there are only a handful of economists alive today who don't "believe" in this), here's a cautionary piece of advice Peter Boettke, from one of the most sensible economists:
Keynesianism broke the old time fiscal religion of balanced budgets and fiscal responsibility, and changed not only attitudes of economists and policy makers, but also eroded whatever institutional constraints existed on public spending that had existed. Keynesianism cannot work to solve our current problems because Keynesianism is responsible for our current problems.
Read his whole article here. Also his citation – of James M. Buchanan.
That Keynes also broke the second law of economics should be self-evident, as well.
There is simply no doubt in my mind that Keynes was a Fabian socialist, regardless of whether he was a member of that society or not. Fabians had a goal of INCREMENTAL socialism: socialism by stealth.
Read this little bit from his concluding chapter 24 of the "General Theory" (of nonsense):
I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution. [Source - also read the entire blog post I've linked].
The argument that Keynes makes in chapter 24 (and there is enormous amount of rubbish in that chapter, if you care to read it!) is beyond ridiculous: it displays total disregard for the function of the ENTREPRENEUR and INVESTOR. Without these two (a) coming up with ideas and (b) taking risks, there can be NO PRODUCTION. Keynes has conveniently trashed the MOST FUNDAMENTAL functions of a free economy by socialising investment. In his view (just like in Marx's) the government can PRODUCE by picking and choosing between different investments.
Note what Don Boudreaux writes about this Keynesian nonsense:
Anyone who writes that “there is no intrinsic reasons for the scarcity of capital” doesn’t have a clue about what he is writing.
All scholars err, and many scholars sometimes err big time. But such a statement by someone celebrated as an economist – indeed, as a “great economist” – is error so deep, so profoundly at odds with the most fundamental propositions not only of economics but of the world as we know it – that the person who writes such a thing reveals himself to be no economist at all and, hence, utterly undeserving of the professional accolades heaped on him. [Source]
Keynes is not just an incompetent "economist" he is no economist at all.
The tragedy is that 1000s of "economists" who think along these confused lines have been promoted to the very top in ALL governments across the world.
Just like in climate science those who think scientifically have been pushed out, the Keynesians have cleverly manoeuvred (by sucking up to politicians) themselves to positions where they are able to THROW trillions of dollars down the drain.
Tragically, as is always the case with socialist ideas (and as Bob Higgs notes), it is "the widows, orphans, retired people, and all other financially untutored people who rely on interest earnings to support themselves in their old age or adversity" who are being impoverished by the Keynesians, even as the big banks (who participated in the ruin of USA and Europe) and bureaucrats become even wealthier.
Addendum
The long run…Are we there yet?
The Keynesian mental muddle is so self-evident from this article (from Buttonwood) that I don't think it needs any comment.
But I'll make a few short comments nevertheless.
These glorified jokers imagine that they "control" the economy by pushing or pulling a few buttons. As if they have access to a cockpit where pressing a lever here or there will change the "flight path" of the economy.
I'm afraid this is NOT the way real economies work.
Real economies are based on trillions of (small or big) decisions by individual consumers and producers (including entrepreneurs) who are constantly scanning the horizon for relevant information to inform their decisions.
These decisions are always based on LOCAL knowledge of individual circumstances.
The lunatic actions of the Keynesians in "stimulating" the economy or other such mad endeavours merely signal that there is something really wrong! These "stimulii" don't send people into a spending spree simply because PEOPLE ARE NOT AS STUPID AS THESE "ECONOMISTS" think they are.
Such actions make people save even more since consumers sense that something is seriously wrong and they better save for their future. Investors are badly scared by such actions as well because stimulii CLEARLY represent future tax increases which will hurt demand for products just at the time when these products come into the market.
Everyone who is sensible (which naturally excludes the Keynesians) starts thinking of the government as Alice might have thought of the Mad Hatter – totally berserk.
Instead of being seen as a neutral umpire who systematically enforces justice, the government is now seen as a bunch of incompetents attempting to manage something they don't control! It is a scene straight out of any early 20th century lunatic asylum.
The day these fools will stop "fine-tuning" the economy and allow the DISCIPLINE of the market to take its course, that day the people will once again regain their confidence. That day investors will once again start investing.
It is IMPORTANT for consumers (and investors) to see MANY and even huge (well deserved) bankruptcies. It is important that the fat (subsidy) injected into the system by Ben Bernanke and his fellow Keynesians be cleansed.
The subsidisation of the incompetent is choking the arteries of the West.
The medicine was always only one – a free but just market. The market became unjust when those who made bad decisions could fly in their private airplanes to Washington and get bailed out.
They SHOULD have been allowed to go under in 2008 (or earlier). Had that happened, by how the system would have been cleansed and refreshed. It is not too late even now for this harsh remedy.
The longer the West delays necessary action (and discipline) and continues this talk about subsidising zombies, the greater the risk to the entire economic system of the world.
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