Monday, October 1, 2012

First the USSR Crashed, Why Keynesianism Will Crash Next

Gary North writes:

 What defeated the Soviet Union was socialist economic planning. The Soviet Union was based on socialism, and socialist economic calculation is irrational. Ludwig von Mises in 1920 described why in his article, "Economic Calculation in the Socialist Commonwealth." He showed in theory exactly what is wrong with all socialist planning. He made it clear why socialism could never compete with the free market. It has no capital goods markets, and therefore economic planners cannot allocate capital according to capital's most important and most desired needs among by the public...

Mises's argument was not taken seriously by the academic community. Socialism was so popular by 1920 among academics that they did not respond to Mises...

Finally, when it became clear in the late 1980s that the Soviet economy was bankrupt, a multimillionaire socialist professor named Robert Heilbroner wrote an article, "After Communism," for the New Yorker (September 10, 1990), which is not an academic journal, in which he admitted that throughout his entire career, he had always believed what he had been taught in graduate school, namely that Lange was right and Mises was wrong.

Then, he wrote these words: "Mises was right."...

The academic community is intellectually corrupt. It goes with fads, and it does not react to the truth. It suppresses the truth...

I say this to give you hope. The Keynesians seem to be dominant today. They are dominant because they have been brought into the hierarchy of political power. They serve as court prophets to the equivalent of the Babylonians, just before the Medo-Persians took the nation.

They are in charge of the major academic institutions. They are the main advisers in the federal government. They are the overwhelmingly dominant faction within the Federal Reserve System. Their only major institutional opponents are the monetarists, and the monetarists are as committed to fiat money as the Keynesians are. They hate the idea of a gold-coin standard. They hate the idea of market-produced money....

The Keynesians are eventually going to face what the Marxists have faced since 1991. Literally within months of the collapse of the Soviet Union, when members of the Communist Party simply folded up shop and stole the money that was inside the Communist Party coffers, any respect for Marxism disappeared within academia. Marxism became a laughingstock. Nobody except English professors, a handful of old tenured political scientists, and a tiny handful of economists in the Union of Radical Political Economists (URPE), were still willing to admit in late 1992 that they were advocates of Marxism, and that they had been in favor of Soviet economic planning. They became pariahs overnight. That was because academia, then as now, is committed to power. If you appear to have power, you will get praised by academia, but when you lose power, you will be tossed into what Trotsky called the ashcan of history.

This is going to happen to the Keynesians as surely as it happened to the Marxists. The Keynesians basically got a free ride, and have for over 60 years. Their system is illogical. It is incoherent. Students taking undergraduate courses in economics never really remember the categories. That is because they are illogical categories. They all rest on the idea that government spending can goose the economy, but they cannot explain how it is that the government gets its hands on the money to do the stimulative spending without at the same time reducing spending in the private sector. The government has to steal money to boost the economy, but this means that the money that is stolen from the private sector is removed as a source of economic growth.

The Keynesian economic system makes no sense. But, decade after decade, the Keynesians get away with utter nonsense. None of their peers will ever call them to account. They go merrily down the mixed-economy road, as if that road were not leading to a day of economic destruction. They are just like Marxist economists and academics in 1960, 1970, and 1980. They are oblivious to the fact that they are going over the cliff with the debt-ridden, over-leveraged Western economy, because they are committed in the name of Keynesian theory to the fractional-reserve-banking system, which cannot be sustained either theoretically or practically.

The problem we are going to face at some point as a nation and in fact as a civilization is this: there is no well-developed economic theory inside the corridors of power that will explain to the administrators of a failed system what they should do after the system collapses. This was true in the Eastern bloc in 1991. There was no plan of action, no program of institutional reform. This is true in banking. This is true in politics. This is true in every aspect of the welfare-warfare state. The people at the top are going to be presiding over a complete disaster, and they will not be able to admit to themselves or anybody else that their system is what produced the disaster. So, they will not make fundamental changes. They will not restructure the system, by decentralizing power, and by drastically reducing government spending. They will be forced to decentralize by the collapsed capital markets.

When the Soviet Union collapsed, academics in the West could not explain why. They could not explain what inherently forced the complete collapse of the Soviet economy, nor could they explain why nobody in their camp had seen it coming. Judy Shelton did, but very late: in 1989. Nobody else had seen it coming, because the non-Austrian academic world rejected Mises's theory of socialist economic calculation. Everything in their system was against acknowledging the truth of Mises's criticisms, because he was equally critical about central banking, Keynesian economics, and the welfare state. They could not accept his criticism of Communism precisely because he used the same arguments against them...

The welfare-warfare state, Keynesian economics, and the Council on Foreign Relations are going to suffer major defeats when the economic system finally goes down. The system will go down. It is not clear what will pull the trigger, but it is obvious that the banking system is fragile, and the only thing capable of bailing it out is fiat money. The system is sapping the productivity of the nation, because the Federal Reserve's purchases of debt are siphoning productivity and capital out of the private sector and into those sectors subsidized by the federal government...

 The entire academic community has been in favor of the welfare-warfare state, so it will not survive the collapse of that system. It will become a laughingstock.

It is not clear who is going to come out the victors in all this. That could take a generation to begin to sort out. There will be many claimants, all pitching their solutions, all insisting that they saw the crisis coming. But that will be hard to prove for anybody except the Austrians.

This is why it is important that people understand what is wrong with the prevailing system, and that they say so publicly...

The analysts with the best arguments are the Austrians. As to whether they are going to be able to multiply fast enough, or recruit students fast enough, or train them fast enough, with some of them going into positions of authority, is problematical. But we do know this: there has been no systematic criticism of Keynesian theory and its policies except by the Austrians over the past 70 years. Only the Marxists gave comparable criticism, and their ship went down in 1991...

In a time of breakdown, Austrians will explain why it happened, and pin the blame on Keynesians: "Their system failed. They had control ever since 1940."

Keynesians will pin the blame on Keynesians who did not go far enough: "more of the same." We see this already "Krugman vs. Bernanke."

Which version will the public be ready to believe in a crisis? In the late 1930s, we found it: the Keynesians, who blamed the free market, not the neoclassical economists. "The present system is basically OK. We just need more time."

The battle will be fought and won outside of academia. Here is where Austrians must learn to do battle...

I offer this optimistic assessment: the bad guys are going to lose. Their statist policies will bring destruction that they will not be able to explain away. Their plea will be rejected. "Give us more time. We just need a little more time. We can fix this if you let us get deeper into your wallets."

In the very long run, the good guys are going to win, but in the interim, there is going to be a lot of competition to see which group gets to dance on the grave of the Keynesian system.

Get out your dancing shoes. Keep them polished. Our day is coming.

Read this very important article in its entirety here.


  1. Yep, Doc North knows the historical parallels and is an outstanding writer: concise, clear. Thanks for linking the column, sir!

  2. Great article, already read it at the Mises Institute website. Just one observation: When Keynesianism crashes it will collapse economies throughout the western world. That will make the death rattle of Communism look like a walk in the park.

  3. Our day is not coming. 9/11 proved Dr. Paul right. The housing collapse proved Dr. Paul right. Yes he gained a lot of supporters with these predictions but the majority still do not understand the causes of either event. Most people are just too dumb I'm afraid.

  4. Nobody cares about majority of stupid sheep. They will go along with anything, uncritically believing in whatever received wisdom there is. It's the dedicated and motivated minorities which make societies to change direction.

    There's no questing that the status quo will collapse. The question is what is poised to replace it.

  5. "Keynesians will pin the blame on Keynesians who did not go far enough: 'more of the same.' We see this already 'Krugman vs. Bernanke.'"

    We've also seen and heard this defense of the status quo from Ben Stein - sorry, I don't recall the YouTube link, but he literally claimed that the reason the "stimulus" failed was because not enough money was tossed into the maw (not his literal words).

  6. Please include full article in RSS feed!