The Follies and Fallacies of Keynesian Economics

Dear Bob,

I have a new article on the “EpicTimes” news and commentary website on, “The Follies and Fallacies of Keynesian Economics.”

This February marks the 80th anniversary of the publication of John Maynard Keynes’s most famous book, “The General Theory of Employment, Interest and Money,” which appeared in London bookstores on February 4, 1936, and served as the foundation for Keynesian Economics.

Few book have so rapidly come to dominate the thinking of economists and policy-makers as Keynes’s ideas and policy prescriptions. In less than a decade after its publication all of the older insights of the pre-Keynesian economists were shoved aside for the “new economics”

Gone was the older understanding of how competitive markets worked, why a sound monetary system based on gold was desirable, and why government spending should be restrained within the requirement of balanced budgets. Also rejected was the alternative theory that if booms and busts of inflations and depressions occurred it was not because they were inherent in the capitalist system, but were set in motion as a result of monetary expansion and interest rate manipulations by central banks.

Instead, Keynes insisted that markets were unpredictably unstable for the correction of which it was necessary to have paper monies controlled at the discretion of central banks, and that governments needed to have the power and flexibility to run budget deficits whenever and to whatever extent needed to compensate for the instabilities of market capitalism that threatened mass and prolonged unemployment when left to its own devices.

Here was now the economics of perpetual budget deficits, arrogant and presumptuous monetary central planning, and dangerous growth in the size and intrusiveness of government over society wrapped in the rationale of macroeconomic stability and stabilization.

In spite of changes and developments in Macroeconomics over the last half-century, the premise and presumption remains that governments and their central banks have the knowledge and wisdom, and need the necessary economic policy tools to micro-manage the “macro-economy,” with, unfortunately, continuing disastrous effects.

http://www.epictimes.com/richardebeling/2016/02/the-follies-and-fallacies-of-keynesian-economics/

Best,
Richard

RW Note:

Richard's summary of the problems with Keynesian economics is excellent.

For those looking for a detailed page-by-page destruction of The General Theory, Henry Hazlitt's The Failure of the New Economicss is a must read.

For an understanding of Keynes on an individual level, his intellectual shifts, his membership in secret societies, etc, see: Keynes the Man by Murray Rothbard.


                       

A Letter to the Editor of the Financial Times:

October 20, 2014 11:48 pm

Dentists have last laugh over sneering Keynes

Sir, Your editorial “A Nobel award for work of true economic value” (October 15) cites the witty and memorable line of J M Keynes about wishing that economists could be “humble, competent people, on a level with dentists”, which concludes his provocative 1930 essay on the economic future. You fail to convey, however, the irony and condescension of the original text of the arrogant, intellectual elitist Keynes, who, while superlatively competent, was assuredly not humble. With the passage of 84 years, the irony has changed directions, for modern dentistry is based on real science, and has made huge advances in scientific knowledge, applied technology and practice, to the great benefit of mankind. It is obviously far ahead of economics in these respects, and it is indeed unlikely that economics will ever be able to rise to the level of dentistry.

Alex J Pollock, Resident Fellow
American Enterprise Institute,
Washington, DC, US

(via AEI)

Here's What a Real Anti-Semite Sounds Like

As Walter Block points out, it is absurd to call Ron Paul an anti-Semite, when Dr. Paul states regularly that he looks to the writings of Ludwig von Mises and Murray Rothbard, both Jews, when it comes to trying to understand economics.

You might,though, consider the man writing this anti-Semitic

[Jews] have in them deep-rooted instincts that are antagonistic and therefore repulsive to the European, and their presence among us is a living example of the insurmountable difficulties that exist in merging race characteristics, in making cats love dogs …
It is not agreeable to see civilization so under the ugly thumbs of its impure Jews who have all the money and the power and brains.

The above come from the writings of John Maynard Keynes.

And be sure to read Professor Ralph Raico on the myth that Keynes was a liberal: here, here and here.

The Greenbackers as the Largest and Oldest Component of the Eeconomic Underground Promoting Government-Issued Fiat Money

By Gary North

Americans are living in a world of central bank profligacy. This has been true ever since 1914, when the Federal Reserve System opened for business. But the most recent bank-created economic crisis, which began in December 2007, has received more attention than ever before. This is mainly the result of Ron Paul's 2007 candidacy for the Republican nomination for President. He warned that this crisis would happen. He also spelled out the reasons: Federal Reserve policy. Then the crisis hit.

The Federal Reserve lost its immunity from criticism in 2008-9. It will never get it back. It also lost its invisibility. The general public now has some limited awareness of the FED. The FED gets a lot of negative publicity. This to a positive development.

This has also created a problem. Some of the critics of the Federal Reserve System propose a solution worse than the FED itself: the creation of a fiat-money based central bank that creates money out of nothing to pay for government-funded projects. These critics argue that this government-run bank will be able to offer interest-free loans to the public, which will keep the economy running at full capacity.

This is what John Maynard Keynes taught in "The General Theory of Employment, Interest, and Money" (1936). Keynes praised several economically unsophisticated predecessors who proposed schemes for government-created zero-interest money, including the founder of Social Credit, Major C. H. Douglas, and the farmer and former economist for the week-long Bavarian Soviet Republic of 1919, Silvio Gesell. He referred to them as part of the economic underground, as indeed they were. I have given a lecture on this. You can hear it here.

THE GREENBACKERS

In the United States, the largest and oldest component of the economic underground promoting government-issued fiat money has been the Greenback movement, named in honor of the Union's Civil War currency, unbacked by gold and printed with green ink. The Greenbackers have been a separate ideological movement ever since the 1870s. They are influential on the extreme fringes of both Left-wing and Right-wing circles – a unique achievement.

I have been writing about these people for over 45 years. I am the only person in the Austrian School who has published critiques of their position. The first one I wrote in 1965 as a privately circulated essay. I published it in my book, "An Introduction to Christian Economics" (1973). I revised it to bring it up to date as a mini-book published by the Mises Institute: Gertrude Coogan's Bluff. You can download a PDF for free here.

Miss Coogan was the main theoretician of the Greenback movement in the 1930s. Her books are still in print. More recently, she has been replaced by a lawyer, Ellen Brown. I have dissected her book, The Web of Debt (2007) here.

The Greenbackers hate the idea of the gold standard, just as Keynes did. They claim that fiat money will keep depressions from happening, just as Keynes did. They claim that capital – the tools of production – can be obtained free of charge at a rate of zero percent per annum, just as Keynes did.

The odd thing is this: most of the adherents of the Greenback position think of themselves as conservatives. They think of themselves as defenders of the free market. Yet they see all privately owned banking as an economic evil. They trust Congress to set up a government-owned bank with the legal right to print however much fiat money that the government-protected, monopolistic bankers decide.

WHAT'S WRONG WITH THEIR POSITION?

They do not understand the reason why there are interest rates in every society. They see interest payments as an undeserved payment to bankers. The bankers, because they control lending, are exploiting the public. They are able to get something (interest) for nothing (fiat money).

Read the rest here.

Krugman and DeLong versus Hayek and Mises

Mario Rizzo comments on the latest attacks by Paul Krugman (on Friedrich Hayek) and Brad DeLong (on Ludwig von Mises) and believes a major nerve has been touched. Under the title, Yes, Paul: It is Hayek versus Keynes, Rizzo writes:

...now comes Paul Krugman with his sometimes-echo Brad Delong (or is it vice versa?). Krugman thinks that Hayek was not an important “macro” economist; certainly not the rival or alternative to Keynes, either in the 1930s or today. In fact, Hayek embarrassed himself with his cycle and capital theory. Hayek’s brilliance as a monetary theorist (aka “macroeconomist”) is a figment of the political imaginations of those who love him for his “political” book, The Road to Serfdom.

Until just a little while ago, I thought it best to ignore the latest Krugmanic outburst, especially since there are excellent posts at Marginal Revolution and Café Hayek, just to mention two. And yet the recent obsession Krugman has with Hayek (and lately the obsession DeLong has with Mises) means that some nerve has been touched. Of course, it might simply be that Krugman needs material for his blogs and columns.

However, I think the real issue is this. Hayek’s approach attacks, root-and-branch, the macroeconomic way of thinking. It is not simply a challenge to a particular theory of the determinants of mass unemployment, inflation, business cycles and the like. Hayek is not accepting the rules of the game or the parameters of the sub-discipline of modern macroeconomics. Hayek does not want to argue that the government expenditure multiplier is 0.5 instead of 2.0, for example. He does not want to discuss just how much fiscal stimulus should be undertaken and what form it should assume.

In short, he does not want to focus on aggregate spending and aggregate consequences. Hayek’s approach says: Let us pierce the veil of aggregates and look at the distortive effects on relative prices and relative output produced by boom-time credit expansions. Let us look at the distortive effects that booms leave us as we work our way through a recession. Let us concentrate on sustainable lines of expenditure both during the boom and during the road out from the bust.

Suffice it to say this greatly erodes the intellectual capital of a field of economics – although one not noted for its successes. It mocks the claim that Keynes was a true revolutionary in economic thought. It opens the possibility that he was muddled, inconsistent and unaware of the contributions to monetary and business cycle theory made by the “classical economists” on the eve of the General Theory.

It also opens the possibility that Keynes’s economics was catapulted into prominence not so much by its technical or scientific excellence but the compatibility of its policy nostrums with the temper of the times.

NYT's Bill Keller Quotes a Super-Racist to Support His View

The former executive editor of NYT, and now Op-Ed columnist at the paper, Bill Keller tells us he has been reading up on economics while on planes and at his bedside, and so now I think he believes he is an expert.

At one point in his column, he writes of  this Keynesian solution:

There really is a textbook way to fix our current mess. Short-term stimulus works to help an economy recover from a recession. Some kinds of stimulus pay off more quickly than others. Once the economic heart is pumping again, we need to get our deficits under control. The way to do that is a balance of spending cuts, increased tax revenues and entitlement reforms. There is room to argue about the proportions and the timing, and small differences can produce large consequences, but the basic formula is not only common sense, it is mainstream economic science, tested many times in the real world.

Yup, he thinks he is an expert. Yet, he is so clueless that at another point he quotes a racist, making a racist remark, and thinks he is being profound:

I’ve come to think something is rotten in the state of economics. The dismal science, as Thomas Carlyle called it, has been ravaged by the same virus that has corrupted the rest of our national discourse.

Do my eyes deceive me? Has the former executive editor of NYT just quoted one of the most racist comments ever to be uttered in economics debate.

Carlyle called economics the dismal science in a pamphlet he wrote titled, "An Occasional discourse on the Nigger Question". He considered it a dismal science because he saw economics as being anti-slavery. Gavin Kennedy, Professor Emeritus, Heriot-Watt University, explains:

Carlyle called 'economics the dismal science' not because of its pessimism but because he objected to its humanitarian optimism Carlyle did not in fact direct his remarks at Ricardo or Malthus, or even at Adam Smith. He was writing a rebuttal of ideas expressed by John Stewart Mill, whose Principles of Political Economy was published in 1848. Mill had advanced the notion that all peoples on Earth, from all races and colours, were basically the same. Black men and women were not born to slavery; they were forced into it. Carlyle absolutely disagreed with Mill's humanistic notion. He expresses in his pamphlet the most offensive justification of slavery, denied explicitly that Africans were of the same species at Europeans (the very idea incensed Carlyle — as it did his friends and colleagues, among whom we find John Ruskin and Charles Dickens), and he lambasted J. S. Mill, an economist and former close friend for claiming the contrary view.

Keller is as clueless as they get. Not only is he waving around quotes from a super-racist. He is waving around Keynesian economic theory as though no other economics existed, despite the fact that Keynesian economists failed in detecting the recent Great Recession. Look no further than a recent comment by Federal Reserve economist Simon Potter for the failure of the Federal Reserve in detecting the crisis. And, don't think for a minute that Fed economists were using non-Keynesian theory, that's all they know. (For those who did forecast the Great Recession see here)

So next time you want to write about economics, Bill, try and take a broader view before declaring Keynes King and waving Carlyle quotes around. Read up on, Mises, Hayek and Murray Rothbard. And if you really want to understand the problems with Keynesian economics you might try reading The Failure of the New Economics.

It is a page-by-page takedown of Keynes' General Theory. The takedown was written by Henry Hazlitt, not only was he a great economist, but he was a greater writer, Bill. In fact, he sat in your seat at NYT as a columnist,  but he was not fooled for a minute by Keynesian economics. Hazlitt would never have written the confused column you just did.

Henry Simons on Keynes' "General Theory"

Richard Ebeling emails:


Dear Bob:

One of the "forgotten" reviews of Keynes' "General Theory" seems to be Henry Simons' piece on it that appeared in "The Christian Century" (July 22, 1936). It is not reprinted in the collection of Simons'
essays, "Economics of the Free Society." Nor is it reprinted in Henry Hazlitt's edited collection, "The Critics of Keynesian Economics."

Henry Simons was one of the leading members of the "older" Chicago School of Economics in the 1930s and 1940s. et, it is one of the sharpest and most critical reviews of the book, equal in tone (and nastiness!) to the one that Joseph A. Schumpeter penned, and which is reprinted in Schumpeter's "Essays" edited by
Richard V. Clemence in 1951 (pp. 160-164).

I am enclosing it as a pdf for your "pleasure."

Best,
Richard

Simons' review is here.

Keynes vs Hayek: The Cambridge vs. LSE Debates, 1932

Richard Ebeling emails:

Dear Bob:

Enclosed are two letters that appeared in the London "Times" in October 1932.

To my knowledge, they have never been reprinted.

On the "left" is a letter signed by Keynes, Pigou & Co. on the case for "stimulus" spending.

On the "right" is a letter signed by Hayek, Robbins, & Co., on the case against such spending and for freeing markets.

The battle continues . . . today!

Yes, indeed, the battle continues. This could be Krugman, Mankiw, Blinder [representing the Cambridge camp] versus Ebeling, Wenzel, Murphy, W. Anderson [representing the LSE camp], in 2010, with one exception. I believe that everyone in the the Ebeling camp would be even more hardcore anti-central bank intervention than even the LSE camp, in that they would not be anti-deflation. They would all back up the Murray Rothbard insight that the markets should simply be allowed to work out any deflation and that deflation, itself, is a great thing.

View these very important documents here.

Keynes a Liberal? Not a Chance

By Ralph Raico

Keynes and Neomercantilism

It is now common practice to rank John Maynard Keynes as one of modern history's outstanding liberals, perhaps the most recent "great" in the tradition of John Locke, Adam Smith, and Thomas Jefferson.[1]

Like these men, it is generally held, Keynes was a sincere – indeed, exemplary – believer in the free society. If he differed from the "classical" liberals in a few obvious and important ways, it was simply because he tried to update the essential liberal idea to suit the economic conditions of a new age.

There is no doubt that throughout his life Keynes endorsed various broad cultural values, such as tolerance and rationality, that are often referred to as "liberal," and, of course, he always called himself a liberal (as well as a Liberal – that is, a supporter of the British Liberal Party). But none of this carries great weight when it comes to classifying Keynes's political thought.[2]

Prima facie, Keynes as model liberal is already paradoxical on account of his embrace of mercantilist doctrine. When The General Theory of Employment, Interest, and Money (Keynes 1973b) appeared in 1936, W.H. Hutt was about to send his Economists and the Public (1936) to press. In later years, Hutt would subject Keynes's system to detailed and withering criticism (Hutt 1963, 1979), but at this point he could only hurriedly insert some initial observations. What struck him most of all was that this renowned economist "would have us believe that the Mercantilists were right and their Classical critics were wrong" (a position expounded in chapter 23 of the General Theory) (Hutt 1936, p. 245).

Hutt was writing from the standpoint of economic science. Here we are dealing with the integrity of liberalism as a social philosophy. If, as I have argued elsewhere (Raico 1989, 1992, 1999, pp. 1–22), the liberal doctrine is characterized historically by a repudiation of the paternalism of the absolutist welfare state, it is characterized even more so by its rejection of the mercantilist component in 18th-century absolutism. How, then, can a writer who tried to rehabilitate mercantilism be counted among the liberal greats?[3]

In defense of Keynes, Maurice Cranston contends that no one would deny John Locke inclusion in the liberal ranks in spite of his adherence to mercantilism (1978, p. 111). Whether Locke espoused mercantilism is debatable; Karen Vaughn (1980) has furnished grounds for believing otherwise. But even if he had been a mercantilist, that fact would lend no support to Cranston's argument. Locke is rightly viewed as a liberal great not because of his views on economic theory and policy, whatever they may have been, but by virtue of his libertarian account of natural rights and what he believed followed from that account.[4]

The Keynesian System

According to his supporters and himself, Keynes's turn to neomercantilism was necessitated by his discovery of fundamental flaws in classic economics. The classical theory, the claim goes, proved impotent to explain the causes of either Britain's chronic high unemployment in the 1920s or the Great Depression, whereas in The General Theory Keynes did both. He accomplished this feat by exposing the inherent gross defects of the undirected market economy, thereby effecting a "revolution" in economic thought.

Yet the particular crises to which Keynes reacted were themselves the products of misguided government policies. The persistence of high unemployment in Great Britain is traceable in part to Winston Churchill's decision as chancellor of the exchequer to return to gold at the unrealistic prewar parity and in part to the high unemployment benefits (relative to wages) available after 1920. The Great Depression resulted primarily from government monetary management, in particular by the Federal Reserve System in the United States. Both of these crises are amenable to explanation by means of "orthodox" economic analysis, requiring no theoretical "revolution" (Rothbard 1963; Johnson 1975, pp. 109–12; Benjamin and Kochin 1979; Buchanan, Wagner, and Burton 1991).[5]

As Hutt noted, Keynes in The General Theory turned his back on all the recognized authorities, from Hume and Smith to Menger, Jevons, and Marshall, and on to Wicksell and Wicksteed. Those thinkers, whatever the degree of their adherence to strict laissez-faire, at least held that the market economy contained self-correcting forces that rendered business depressions temporary. Keynes, discarding his "orthodox" predecessors (and contemporaries), aligned himself with what he himself dubbed that "brave army of heretics," Silvio Gesell, J.A. Hobson, and other social-reformist and socialist critics of capitalism whom mainstream economists had dismissed as crackpots (Friedman 1997, p. 7).

In a popular essay in 1934, Keynes had already ranged himself on the side of these "heretics," the writers "who reject the idea that the existing economic system is, in any significant sense, self-adjusting…. The system is not self-adjusting, and, without purposive direction, it is incapable of translating our actual poverty into our potential plenty" (1973a, pp. 487, 489, 491). The General Theory was intended to provide the analytical framework to justify this position.

Changes in prices, wages, and interest rates, according to Keynes, do not fulfill the function ascribed to them in standard economic theory – tending to generate a full-employment equilibrium. The level of wages has no substantial effect on the volume of employment; the interest rate does not serve to equilibrate saving and investment; aggregate demand is normally insufficient to produce full employment; and so on. The false assumptions, conceptual incoherencies, and non sequiturs that vitiate these extravagant claims have been frequently exposed (for example, in Hazlitt 1959, [1960] 1995; Rothbard 1962, p. 2;: passim; Reisman 1998, pp. 862–94).[6] As James Buchanan sums up the issue, "There is simply no evidence to suggest that market economies are inherently unstable" (Buchanan, Wagner, and Burton 1991, p. 109).

In any case, not every system that retains elements of the private-property market order can reasonably be considered liberal. In modern history, there was, famously, a system that included private property and permitted markets to operate in a restricted and limited way. Its overseers insisted, however, on the state's overriding role, without which, they believed, economic life would collapse into anarchy. Economic liberalism arose as a reaction against this system, which is called mercantilism.

Equally crucial to the question at issue are the ways in which Keynes's errors undermined confidence in the free-market order and opened the way for the colossal growth of state power.

Read the rest here.