Thursday, August 25, 2011

Keynes: Economist of the Dictators

I don't know much about economics, but I do know that a politburo full of eggheads can crash the economic ship just like us simpletons in the free market can. Only the egghead crashes are much more spectacular.

Economics is the dismal science, so I hope this post is not too dismal. 

Ducky asked me about liquidity traps in one of his posts last week, and this this the response.  It's Keynes versus the Misesian free marketeers.  I've included lots of links for those who want to explore these pressing but timeless issues further.


Keynesianism is a cold, mechanistic theory sprung from an era when strongman dictatorships were admired for making the trains run on time
"[T]he Krugman/Keynesian viewpoint is based on an extremely mechanistic interpretation of human action. People within a market setting do not purchase goods they believe will meet their individual needs; no, they spend, as though the spending itself is the ultimate end of an economy." (The Deepening Depression)
To the Keynesian statists, we are merely cogs in the machine

Paul Krugman and the rest of the big government, spend spend spend, more stimulus crowd are Keynesians. They believe that if government just spends enough, it can stimulate a down economy. They also believe in the fiction, the fatal conceit, that government central planners can flatten the hills and fill in the valleys of the free market economy.

What modern-day Keynesians tend to forget is that Keynes’s recommendation for governments to spend more in times of economic crises was predicated on the assumption that government would bank up cash during the good times. As we are all now painfully aware, that didn’t happen.  They Keynesians were wrong, again, and the Austrian School has been vindicated, again.
After all, this Keynesian nonsense has had many trial runs, and it has failed every single time. And there are specific reasons: government spending drains reserve capital, nationalizations prop up inefficiencies, and money creation distorts reality and forestalls recovery.
It doesn't take a fortune-teller to discern that this hokum will not work to accomplish its stated aims. All it does is prop up the state and its friends at our expense. (Jeffrey Tucker - The Austrians were Right)
Governments worldwide spent like there was no tomorrow during the good times, so there is no reserve to draw from.  Keynesian stimulus must be funded by putting ourselves further in hock to Communist China. Do any of you know anyone who has borrowed his way to prosperity?   

Liquidity Traps and Other Keynesian Fictions

When Keynesian schemes collapse, as is happening now on a global scale, statists like Krugman resort to that shiniest of glittery baubles, the liquidity trap.
 
Liquidity Trap:  A theoretical fiction created to explain away the failures of Keynesianism.  The point at which you cannot induce people to borrow and spend, even if you give money away. 

The only reason they get by with such nonsense is because the average citizen has little understanding of economics.  There's a lot of "Pay no attention to that man behind the curtain!" in central-planned statist macroeconomics.

Swedish economist Richard Johnsson writes a short but dense riposte to this nonsense, The Liquidity Trap Myth.

William Anderson provides a less-scholarly, more layman-friendly explanation in his short article,  The Deepening Depression 

 Contra Krugman:  The Austrian School
Murray Rothbard delivered many a withering critique of Keynesianism.  Here are two good ones.  I have to point out that his critique of Reaganomics was principally due to the fact that Milton Friedman's supply-side theories were founded in Keynesianism, government manipulation of people and markets.

Supply Side is Suspect as Well

Finally, Richard Ebeling delivers a critique of Supply Side economics.  He also explains why the Laffer Curve may be a wonderful visual aid used to explain a general concept, but it is not a viable mathematical model.

Supply Side economics is based upon Keynesian principles, and therefore Austrians see it as just another means for statists to chain We The People to the mill wheel of government, albeit in a perhaps more efficient fashion.

I know this may be confusing to those who haven't delved into the dismal science, but it's important to understand it, because this is what future arguments will be revolving around as the slow-motion global economic collapse continues.

See also:   Reason – How Long Will it Take for Keynesianism to Die?

45 comments:

Ducky's here said...

The Keynesians have been caught short again. In the early and the late 1970s, the wind was taken out of their sails by the arrival of inflationary recession, a phenomenon which they not only failed to predict ...

-----------------

I think Mr. Rothbard (Full disclosure: He's a serious crank) is wrong. Arthur Burns wanted to take action but Nixon was afraid it would negatively impact his election chances and caused much trouble.

Silverfiddle said...

Ducky: I think current events speak for themselves. The egghead Keynesians and Monetarists have fooled themselves and the rest of us.

Bunkerville said...

Thanks for a great roundup on this topic. It reminds me of the Ponzi scheme called Airplane that was going around decades ago. The goal was to make captain by getting others to contribute, play the game, and get more members. Eventually, no more suckers. Sounds a lot like today.But then I am no economist.

Anonymous said...

SilverFiddle,

A lot to chew and try to digest in one day. I'll have to wait till after breakfast even to try.

Thanks for doing all the research. Looks like it won't be a dull day after all.

I have to admit I have difficulty understanding the differences among Marxism, Socialism, Fascism, and Statism. All seem to produce the same results -- suppression of individual rights, loss of liberty and despotism. No much different from Feudalism, except power is even more centralized.

For me results are all that count. Intentions mean nothing, unless they prove themselves worthy in the realm of reality.

Ducky accused me of not understanding the rationale behind Welfare Statism. Without wading through dreary tomes put out by sociologists and economists, I think I can divine an understanding for myself.

All one has to do is look at the results -- the dismal failures, the monumental catastrophes -- the desperate poverty and mega-death -- dictatorshit has brought about to realize that whatever led to such misery and degradation must be based on fallacious thinking implemented by the fundamental stupidity of the masses everywhere who vainly imagine that "Someone" could -- and would -- take care of them.

It is the desire to remain a child forever protected by a mother's loving arms and spoon fed Pablum that keeps humanity in thrall. It also takes the not-often-well-meaning desire of certain elements to play the role of Mother. AFter all, as long as the child remains in the crib, the cradle, the high chair and the playpen, Mother's power is at it's height.

Only a selfish, stupidly wicked Mother would not do everything in her power to teach her child to become an independent, fully functioning adult.

Those who embrace dictatorship of any kind harbor a belief that Life, itself, is failed process that needs to be "fixed." Those of us who love liberty see it as a Gift from God filled with boundless opportunity to use our intelligence and creativity to make each day a unique, meaningful, possibly beautiful experience.

See you later.

~ FreeThinke

Divine Theatre said...

The Left has taken over the college curriculum! As far as they are concerned, Keynsianism is the only brand in town!
I spent many a painful hour listening to Keynsian nonsense while earning my degree! I wrote two papers for each requested, one to please the professor and the other to prove their theories wrong!
One open minded professor did actually allow me to speak to the class after he lost a bet.

Fredd said...

Economics is not called the dismal science for nothing: please open that Richard Johnsson link of 'The Liquidity Trap Myth' and suffer...

These economists who try to explain human behavior with mathematical models are doomed to a life of writing thesis for each other, and nobody else.

And, of course, anyone immediately loses the argument by introducing the Laffer Curve in graph format, much like mentioning Hitler in any argument. (note: even though the Laffer Curve accurately explains and predicts human economic behavior to a tee).

conservativesonfire said...

Excellent post and research, Silver. Economics can be dull but Mises.org is a good place for people to begin. Also, a little common sense goes a long ways to help the understanding.

Jersey McJones said...

The Laffer Curve is a joke. No serious economist takes it seriously. It's a lovely little graph, except when you plug the numbers you find it is simply not true.

All the proof you need that Keynesian theory works is WWII. Massive government spending on a high return investment created the greatest growth in American history. There's no arguing that.

And we don't need a reserve from the past, we simply need to raise taxes! They are historically low, while the wealthy are historically rich. We can pay our bills! It's called not being an ideological idiot!

JMJ

Silverfiddle said...

Jersey:
As usual, you are wrong on so many levels.

First:

The Laffer Curve is a joke. No serious economist takes it seriously. It's a lovely little graph, except when you plug the numbers you find it is simply not true.

Wrong. But not for the simple-minded reason you think.

It is a useful visual aid, because it does generally describe human behavior, and it generally conforms to historic reality.

Your "plug in the numbers" comment belies your naked ignorance of this subject. You cannot "plug numbers into" the Laffer curve, and therein lies the problem with it.

The WW II example is good as a narrow example of a nation of individuals putting aside individual concerns and working for the good of the nation.

That is what people do when faced with an existential threat. Gearing up for a war requires central planning and coordinated action; everyday life does not. That is where your example falls down.

Keynesianism failed during the 30's, putting the "Great" in the great depression. It failed in the 70's, and it's failed at the hands of Obama.

Keynesianism and centrally planned economies run by corporatist politburos stimulating this and that and manipulating money has failed.

Pull your head out of your msnbc, open your eyes and look around you.

Silverfiddle said...

To further the point about WWII, steering the whole economy led to gross inefficiencies and wide-spread privation and rationing. Is that really what you want?

And are you recommending another great gearing up of the Military Industrial Complex as an economic remedy?

This is what happens when someone like Jersey merely regurgitates bs he heard one of his ideological heroes spout. It also demonstrates the value of thinking before you speak and analyzing an idea before you adopt it as your own.

You're on a roll, Jersey. Yesterday you lambasted Governor Perry for hiring teachers, and now this!

Keep 'em coming, we need the laugh!

Z said...

Super post, SF..comprehensive and full of good information.

Divine Theatre hits on a huge problem; the indoctrination in our schools, again, that only one theory or plan is the right one...and that would be the LEFT one. It's a serious problem when people are better trained to 'kill the messenger' via mocking and echoing leftwing media stupidity than to THINK. Sadly, we're stuck in that now.

How does one change two generations of indoctrination? Even showing how theories haven't worked in Europe aren't enough! Then we here "But WE will do it (Socialism, etc.)RIGHT!"
wow

Divine Theatre said...

Jersey,

Might I suggest a little Bastiat?

Silverfiddle said...

Divine: Careful! Jersey probably thinks that was some kind of kinky proposition ;)

Monseur Frederic would probably just confuse him.

Z: Indoctrination is a problem. We've been conditioned to believe as Jersey does, even in the face of so many failures.

How do we change? I know what I'm doing. I'm raising little libertarians.

My older daughter and I had a nice conversation just last evening about Locke's Second Treatise on Government and what influence it had on the founding of our nation.

All my kids, even the little one understand that if you don't work you don't eat, and they also know stealing is wrong, even when the government does it for ostensibly "good" purposes.

Jersey McJones said...

I know all about Bastiat.

Silver,

I don't think you understand the Laffer Curve, and even if you you, I don't think you've looked critically at it.

http://finance.yahoo.com/expert/article/economist/4065

http://www.antifascistencyclopedia.com/allposts/the-laffer-curve-in-real-life-2

Here are two solid debunkings of that stupid "theory." (It takes about three seconds to look something up, ya' know)

And what the heck are you talking about with Keynesian economics in the 70's and 2000's??? Keynesian investment was historically low during those periods! Obama isn't applying Keynes. He simply reacted to the recession! That's not Keynesian. That's just ethics.

When first tried in the 30's, FDR wasn't really applying Keynes, but a sort of quasi-Keynesian approach. Keynes theory really came into place during the war years, and then in the 1950's and 60's - the war effort, the national highway system, the TVA etc. Towards the end of the 30's (remember, the depression was essentially over by the late 30's and FDR inherited it three years on), the Keynesian approach began to take form, and were inarguably extremely successfull.

JMJ

Silverfiddle said...

The Laffer Curve expresses a general concept, nothing more. I am not defending it as a mathematical model because it cannot be defended. You never know where you are on the curve or even its exact shape. Even if you could, a myriad factors would ensure that it was never static.

You can't have it both ways. Was the recession over in the late 30's or did WWII spending end the recession? Which is it?

And yeah, yeah... It didn't work because we didn't spend enough!

You and Nixon: "We're all Keynesians now."

Trestin said...

"The Laffer Curve is a joke. No serious economist takes it seriously."

Jersey, I guess in your mind the Austrian school is not serious economics? So the only serious economists are Keynesian socialists?

Silver don't back down one inch to Twiddle Dee and Twiddle Dumb on this one. Keynesian economics is a failed system as sure as the sky is blue. All the statists who keep trying to pound this square peg of ideology through the round hole that is reality will not stop until they achieve their real objective the destruction of all nations.

Silverfiddle said...

Jersey:

Your links are crap.

The Yahoo yahoo said this:

The economy grows, government revenues shrink.

That's basically what happened with the large Reagan and George W. Bush tax cuts, both of which were followed by large budget deficits.


He is flat out wrong. Revenue flatlined and then increased after both Reagan and Bush tax cuts. This government data proves it:

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200

Your second link is OK, but he ascribes growth to what he want to ascribe it to while ignoring every other factor. A sure sign he has an agenda.

My link is still the best critique of the three:

http://mises.org/daily/4132

Silverfiddle said...

Trestin:

I'm not backing down. The Laffer Curve is a product of Keynesianism, and the Austrian School rightly criticizes it.

Jersey is the befuddled one. I just got him to attack a Keynesian baby and he doesn't realize it.

Bastiatarian said...

>I know all about Bastiat.

He said with a wink.

Reading the Wikipedia entry doesn't count, son.

Jersey McJones said...

Son? What, I thought I was like twice your age!

Nice try at adolescent derogatory.

Silver, how the heck does the Laffer Curve come from Keynes? That makes no sense.

The Laffer curve was a snake-oil scam devised for Dick Cheney on a napkin.

As a percentage of GDP tax revenues went down during the tax breaks of the 80's & 00's and as well in real dollars. Vood Doo economics is a failure. It is a crooked theory devised by the wealthy to placate the dopey.

Don't be dopey.

JMJ

Ducky's here said...

One point you bring out that I think is critical, Silverfiddle, is our lack of savings.

Frankly I'm at a loss wondering how we can maintain growth without this insane cycle of high consumption and the accompanying debt.

I do believe that carefully targeted government spending has to be part of the equation. Pissing it away on a severely depreciating asset like military ordnance won't do. Maybe the power grid, transportation network, energy.

Bastiatarian said...

>I thought I was like twice your age!

Only if you're Methuselah, sport.

>Nice try at adolescent derogatory.

Hey, at least I don't think you're a teenaged girl anymore.

And, reading the Wikipedia entry still doesn't count. Saying "I know all about Bastiat" doesn't count either, in case you were wondering, old fella.

Ducky's here said...

Silverfiddle, you can't be serious about the Laffer Curve.

Come on, do you eat everything the far right puts on the plate?

Ducky's here said...

Let's see, z thinks that there is a serious indoctrination occurring because colleges don't concentrate on Ludwig von Mises.

He's considered a fringe player but that's because economists are all brainwashed and don't have z's training and insight planning lunches?

They don't teach Hayek at U. Chicago or Princeton? Bore me later, z.

Thersites said...

Personally, I think there's a serious indoctrination going in colleges because they don't teach Xenophon's "Oeconomicus".

Ducky's here said...

On the flip side, Keynesians hold that if new spending does not occur, then deflation will result, making more resources unemployed until ultimately the economy is in a perverse equilibrium in which huge numbers of people are out of work with no prospects for economic improvement.

-------

From the Anderson article.

Seems like a solid definition of the current housing market to me.

Finntann said...

I think you both miss an important aspect of WWII in regards to economic recovery, in that post war economic recovery had less to do with wartime spending and more to do with wartime saving.

First, forced conscription virtually eliminated unemployment, and in fact created a labor shortage. Average wages rose 65% between 1941-1945.

Companies were forced to make capital investements in order to successfully compete in the wartime market. Many were redirected or cajoled into alternate mfg lines compared to their peacetime product output.

With unemployment effectively nil and salaries at an all time high, there really wasn't anyplace to spend it given rationing and goods shortages. This is how most companies in WWII wound up earning the "Minuteman" flag, indicating that all workers belonged to the "10% club" That is...10% of their salaries directly invested in war bonds.

At the end of the war, the country was flush with savings, providing a significant economic boost in the postwar years. People who had been saving their money for the past 4 years suddenly had the opportunity to spend, spend, spend.

Although the government was spending like crazy, it was also taxing like crazy, and by wars end roughly 100% of the employed population was paying income tax compared to only 10% prior to the war.

The government's spending sustained roughly 40% of the economy during the war... but afterwards it was the civilian population flush with cash and a desire for goods that created the post-war boom.

Cheers!

Anonymous said...

Don't you love the reports that come from inside The Belly of the Beast that tell us that nothing that comes from outside the Belly of the Beast is "mainstream" but merely "fringe?"

If conceit were consumption, The Beast would be consumed.

The left adores the Parallel Universe they created. I guess it makes them feel godlike. Soros even said he was "like a god" for Chrissakes.

Naturally they don't teach anything but Marxian economic theories and their equally hideous derivatives at the "major" schools of economics. Something close to 90% of all the professors in those place are crypto or de facto Marxists.

That what happens when naive people allow termites like Herbert Marcuse to gain employment in their universities.

The Frankfurt School and its followers infected this country with economic and social cancer. We're dying because of it.

Never underestimate the power of pernicious ideology. It always sounds as though it will make life easier and "fairer."

Nothing can ever do that, except a lot of boundless ambition and damned hard work -- and THRIFT.

~ FreeThinke

PS: Ducky's been practicing Critical Theory on us again. Don't be taken in by his aura of supreme confidence. It's just an ACT. ~ FT

Silverfiddle said...

Ducky: I am not defending the Laffer Curve as a mathematical economic model. Please reread. I only stated that it illustrates a general point. Even the expert critics say as much.

Jersey: It is Keynesian in that it manipulates people and has as its goal the maximizing of citizens' money flowing into government coffers. It is a form of centrally-planned social engineering.

Jersey: You are correct that revenue/GDP decreased, but actual revenue in constant dollars increased.

That is the point and the goal: Working people keeping more of their own money. Still, the Yahoo in the first article is in plain error, since he did not qualify his statement as you just did.

Silverfiddle said...

@ FT: Don't be taken in by his aura of supreme confidence. It's just an ACT. ~ FT

Supreme confidence? Is that what it is? I always thought it was bravado...

OD357 said...

Jersey, I want to defend you but how can I when you spew rhetoric willy nilly? It was WWII and the massive spending that ended the remains of the great depression. It's Hoover and then FDR Keynesian economics that prolonged the great depression. It took WWII to find a job for the millions of unemployed. That job was freeing the world from tyranny. Obama reacting to the 2007 recession was Keynesian. Just like FDR's. Prolonging the agony instead of letting the markets correct themselves.

The Laffer curve is just an example of human behavior. Basically if a person's reward of his efforts are going to be taken away, that person will not be as inclined to produce. Jersey, unlike your Google and Wikipedia based in-depth research techniques, I actually read Arthur B Laffer's book. You know, where they got the phrase - The Laffer Curve.

Having said than, another good read is the book "The End of Prosperity" How Higher Taxes Will Doom the Economy

Ducky's here said...

I only stated that it illustrates a general point.

------

Nope. The Laffer curve is a mathematical construct with theory behind it. The theory FAILED.

The "general point" is a FAILURE.

Ducky's here said...

Marcuse, Frethinker? Your word for the day?

What gets dropped next, Gramsci?

Greetings from the children of Marx and Coca-cola.

Fredd said...

See what I mean by inserting the Laffer Curve into any discussion?

I rest my case.

And Silver: why do you encourage Jersey as you do? Just ignore irrational liberals (poking sticks at dogs through fences, don't make me remind you...)

Anonymous said...

Confidence? Bravado? Conceit? Arrogance? Effrontery? Gall? Haughtiness? Insolence? Superciliousness? Condescension? Overbearing?

All branches of the same tree. All stem from the same sinful root -- i.e. Pride.

Read St. Paul on Charity. ("Though I speak with the tongue of man and of angels and have not Charity ..." etc.)

An PLEASE don't fail to read up on Critical Theory. You don't need to digest a tome full of self-aggrandizing BS to understand it. We see abundant examples of it every day both here, on TV News and in newspapers and magazines.

You're NOT losing your mind, you're simply being had, by agenda-driven leftists determined not to confront or give any credence to whatsoever to Truth.

Aggressively promoting proven falsehoods as virtuous, enlightened thinking is the name of the game. DON'T fall for it. DON'T get sucked in.

"Resist the devil, and he will flee from you."

~ FreeThinke

Divine Theatre said...

Jersey,
May I suggest the works of economist Mark Skousen? "The Making of Modern Economics: The Lives and Ideas of the Great Thinkers" is a good place to start. Simple read.

Try this "Saving the Depression: A New Look at WWII",

http://www.mises.org/journals/rae/pdf/rae2_1_14.pdf

Jersey McJones said...

"It was WWII and the massive spending that ended the remains of the great depression."

Yes, it was a Keynesian success.

"It's Hoover and then FDR Keynesian economics that prolonged the great depression."

No. Have you ever read Keynes? He was around back then, you know. I hardly think he'd have described it in any way like that! LOL!

"Obama reacting to the 2007 recession was Keynesian."

No. Keynesisnism would have dictated a very different approach. All Obama did was shore up the welfare state. Remember, much of the old federal burden has been shifted to the states and localities in modern times. When the recession hit - and moreso the mortgage meltdown - the states and localities couldn't pay their bills. Essentially, two-thirds of the RECOVERY (not "stimulus") ACT was just for that.

The rest was somewhat Keynesian here and there but in no way near the order of magnitude requisite for the problem.

WWII - the perfect example of smart Keynesianism - was the most massive undertaking in our history, and it stimulated the economy more than any other single stimulant in our history.

It doesn't matter why we went to war, in the context of this conversation. In the end, it was an extremely expensive, massive, risky, central government undertaking, that was very profitable in the end.

Same goes the national highways, dams, the railroads, the Panama Canal, and on and on. These large investments put people to work, pa for themselves and much more in the long run, and can be very useful ways to turn around a bad economy by building for the future.

Personally, I think it's stupid to think otherwise.

JMJ

Anonymous said...

The noted economist Keynes
Must have had shit for brains.
To spend funds you don’t own
Off your horse gets you thrown
To suffer unspeakable pains.


~ Anne Animus

Bastiatarian said...

>May I suggest the works of economist Mark Skousen?

I would add big brother Joel and uncle Cleon to the list as well, for a variety of reasons.

Bastiatarian said...

>it stimulated the economy more than any other single stimulant in our history.

I can't believe there are still people dopey enough to believe that. The Raw Deal and WWII extended the Great Depression by many years (including what was basically a second depression that came in the 1930s. The Depression didn't actually end until 1947 or 1948, after the huge economic drain of the war had ended and assets could be used to build rather than replace. War reduces prosperity, and damages economies. That's an elementary concept.

Remember the Broken Window Fallacy, little one. Broken Window Fallacy.

And I thought you knew Bastiat so well.

Always On Watch said...

Silverfiddle,
Good info in this post. I'll use some of the material when I teach Economics this 2011-2012 school term.

Silverfiddle said...

Thanks, AOW!

Ducky and Jersey: I remind you both that I criticize the Laffer Curve in my original post, so I don't know why you keep focusing in on that.

And you are wrong Ducky. I does express a general tendency, but it cannot be used for it's intended purpose for the reasons cited in the link that criticizes it.

So, you hopium smokers, keep defending the status quo. It's working so well!

Ducky's here said...

Defending the status quo?

Man, you be trippin'.

Ducky's here said...

Cleon Skousen?

Told ya' the dominionists are here.

Bastiatarian said...

Well, Ducky, I guess you would actually have to read Skousen to get it. Being perceptive enough to notice the obvious fact that Skousen has been vindicated on most points would also be helpful.