Thoughts on economics and liberty

Keynes the incompetent economist

Apart from being a very devious and perverted person (see this blog post) who misrepresented other economists and took credit for things that others had done, he was simply wrong. He was a VERY BAD ECONOMIST.

Indeed, after the Philips curve controversy in the 1970s, the resurgence of the Chicago school (Keynesians were operating primarily from Harvard and the London School of Economics), and Lucas's work on rational expectations that explored the micro-economic foundations of the economy, Keynes was basically dumped from most advanced course work in the major universities.

But he seems to re-emerge from the corners in the kitchen, just like a cockroach comes out when the house owner (government in this case, with the GFC) makes a mess.

Nevertheless it is important that we continue to disprove the theses of these failed economists. Marx's theses must be disproved because the academia continues to be full of old fogies who blindly teach Marx. Similarly there are Keynesians across the world, particularly in the government, whose ideas must be disproved, since they will revert to bad form at the slightest opportunity ("opportunity" that they would have created themselves through bad policy). The fight for freedom is not easy. It can only be won if its detractors are continuously challenged, else their ghosts will emerge in each generation to haunt us. 

And so it is important that we continue to disprove Keynes's theses. 

Surya has very kindly suggested that I read Henry Hazlitt's book, Failure of the New Economics, and I surely will.
Thanks, Surya. Your insights always appreciated. I would be most pleased to publish your analysis of Hazlitt's key arguments (or even a set of relevant extracts). We must try to condense and distil relevant information for the general public, for they are busy in their daily lives and have little time to breathe, leave alone read massive tomes. 

In the meanwhile, below is a short video by Hayek (on Keynes) and an extract from Murray Rothbard – to keep you thinking, and to prove that Keynes was basically incompetent as an economist. I'll put out more stuff in the coming days/weeks. My main task in the next two days is to finish my next article for Freedom First.

(Btw, through the link provided inside this video – on Youtube – I've discovered a treasure trove with leads to many interesting things. These days one thing leads to another, and yet another. These are the times when mankind's ignorance should dissipate rapidly – if only we put in the effort to acquire the knowledge we need to ensure our freedom and prosperity). 

Hayek on Keynes

 
Note what Hayek says about why he did not critique the General Theory:
 
Interviewer: Why do you think that the general theory which came out in thirty six and with which you disagreed, any many other economists, why did it have such an enormous influence
 
Hayek: Well I wish I knew. I was puzzled by it at the time, in fact I did not believe it would succeed, so much so that while I'd spent a year analysing in great detail his earlier book the Treatise on Money and then only to hear from him by the time the second part of my criticism was published "oh I no longer believe in all that" I did not want to invest more effort in criticising the general theory who's success is still a puzzle to me because it reverted to a very primitive idea which had been clearly refuted in the nineteenth century that there is a single relation between the demand – aggregate demand for final products and employment, so much so that Leslie Steven in the eighteen eighties had pointed out the test of a good economist is that he does not make that particular mistake. Well Keynes revived it and gave a plausible explanation and, I should add that he did not succeed while he lived, but when he died he was suddenly raised to sainthood.
 
Interviewer: But Keynes might not have approved of the Keynesianism which came to dominate policy.
 
Hayek: Well I am sure he wouldn't, in fact I can positively say so. The very last time I saw him, about six weeks before his death, I was meeting him at the.. I was still having dining rights at Kings College and I was there for a weekend and talked to him after dinner and asked him whether he wasn't alarmed by what his pupils, naming two who I won't name now, were doing agitating for more expansion when in fact the danger clearly was inflation he completely agreed with me, and assured me, "my theory was frightfully important in the nineteen thirties when the question was of combating deflation. Trust me if inflation ever becomes a danger I am going to turn public opinion around [like this]". Six weeks later he was dead and couldn't do it. I think he would have been fighting the inflationary policy. [My comment: Hayek was being VERY naive on this]
 
Addendum: Also read
  • F. H. Knight, "Unemployment: And Mr. Keynes's Revolution in Economic Theory", The Canadian Journal of Economics and Political Science, Vol. 3, No. 1 (Feb., 1937), pp. 100-123 [JSTOR]
  • "Hayek on Keynes" – a blog post by Don Bourdeaux.
  • Y = C+I+G+(X-M)
And now for an extract from Keynes, the Man By Murray N. Rothbard
 
In The General Theory, Keynes set forth a unique politico-economic sociology, dividing the population of each country into several rigidly separated economic classes, each with its own behavioral laws and characteristics, each carrying its own implicit moral evaluation. First, there is the mass of consumers: dumb, robotic, their behavior fixed and totally determined by external forces. In Keynes’s assertion, the main force is a rigid proportion of their total income, namely, their determined “consumption function.” Second, there is a subset of consumers, an eternal problem for mankind: the insufferably bourgeois savers, those who practice the solid puritan virtues of thrift and farsightedness, those whom Keynes, the would-be aristocrat, despised all of his life. All previous economists, certainly including Keynes’s forbears Smith, Ricardo, and Marshall, had lauded thrifty savers as building up long-term capital and therefore as re­sponsible for enormous long-term improvements in consumers’ standard of living. But Keynes, in a feat of prestidigitation, severed the evident link between savings and investment, claiming instead that the two are unrelated. In fact, he wrote, savings are a drag on the system; they “leak out” of the spending stream, thereby causing recession and unemployment. Hence Keynes, like Mandeville in the early eighteenth century, was able to condemn thrift and savings; he had finally gotten his revenge on the bourgeoisie.
 
By also severing interest returns from the price of time or from the real economy and by making it only a monetary phenomenon, Keynes was able to advocate, as a linchpin of his basic political program, the “euthanasia of the rentier” class: that is, the state’s expanding the quantity of money enough so as to drive down the rate of interest to zero, thereby at last wiping out the hated creditors. It should be noted that Keynes did not want to wipe out investment: on the contrary, he maintained that savings and investment were separate phe­nomena. Thus, he could advocate driving down the rate of the interest to zero as a means of maximizing investment while minimizing (if not eradicating) savings.
 
Since he claimed that interest was purely a monetary phenomenon, Keynes could then also sever the existence of an interest rate from the scarcity of capital. Indeed, he believed that capital is not really scarce at all. Thus, Keynes stated that his preferred society “would mean the euthanasia of the rentier, and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.” But capital is not really scarce: “Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.” Therefore, “we might aim in practice . . . at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor [the rentier] will no longer receive a bonus.” Keynes made it clear that he looked forward to a gradual annihilation of the “functionless” rentier, rather than to any sort of sudden upheaval (Keynes 1936: 375–76; see also Hazlitt [1959] 1973: 379–84).[1]
 
Keynes then came to the third economic class, to whom he was somewhat better disposed: the investors. In contrast to the passive and robotic consumers, investors are not determined by an external mathematical function. On the con­trary, they are brimful of free will and active dynamism. They are also not an evil drag on the economic machinery, as are the savers. They are important contributors to everyone’s welfare. But, alas, there is a hitch. Even though dynamic and full of free will, investors are erratic creatures of their own moods and whims. They are, in short, productive but irrational. They are driven by psychological moods and “animal spirits.” When investors are feeling their oats and their animal spirits are high, they invest heavily, but too much; overly optimistic, they spend too much and bring about inflation. But Keynes, especially in The General Theory, was not really interested in inflation; he was concerned about unemployment and recession, caused, in his starkly superficial view, by pessimistic moods, loss of animal spirits, and hence underinvestment.
 
The capitalist system is, accordingly, in a state of inherent macro-instability. Perhaps the market economy does well enough on the micro-, supply-and-demand level. But in the macro-world, it is afloat with no rudder; there is no internal mechanism to keep its aggregate spending from being either too low or too high, hence causing recession and unemployment or inflation.
 
Interestingly enough, Keynes came to this interpretation of the business cycle as a good Marshallian. Ricardo and his followers of the Currency school correctly believed that business cycles are generated by expansions and contractions of bank credit and the money supply, as generated by a central bank, whereas their opponents in the Banking school believed that expansions of bank money and credit were merely passive effects of booms and busts and that the real cause of business cycles was fluctuation in business speculation and expectations of profit—an explanation very close to Pigou’s later theory of psychological mood swings and to Keynes’s focus on animal spirits. John Stuart Mill had been a faithful Ricardian except in this one crucial area. Following his father, Mill had adopted the Banking school’s causal theory of business cycles, which was then adopted by Marshall (Trescott 1987; Penman 1989: 88–89).
 
To develop a way out, Keynes presented a fourth class of society. Unlike the robotic and ignorant consumers, this group is described as full of free will, activism, and knowledge of economic affairs. And unlike the hapless investors, they are not irrational folk, subject to mood swings and animal spirits; on the contrary, they are supremely rational as well as knowledgeable, able to plan best for society in the present as well as in the future. This class, this deus ex machina external to the market, is of course the state apparatus, as headed by its natural ruling elite and guided by the modern, scientific version of Platonic philosopher-kings. In short, government leaders, guided firmly and wisely by Keynesian economists and social scientists (naturally headed by the great man himself), would save the day. In the politics and sociology of The General Theory, all the threads of Keynes’s life and thought are neatly tied up.
 
And so the state, led by its Keynesian mentors, is to run the economy, to control the consumers by adjusting taxes and lowering the rate of interest toward zero, and, in particular, to engage in “a somewhat comprehensive socialisation of investment.” Keynes contended that this would not mean total state Socialism, pointing out that
 
it is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. (Keynes 1936: 378)
 
Yes, let the state control investment completely, its amount and rate of return in addition to the rate of interest; then Keynes would allow private individuals to retain formal ownership so that, within the overall matrix of state control and dominion, they could still retain “a wide field for the exercise of private initiative and responsibility.” As Hazlitt puts it:
 
Investment is a key decision in the operation of any economic system. And government investment is a form of socialism. Only confusion of thought, or deliberate duplicity, would deny this. For socialism, as any dictionary would tell the Keynesians, means the ownership and control of the means of production by government. Under the system proposed by Keynes, the government would control all investment in the means of production and would own the part it had itself directly invested. It is at best mere muddleheadedness, therefore, to present the Keynesian nostrums as a free enterprise or “individualistic” alternative to socialism. (Hazlitt [1959] 1973: 388; cf. Brunner 1987: 30, 38)
 
There was a system that had become prominent and fashionable in Europe during the 1920s and 1930s that was precisely marked by this desired Keynesian feature: private ownership, subject to comprehensive government control and planning. This was, of course, fascism. Where did Keynes stand on overt fascism? From the scattered information now available, it should come as no surprise that Keynes was an enthusiastic advocate of the “enterprising spirit” of Sir Oswald Mosley, the founder and leader of British fascism, in calling for a comprehensive “national economic plan” in late 1930. By 1933, VirginiaWoolf was writing to a close friend that she feared Keynes was in the process of converting her to “a form of fascism.” In the same year, in calling for national self-sufficiency through state control, Keynes opined that “Mussolini, perhaps, is acquiring wisdom teeth” (Keynes 1930b, 1933: 766; Johnson and Johnson 1978: 22; on the relationship between Keynes and Mosley, see Skidelsky 1975: 241, 305–6; Mosley 1968: 178, 207, 237–38, 253; Cross 1963: 35–36).
 
But the most convincing evidence of Keynes’s strong fascist bent was the special foreword he prepared for the German edition of The General Theory. This German translation, published in late 1936, included a special introduction for the benefit of Keynes’s German readers and for the Nazi regime under which it was published. Not surprisingly, Harrod’s idolatrous Life of Keynes makes no mention of this introduction, although it was included two decades later in volume seven of the Collected Writings along with forewords to the Japanese and French editions. The German introduction, which has scarcely received the benefit of extensive commentary by Keynesian exegetes, includes the following statements by Keynes: “Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a lance measure of laissez-faire.” (Keynes 1973 [1936]: xxvi: cf. Martin 1971: 200–5; Hazlitt [1959] 1973: 277; Brunner 1987: 38ff.; Hayek 1967: 346)

Sanjeev Sabhlok

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