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The Second Coming Of Keynes

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how did the western world end up being run by idiots

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The Second Coming of Keynes

Paul Krugman wants to be our savior. Moreover, he wants to be a specific kind of savior: a magus of the scientific age, a blackboard prophet.

The roots of this curious ambition can be seen in his recent profile in Newsweek:

Krugman says he found himself in the science fiction of Isaac Asimov, especially the "Foundation" series "It was nerds saving civilization, quants who had a theory of society, people writing equations on a blackboard, saying, 'See, unless you follow this formula, the empire will fail and be followed by a thousand years of barbarism.'"

Now here we are at an economic zero hour for the American empire, and perhaps for modern civilization itself, and many in the global urban elite think this establishment triathlete with his Princeton professorship, his New York Times column, and his Nobel Prize, has the equation for salvation. So what is Krugman's formula? What commandments does the magus have scrawled on his blackboard for us, his plebian flock?

To understand that, one must understand Krugman's intellectual heritage, such as it is.

Paul Krugman is a devotee of John Maynard Keynes. He's such a hard core disciple that he was Keyensian when Keynesianism wasn't cool: the period between the 1970s stagflation, which seemed to disprove Keynesian doctrine, and now, when it is groundlessly renascent due to our society's stunted memory span. He himself proudly admits his devotion to Keynes. He has written such headlines as "The Greatness of Keynes" and "Why Aren't We All Keynesians Yet?" But what does it mean to be keen on Keynes? What diagnosis does Krugman's Keynesian economics have for the economic crisis, and what remedies does he prescribe?

The Keynesian Diagnosis: A Deadly Case of Frugality

In the Keynesian whodunit mystery of depression economics, the culprit is nothing other than savings. That's right, savings: that necessary precondition for all capital development, thereby all gains in productivity, and thereby all increases in general human prosperity.

The Keynesian story of depressions in a nutshell is that (1) excessive savings leads to (2) underconsumption which leads to (3) unemployment. Unemployment engenders even more dread savings, completing the loop of a vicious cycle. This theory was a spit in the face of hundreds of years of progress in economic thought. Economists before Keynes painstakingly, analytically, and progressively built up a mighty edifice of knowledge and truth, all of which centered around how markets find optimal prices and equilibrate in response to changing situations. Keynes blithely dismissed it all as "orthodoxy" and falsely characterized the market as an inherently dysfunctional mechanism that tends to seize up into long-lasting depression without intervention from the wise government.

Paul Krugman completely buys the Keynesian story. He wrote recently,

one of the high points of the semester, if you're a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone's income.

So to Krugman, the road to economic hell is paved with the good intentions of frugality. This "underconsumption theory" is basically what he's talking about whenever you read Krugman warning ominously about "saving gluts," the "paradox of thrift," "consumer capitulation," "insufficient aggregate demand," etc., etc. It's all just adult jargon dressing up a childish theory. As Gary North wrote, underconsumption theories

speak of saving as if it were a system for hiding paper currency under a mattress. They refuse to answer this crucial question: What does the bank do with the money that a consumer deposits instead of spending? Put another way: What analytical or conceptual difference does it make whether a saver deposits a dollar [in] his bank, which the bank will lend, or whether he spends it, enabling the seller to deposit the dollar in his bank, which his bank will lend?

And even if saving were a matter of greenbacks and mattresses, any particular amount of such "hoarding" would not lead to underconsumption, as Murray Rothbard showed in his economic treatise Man, Economy, and State, but merely "an increase in the real value of their cash balances and of the monetary unit." This would depress business revenues in nominal terms, but it would lower business costs as well, leaving businesses just as profitable in real terms as before.

The Keynesian Remedy: Spend Your Way to Riches

Since Krugman has such a backwards diagnosis of depressions, it should be no surprise that his Keynesian remedies would be equally wrongheaded, and disastrously destructive. The Keynesian prescription to ward off depression is government stimulus. This is what Krugman is talking about whenever he calls for "priming the pump." Keynesian stimulus comes in two forms: monetary and fiscal. With monetary stimulus, a central bank (like the Federal Reserve) greatly increases the money supply, which dramatically lowers interest rates, which in turn stimulates spending. This is the "pro-bubble" side of Krugman's economics, which I've written about here and here. His now-notorious prescription of an induced housing bubble was to be accomplished (and was actually accomplished) via monetary stimulus. Krugman said in an interview with Lou Dobbs:

Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. (emphasis added)

This was his prescription for the recession in 2001. The rest is housing bubble history.

The ironic thing is that monetary expansion, Krugman's cure for depressions, is the very poison that causes them in the first place. According to the Austrian Business Cycle Theory, which was first expounded in 1912 by Ludwig von Mises, the great Austrian economist who predicted the Great Depression, monetary expansion misdirects resources, causing excessive investment in stages of production that are more removed from the final products. This lengthening of the chain of production is unsustainable, given the actual amount of savings available for continuous investment. Eventually, businesses realize this fact, and that the malinvestments need to be liquidated and resources reallocated toward sustainable projects. Further monetary stimulus (or any government intervention for that matter) only serves to retard that reallocation process and to prolong the depression. For a nice primer on the true story behind business cycles, I recommend this article and this speech (video) by Thomas Woods.

According to Krugman's assessment of the current state of the economy, monetary stimulus has done pretty much all it could do (thank God for that!), and we are now coming upon a Keynesian "liquidity trap," which, as he characterizes it, is "a situation in which conventional monetary policy loses all traction. When short-term interest rates are close to zero … " What does Keynesian doctrine prescribe in such situations? It calls for massive fiscal stimulus: government spending intended to fill the hole in aggregate demand that underconsumption has left. This is how Krugman himself characterized it in February, according to a University of Pennsylvania e-newsletter:

With monetary policy a non-starter, "That leaves nothing but government spending" to prime the pump, Krugman said. "That's pure Keynes."

Krugman estimated that the "spending hole" in the U.S. economy is $2.9 trillion dollars. Because of that, he complained, President Obama's stimulus package should be over three times its present size!

"It's helpful, but it does not cover even one-third of the gap, so it's disappointing," Krugman said. Out of the $789 billion approved, only about $600 billion adds real stimulus, in Krugman's opinion. "So you've only got $600 billion to fill a $2.9 trillion hole."

The only hole that needs filling is the one in Krugman's understanding. As we have already seen, the notion that stimulus does any good by moving money out of mattresses and bank vaults is fallacious. And as Ludwig von Mises wrote,

a government can spend or invest only what it takes away from its citizens … its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity.

This leads to the question of whether government spending and investment does more good than private spending and investment. Sound economics answers this question with a resounding "no"; yet we don't even need to consider the question in regards to Krugman's Keynesianism. This is because ultimately, Keynesian fiscal stimulus is not even about the goods and services produced by the additional spending (infrastructure, welfare, etc). You see, the fiscal stimulus might as well be literally filling holes, since according to Keynes's ridiculous understanding of how an economy works, it doesn't matter what the government spends money on; even digging up holes just to refill them would qualify as beneficial stimulus. You might think that this must not be literally true. "Keynes may have been wrong on some things," you may protest, "but no economist as prominent as him would believe something so foolish!" Read the man's words for yourself:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

The above passage is not some off-hand note written to a colleague in a fit of academic speculation. It is part of Keynes's chief contribution to economics, upon which his reputation rests: The General Theory of Employment, Interest, and Money. I don't care how prominent, credentialed, or "accomplished" an economist is. If he says that burying cash in the ground can be a boon to society, then he should be immediately dismissed from public and academic discourse.

The simple fact that Krugman regards such a fellow as an exemplar of economic scholarship would be highly telling by itself. "Okay," you might think, "Keynes was a bit extreme. But Krugman himself wouldn't go so far as to believe something like that."

Wrong again. In April, Krugman actually bemoaned the fact that Obama's stimulus projects were under budget.

President Obama hails the fact that stimulus projects are coming in ahead of schedule and under budget. Yay — but boo.

Ahead of schedule is good. Under budget — well, ordinarily that's a good thing. But the point of the stimulus is to increase spending!

That's right: Krugman would, all other things being equal, prefer government stimulus spending to be inefficient. He then goes on to quote the very same ridiculous passage from Keynes's General Theory, which I quoted above, but favorably. And the title of the piece in which he made this complaint? "Time for Bottles in Coal Mines."

I told you he's hard core.

This brings me to a side point I'd like to make. One might think that in writing in such, let's say "direct," language, I'm needlessly vilifying both Keynes and Krugman. I certainly wouldn't write this way about just anyone who I happened to disagree with. But, as should now be evident, Keynesians are special. Their economic doctrines are so fallacious, and their policies are so destructive that, for the sake of truth and humanity, one cannot be too forthright in denouncing them.

Conclusion

Paul Krugman wants to be our savior. Like a savior, he would perform a miracle for us: that of turning consumption into wealth. But who would accept a messiah with such a John the Baptist as John Maynard Keynes, who proclaimed that credit expansion could perform the "miracle … of turning a stone into bread"? In any case, Krugman is a curious kind of savior: one more interested in exercising his brilliance than in actually helping people. In the Newsweek profile, he said of his policy advocacy,

"I am not overflowing with human compassion. It's more of an intellectual thing."

Indeed, there is something almost calculated in the unblinking wrongheadedness of both Keynes and Krugman. You're not likely to get much notoriety as a public intellectual advocating common sense.

What's more, you can't express common sense in calculus, which is actually useful in the natural sciences, but which only provides a fallacious veil of obscurity and elitism over the social sciences. In other words, sound economics just doesn't make for a cool-looking blackboard. And without a cool-looking blackboard, how could Paul Krugman be the "nerd saving civilization"?

John Maynard Keynes reveled in the ballyhoo over his bold "new economics," even though his doctrines were merely age-old inflationist fallacies dressed up in mathematical jargon. When confronted with the fact that his solutions would never work in the long run, he would dismissively say, "In the long run, we're all dead." But, as Murray Rothbard used to say, now Keynes is dead, and we're all stuck living in his "long run."Download For our own sake, let's hope Paul Krugman's tenure as an influential economist — as well as the current renascence of Keynes he represents — is a mercifully short-run affair.

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how did the western world end up being run by idiots

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Keynes was right if the Western world had spent more time spending instead of being frugal and saving over the past 15 years then we wouldn't be in this mess today...........oh no..........erm............. :lol:

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Anatole Kaletsy is the reincarnation of Keynes. I can't read any more of his idiocy after the article where he wanted deposits taxed to create a negative yield on savings.

My "O" Level Economics teacher was a mad Keynesian. We used to have a laugh writing praise for the hole digging & filling thing so we got good marks when even as 15 years olds we sensed it was complete balls.

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Anatole Kaletsy is the reincarnation of Keynes. I can't read any more of his idiocy after the article where he wanted deposits taxed to create a negative yield on savings.

My "O" Level Economics teacher was a mad Keynesian. We used to have a laugh writing praise for the hole digging & filling thing so we got good marks when even as 15 years olds we sensed it was complete balls.

Kaletsky's been a Bilderberg attendee in the past, which would suggest he's very much on message. Quite a few journos have, I think Will Hutton's another one. For a long time I used think Kaletsky must be the worst connected economics correspondent in London as he's never got his finger on the pulse.

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Kaletsky's been a Bilderberg attendee in the past, which would suggest he's very much on message. Quite a few journos have, I think Will Hutton's another one. For a long time I used think Kaletsky must be the worst connected economics correspondent in London as he's never got his finger on the pulse.

Will Hutton...... he's another one all right. Makes me want to punch the telly when he's on.

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Will Hutton...... he's another one all right. Makes me want to punch the telly when he's on.

Got that Good To Great book you mentioned on ipod and listening to it in the car. A lot of confirmation bias with a good bit of it. The bits about bank deregulation and Fannie Mae haven't aged well though.

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Consume. Consume. Consume.

We are locusts. The end game of this model of existence seems clear.

We need motivation for productive activity beyond consumption, and to remove the need to consume to sustain an economy.

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Got that Good To Great book you mentioned on ipod and listening to it in the car. A lot of confirmation bias with a good bit of it. The bits about bank deregulation and Fannie Mae haven't aged well though.

Trouble with me is I never read anything properly, just scan. A guy I know in the industry who runs one of the bigger firms put me onto it. They say in the intro that they avoided confirmation bias by selecting the firms on stats and then only looking for commonality. I dunno, who can say what they did?

Only thing was (and here's where my objectivity falls down) that I believed a lot of it as it's how we run our place for the most part. Hedgehog is spot on, so is the stuff about no-publicity/low ego leadership, and finding the right thing to rate your trading on. So I guess I liked it because it agreed with me!

He's since done other books which I must admit made me a bit wary.

Anyway, anything but Tom Peters for me. He made my blood boil big time when I had to sit through his nonsense 20 years ago.

Edited by bogbrush

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how did the western world end up being run by idiots

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Is it because there are too many people listening to guff pumped-out by the von-mises cabal? Turgid writing built on strawmen.

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Is it because there are too many people listening to guff pumped-out by the von-mises cabal? Turgid writing built on strawmen.

It's not a good idea to critique your own posts, Happy? but I broadly agree.

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Economic interventionism, which is of course the cornerstone of Keyne's theory, is not by itself a disaster. The problem was and is that the interventions take the form of bailing out the WRONG people and punishing by proxy others that deserved more help. The current fashion of intervention takes this to extreme, to the point where entire institutions which deserved nothing at all (Goldman Sachs) were given favourable conditions to exploit other people's misery while the American tax payer was sold short by the same intervention.

By contrast we have Friedman and his fans in the UK like Arthur Seldon (promoter of the absurd school voucher scheme which died an embarrassing death) who under-estimated the consequences of an unbridled free market. It seems that nearly all economists, or certainly those that have had any power or influence, have to make their mark through positions of extreme because they fear that positioning themselves otherwise would result in them being un-noticed.

Thus economic theory is constantly being dominated by polarised opposites, swinging wildly over the decades between mad moneterism (Alan Walters), interventionism, then free market economics, while ignoring a more flexible and sensible approach and addressing world wide problems as they occur. It is the stubbornness of fashionable economic theories, which become almost a faith, that ill-serve the world. The current obsession with pumping billions into the proverbial black hole is clearly based on a missionary zeal more allied to propping up corporate pals than doing anything useful for ordinary people who had little control over the excesses of others leading to the present debacle.

It also gives interventionism a very bad name which it doesn't deserve. The real way to intervene is not with wads of cash for the profligate so they can start the same disastrous approach all over again, but to intervene by setting a rock solid legal framework and regulatory system which jails the fraudulent, restrains the greedy and closes down the loopholes that encourage wholesale abuses.

Edited by VacantPossession

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I've always wondered about Keynes - what he says about increasing spending in a bust makes sense to me iff you dampen down a boom by saving in the good times. Otherwise you're just trying to prolong the party artificially which obviously doesn't work.

What GB missed was the "save in a boom" bit.

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Is it because there are too many people listening to guff pumped-out by the von-mises cabal? Turgid writing built on strawmen.

.. which purely by coincidence happens to result in policy prescriptions that benefit the rich.

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I've always wondered about Keynes - what he says about increasing spending in a bust makes sense to me iff you dampen down a boom by saving in the good times. Otherwise you're just trying to prolong the party artificially which obviously doesn't work.

What GB missed was the "save in a boom" bit.

This is the bit about Keynes that many people overlook. You earn the right to pay for the extra spending in a bust from the savings that you accumulated during the boom.

The modern interpretation of Keynes seems to be that you spend more than you make during a boom and spend even more than you make during a bust. He must be spinning in his grave.

There is nothing wrong with counter-cyclical fiscal and monetary policy as long as that counter-cyclicality is applied consistently no matter which part of the boom / bust cycle we are in .......

Edited by LuckyOne

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I've always wondered about Keynes - what he says about increasing spending in a bust makes sense to me iff you dampen down a boom by saving in the good times. Otherwise you're just trying to prolong the party artificially which obviously doesn't work.

What GB missed was the "save in a boom" bit.

Exactly.

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I think it might be fool's gold, this idea that governments should try to dampen the economy during booms and stimulate during busts, so that an idealised economy would keep ticking over at some steady 1.5%pa growth rate forever... Enthusiasm/cynicism, optimism/pessimism, fashion/contrarianism, these are important dualities at the heart of being human. The bad times are necessary as they give society a chance to cut out the dead wood (though admittedly some healthy wood is lost too) and create a breathing space for new growth in the future, and the good times are necessary as they give fledgling ideas a chance to get going in an unusually gentle environment (though this will also give stupid people and ideas a chance to temporarily take hold too). I wonder if it wouldn't be better to see economic cycles not as a regrettable evil, but rather as the natural path of real economic growth.

Although it might also be nice if politicians didn't interfere to make cycles worse than they need to be!

Edited by bearly legal

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Governments will never save during the good times. There is always another needy case, another project to build, another investment to make. Should they ever have a surplus people will call for tax cuts. Politicians did not go into politics to do nothing, they went in to further their pet projects. They see their role as obtaining maximal support for that project including financial. Thus any surplus will rapidly vanish.

The only reason Keynesianism flourishes is because it advocates government spending more and that is what they wish to hear. The intellectual basis of it is irrelevant. Thus Keynesians are promoted to all the influential positions in order to fulfil that agenda. Since they are now all the prominent economists, they get to vote each other Noble prizes and elect further of their school.

The fact is economics is not a science. Its predictions are as often wrong as right. This would suggest ditching economists entirely, yet they have their role. The politicians can turn around and say they were advised by these experts to do this, thus it is not their fault. This is much the same as management bringing a friendly consultancy to advise on an unpopular measure. They can implement the measure yet pass the blame to consultants report that advised them to do it. "I want to spend, these guys say I can, and they should know they are economists".

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My "O" Level Economics teacher was a mad Keynesian. We used to have a laugh writing praise for the hole digging & filling thing so we got good marks when even as 15 years olds we sensed it was complete balls.

Digging stuff out of holes, and later putting it into other holes, is the lynchpin of the industrial/consumer economy ;)

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I've always wondered about Keynes - what he says about increasing spending in a bust makes sense to me iff you dampen down a boom by saving in the good times. Otherwise you're just trying to prolong the party artificially which obviously doesn't work.

What GB missed was the "save in a boom" bit.

What Mr "No More Boom and Bust" missed was that there was a boom :P

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I think it might be fool's gold, this idea that governments should try to dampen the economy during booms and stimulate during busts, so that an idealised economy would keep ticking over at some steady 1.5%pa growth rate forever... Enthusiasm/cynicism, optimism/pessimism, fashion/contrarianism, these are important dualities at the heart of being human. The bad times are necessary as they give society a chance to cut out the dead wood (though admittedly some healthy wood is lost too) and create a breathing space for new growth in the future, and the good times are necessary as they give fledgling ideas a chance to get going in an unusually gentle environment (though this will also give stupid people and ideas a chance to temporarily take hold too). I wonder if it wouldn't be better to see economic cycles not as a regrettable evil, but rather as the natural path of real economic growth.

Although it might also be nice if politicians didn't interfere to make cycles worse than they need to be!

I don't think it's about trying to eliminate the cycle, I think it's about damping the excesses at both ends.

ISTM that we're Austrians/laissez-faire during the boom and Keynesian during the bust. We end up with the front end of a private car bolted to the back end of a public bus and wonder why it doesn't run very well.

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