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How Do We De-bamboozle The Keynesians

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i have met a few business owners who have fallen for the paradox of thrift nonsense

they are all currently in the process of going bust


Lewis writes, "Because few people have read Keynes, it is easy to be confused about what he said" (p. 7). Another source of confusion is that

Keynes himself is often obscure, even at first glance self-contradictory. In some cases, very close examination reveals that Keynes was not actually contradicting himself. Often he was simply being sloppy, although sometimes he seems to be intentionally opaque, rather like former US Federal Reserve Chairman Alan Greenspan.… Opacity has its uses in politics, especially when there is a logical difficulty to obscure or evade.

Where is the logical place to start in order to gain a clear understanding of this difficult original material? Lewis's strategy is to go directly to the source. In part 2 of the book, he presents Keynes's views in a series of short quotes and excerpts from his works (mainly The General Theory). Lewis presents the original words with a minimum of analysis and interpretation.

Reaching chapter 5, in part 2, Lewis summarizes Keynes's macroeconomics as a series of main points (p. 47): (1) people are too future oriented; (2) society tends to underconsume and oversave; (3) interest rates tend to be too high; (4) monetary policy can lower interest rates by money printing; and (5), the core of the theory, "unused savings … interrupt the flow of money through the economy and lead to unemployment. Unemployment reduces society's income."

Keynes believed markets to be fundamentally broken. Markets do not clear, the price system does not allocate resources, and generally, the entire system is unstable and possesses no self-correcting features.

Part 3 parallels the structure of part 2. In fact, in the table of contents, the two parts of the book are lined up in vertical columns, with the heading for each fallacy on the left aligned with the one for the refutation of that fallacy on the right. For example, "Spend More, Save Less, and Grow Wealthy" is lined up across from "Spend More, Save Less, and Grow Poorer."

I will provide a couple of examples of Lewis's analysis. In response to Keynes's view that "interest rates are [too] high because people refuse to lend … on reasonable terms" (p. 91), Lewis writes,

The idea that lenders are obstinately holding out for exorbitant rates is particularly odd. It suggests a one-sided market in which the lenders have all the power and borrowers have little or none.…

Neither lender nor borrower can dictate terms in the market for money any more than in the market for other products or property. (pp. 91–92)

Lewis comes down especially hard on one of the most damaging fallacies of the Keynesian system: the proposition that "new money that has been injected into the banking system is 'just as genuine as any other savings'" (p. 98). Lewis writes,

It is Orwellian to refer to newly printed government money as "savings." Whatever the merits or demerits of "printing press" money, it is not the same as savings. The word savings describes money that has been earned, and having been earned, is not spent but rather set aside for emergency or investment use.…

The government's new money will eventually destroy traditional savings. This is true because the resulting inflation … will ultimately erode the purchasing power of traditional savings and thus ruin the saver, especially the small saver.

Several main themes emerge from Lewis's detailed analysis. One is that most of Keynes's doctrines are paradoxical. The most well-known example is the paradox of thrift :lol: : saving is good for the individual but if everyone tries to save, then it drives the economy downwards into a bust. Another example is "unemployment equilibrium" — the proposition that a market with unemployed resources has no tendency toward their employment.

Contra the "paradox of thrift," Lewis writes,

There is no paradox here; Keynes is wrong. It is prudent for families facing job loss to put something away. It is also prudent for a society that has overspent and overborrowed to start saving. This is true with or without an economic slump.

As we have discussed, the slump came because the government … artificially stimulated the economy by printing new money and injecting it into the economy through the financial system. This lowered interest rates and encouraged a wave of wasteful borrowing and spending by both businesses and consumers. In particular, vast sums were borrowed which would never be paid back.…

The bad investments of the recent past need to be liquidated, or at least marked down in price. Until this happens, savers should build their cash positions and refuse to use them. To invest at the old, unrealistic asset prices would just continue the old pattern of throwing money away. (pp. 129–130)

Finally, Lewis arrives at an important juncture:

One could go on, almost indefinitely, citing Keynes's obscurities, convolutions, inconsistencies, factual or logical lapses, and so on, but it is time to ask the obvious question: why did he write The General Theory this way? (p. 277)

And he offers the answer:

Keynes was a salesman. He was trying to sell a particular type of economic policy, and he was prepared to utilize any rhetorical device, from crystal clarity and wit all the way to complete unintelligibility, in order to make the sale.

Why would unintelligibility help to make the sale? Not just because it can be used to impress. Equally important, it can be used to intimidate. (p. 277)

Keynes: how did his ideas come to have the profound influence that they do now? The ideas in The General Theory form the foundation of modern macroeconomics, which itself guides the central banking and monetary policy in every country. Keynesianism, if not Keynes, is deeply embedded in academic economics, government, and the public consciousness.

It is difficult not to think that there must be something really deep and profound there (something wrong, perhaps, but surely something deep and profound). Could several generations of professional economists have been so wrong as to adopt an intellectual pile of rubbish as the basis for making decisions having impacts of trillions of dollars?

And this is the book's most important contribution: it demystifies Keynes. Lewis cites a story from one of Keynes's books in which

British Prime Minister Lloyd George "bamboozled" US President Woodrow Wilson … [then] found that "it was harder to de-bamboozle [Wilson] than it had been to bamboozle him." This describes our predicament today. Keynes has bamboozled us and it is very difficult to de-bamboozle ourselves. (p 304)

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It's not a paradox of thrift, Keynes was wrong on this, it's really a paradox of debt.

You can only achieve what appears a paradox of thrift if you have allowed debt to get out of control in the first place.

it is only true in the short term anyway

if people increase their level of savings then yes the economy will slow in the short term but it can then move forward on a more sustainable footing. i.e. not on a foundation of debt

still in the long run we are all dead

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it is only true in the short term anyway

if people increase their level of savings then yes the economy will slow in the short term but it can then move forward on a more sustainable footing. i.e. not on a foundation of debt

still in the long run we are all dead

Assuming of course the saving ratio remains the same and those that saved don't go on a huge spending binge.

Luckily people are all like this. They certainly seem to be like this in Japan.

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