The Keynes I like
I’m a very adamant anti-Keynesian. It’s not so much the theory behind General Theory, although I think Keynes was sloppy, over simplified a great deal and just neglected huge parts of the business cycle, I really don’t like how the politicians use his policies to expand Government.
To Keynes credit, in General Theory, he does advocate a pro-cyclical Government spending policy. So in the good times, the Government should be reducing deficits and during bad times they should be expanding deficits. In reality, Politicians spend during good time, when the money is flowing in. They spend even more during bad times, to show that they are “doing something.” I think he fails to understand the motivations and incentives of the political class. Although there is some evidence that he did, which makes his policies all the more suspect.
The Net effect of Keynesian policies is a growth in Government. This is Higgs’ Leviathan, always growing, never letting a crisis go to waste.
Keynes does have a very good peice, that I wish more and more people would pay attention to. It’s The Economic Consequences of the Peace published in 1919 written about the ramification of the Treaty of Versailles.
In it, Keynes displays a full understanding of the effect of inflation and how it increase Government.
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they can not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers’, who are the object of hatred by the bourgeoisie, whom the inflation has impoverished, not less than of the proletariat.
I think it can almost be said that Keynes fully understands the Austrian theory that inflation has asymmetric effects. Meaning as money flows into the system, from a Central Bank, it doesn’t get evenly distributed. Instead it goes to the Politically well connected, ie Goldman Sachs, AIG, Citigroup, etc. These institution can make huge windfalls from the new cash, before that cash has effects on the real economy, raising real prices. That’s how I take it when Keynes says, “Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires…”
We have easily seen this happen during the current crisis as Goldman Sach has recorded record profits as they have been taking Government TARP and Federal Reserve aid. And as Keynes predicted, they are the “object of hatred by the bourgeoisie.”
As the inflation proceeds and the value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does so in a manner which not one man in a million is able to diagnose.
Keynes is certainly right on everything in that passage. We can see the misdiagnosis everyday, when a pundit, intellectual, or laymen talks about the “failure of Capitalism.” It’s not the failure of Capitalism that causes these messes. It’s the failure of Government to keep out of other peoples business. It’s the Government that engages in the constant debauching of the currency, with a Zero Fed Funds rate. When you understand that the only way the Fed can keep it’s interest rates low is by pumping the system full of freshly printed cash, you realize how big the problem is. As they cash looks for a place to go, it create asset bubbles. Hmm sound familiar doesn’t it?
Thankfully, there are more than a few people that properly diagnose the real problem. It’s no wonder that the people with real incentives to keep the system at the status quo, are the ones constantly trying to marginalize these people. People like Hayek, Mises, Rothbard even Ron Paul, all know what really is going on. Thankfully, more and more people are coming to see what is really going on as well.
A great quote from Charles Rowley that we need to remember.
Whatever else they may have been, Lenin and Keynes were not fools. Like Professor Moriarty and Sherlock Holmes, they were endowed with intellectual genius, just like those characters in the novels by Conan Doyle, plotting on opposite sides of the spectrum. The Republican Party minorities in the House and the Senate, unfortunately, score much closer to Lenin’s evaluation of the brain-power of the Russian peasant, than to the genius of Lenin and Keynes. So, we must continue to enjoy life in dangerous times.
We can’t make the mistake of attributing what the Statists and Socialist are doing to ignorance. Some of it, yes, but not all. People like Lenin, knew exactly what they were doing. They were doing it for their own ends, not for the benefit of others.
H/T Charles Rowley, another one of those professors at GMU that see what’s going on. You should read his blog everyday, really great stuff.
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