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.

  1. yttik
    March 12, 2010 at 21:46

    I don’t much care for Keynes, which has become very clear to me over the past couple years, LOL.

    Recently I’ve been studying the emotional side of economics rather then economic theory. It’s been pretty fascinating. If you think about it, economies exist based on strange concepts like faith, trust, shared delusions. Money for example is nothing but paper, totally useless unless you have faith in the myth about it all being backed by gold at Fort Knox. There is nothing standing between us and money being worth only the paper it is printed on, but people’s trust in the federal government. When that got a bit shaky, they just added “in God we trust,” too.

    I truly believe that part of the economic problem we are currently having is about emotion and attitude. Quite simply people do not have faith in the Gov. They don’t know if taxes are going to increase, they don’t know if the whole mess is going to collapse. People are stocking up on spam and dried beans, they aren’t investing or hiring or starting businesses. It isn’t really because people are broke, it’s more because people are scared.

    Lately I’ve come to believe that whether the Gov intervenes or doesn’t intervene are almost secondary to the outcome. Much more important is the emotional health of the country. You see this in the stock market, when people panic, everything crashes. When there’s a sense of well being, the market goes up. Bush understood this, he told everyone to go shopping or the terrorists will win. Creepy but effective for keeping unemployment out of the double digits and stopping people from panicing about the nat’l debt.

    What we need right now more then anything is strong, emotional leadership. We aren’t going to get it.

    • March 15, 2010 at 22:24

      The only reason we use little pieces of paper is because of legal tender laws, which really outlaw any other method of payment. Barter is really illegal if you think about it, because you can’t tax a barter. That’s the way the government thinks about it.

      I don’t like behavior economics, which is what your talking about. The reason is because they give credence to the idea that you can “nudge” people to certain outcomes. To me that is totally against the idea of freedom and liberty. Look at some of the things Cass Sunstein advocates…he is a behaviorist.
      Besides economics is the social science of how humans interact, both rationally and irrationally.

      What your describing about “emotional health” was what Keynes described in his “animal spirits.” It has some merits but also can be confused and is in no way descriptive. It doesn’t explain the causes of recession or downturns, only a semi-qualitative description of how to stay the course. So I’m very skeptical of it.

      And of course I’m completely against the need to strong leadership. I think the people know what is better for them, far more than any political leader (which is what I think you mean.) Also because I’m skeptical that there ever was, is or will be a “right leader.” If there ever is or was, that’s the realm of religion not politics. We have to deal with what we have now, not a romanticized version of what could be.
      The what “could be” and the subsequent what “should be” are the causes of most of the calamities of the past four centuries in my view.

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