Monday, May 26, 2014

The Trouble with Keynes Is Us

Why has Keynesianism survived down to the present day?  Most TV commentators understand the economy in orthodox Keynesian terms.  The survival of Keynesianism is not that hard to understand, according to Sheldon Richman.
I’d have said it’s because Keynesianism gives intellectual cover for what politicians would want to do anyway: borrow, spend, and create money.
Another explanation Richman offers is from Lawrence H. White of George Mason University. Keynes gave people hope in the black despair of the Great Depression.  For economists, it gave them hope that they could solve the unemployment problem without going to totalitarianism.

My view is that the power of Keynes is to give not just politicians and economists but ordinary people the hope that they can continue doing what they are doing without making the wrenching changes that they desperately fear they must make.  Hey, no problem, the politicians can say!  Just sit back and let us do a bit of stimulus here, and a bit of quantitative easing there, and presto, it's recovery summer!  Because everyone wants to keep doing what they are doing until there is no longer any possible hope to continue in the old way.

The orthodox Austrian explanation of the business cycle centers on the idea that a recession is an inevitable consequence of the previous easy credit boom, because investments that looked solid in the boom are suddenly revealed as malinvestments.  Thus the people and resources marshalled into the lines of business now revealed as malinvestments must be liquidated, sooner or later. But nobody wants to hear that!  They don't want to confront what they know they must eventually do.  They want to continue in the old ways, and they sensibly elect politicians that will let them do it.

Of course it is the ordinary people that suffer losses to their wealth in the subsequent inflation and they lose their jobs in the malinvested industries anyway.  Then they will blame the politicians and the whole cycle can begin again.

We can excuse the politicians: theirs is the art of the possible, and if there is no majority for a party that offers orthodox capitalism with sound money and no freebies then a politician is a fool to offer it.

But the economists have no such excuse.  They know the problems with Keynesianism, or they ought to if they are as smart as they claim.  But we know why they are on the Keynesian train.  It is the same reason that the climate scientists are all aboard the global warming train.  It is money, power and the love of beautiful women.  That is one side of the coin.  But there is another reverse side of the coin.  If you don't get with the program you will get the brush off.  There won't be any professorships or adviser jobs for you.  So you'll abandon your economics Ph.D. and get into another line of business, and nobody wants to do that.

So what about the Obama economy?  How long can this miserable "recovery" continue?  Nobody knows.  But you can imagine that by November 2016 the American people will think it is "Time for a Change."  But the ghost of Keynes will still be with us.

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